<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997
REGISTRATION NO. 333-24699
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 1TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COLLINS & AIKMAN FLOORCOVERINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2273 58-2151061
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD (I.R.S. EMPLOYER
OF INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
ORGANIZATION) CODE NUMBER)
311 SMITH INDUSTRIAL BOULEVARD
DALTON, GEORGIA 30722
(706) 259-9711
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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EDGAR M. BRIDGER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COLLINS & AIKMAN FLOORCOVERINGS, INC.
311 SMITH INDUSTRIAL BOULEVARD
DALTON, GEORGIA 30722
(706) 259-2034
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
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COPY TO:
LESLIE A. GRANDIS, ESQ.
MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P.
ONE JAMES CENTER
901 EAST CARY STREET
RICHMOND, VIRGINIA 23219
(804) 775-4322
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This filing is strictly for the purpose of correcting Edgar related
typographical errors on pages F-18 and Exhibit 23.1.
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING
LOCATION IN PROSPECTUS OF
ITEMS OF FORM S-4
<TABLE>
<CAPTION>
ITEMS IN S-4 LOCATION OR HEADING IN PROSPECTUS
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<S> <C>
A.INFORMATION ABOUT THE
TRANSACTION
1. Forepart of Registration
Statement and Outside Front
Cover Page of Prospectus... Outside Front Cover Page; Cross Reference Sheet;
Inside Front Cover Page
2. Inside Front and Outside
Back Cover Pages of
Prospectus................. Inside Front Cover page; Outside Back Cover page
3. Risk Factors, Ratio of
Earnings to Fixed Charges
and Other Information...... Prospectus Summary; Risk Factors; Unaudited Pro
Forma Financial Data; Selected Consolidated
Financial Data
4. Terms of the Transaction... Prospectus Summary; The Exchange Offer; Certain
U. S. Federal Income Tax Consequences;
Description of the Notes
5. Pro Forma Financial
Information Prospectus
Summary; The Acquisition;
Unaudited.................. Pro Forma Financial Data
6. Material Contacts with the
Company Being Acquired..... Not Applicable
7. Additional Information
Required for Reoffering by
Persons and Parties Deemed
to be Underwriters......... Not Applicable
8. Interests of Named Experts
and Counsel................ Not Applicable
9. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities................ Not Applicable
B.INFORMATION ABOUT THE REGIS-
TRANTS
10. Information with Respect
to S-3 Registrants........ Not Applicable
11. Incorporation of Certain
Information by Reference.. Not Applicable
12. Information with Respect
to S-2 or S-3
Registrants............... Not Applicable
13. Incorporation of Certain
Information by Reference.. Not Applicable
14. Information with Respect
to Registrants Other Than
S-2 or S-3 Registrants.... Outside Front Cover Page; Prospectus Summary;
Risk Factors; The Acquisition; Pro Forma
Capitalization; Selected Consolidated Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Certain Transactions;
Description of the Notes; Description of Credit
Agreement; Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<S> <C>
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3
Companies................................. Not Applicable
16. Information with Respect to S-2 or S-3
Companies................................. Not Applicable
17. Information with Respect to Companies
Other Than S-2 or S-3 Companies........... Not Applicable
D.VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations are to be Solicited........ Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer...................... Management; Certain Transactions
</TABLE>
<PAGE>
PROSPECTUS
OFFER TO EXCHANGE
SERIES B 10% SENIOR SUBORDINATED NOTES DUE 2007 ("EXCHANGE NOTES")
FOR ALL OUTSTANDING
10% SENIOR SUBORDINATED NOTES DUE 2007 ("INITIAL NOTES")
OF
[LOGO OF COLLINS & COLLINS & AIKMAN
AIKMAN APPEARS HERE] FLOORCOVERINGS, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JULY 7, 1997, UNLESS EXTENDED
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Collins & Aikman Floorcoverings, Inc. a Delaware corporation (the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus (the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal") which together with the Prospectus
constitute the "Exchange Offer," to exchange up to an aggregate principal
amount of $100,000,000 of its Series B 10% Senior Subordinated Notes Due 2007
(the "Exchange Notes") for up to an aggregate principal amount of $100,000,000
of its outstanding 10% Senior Subordinated Notes Due 2007 (the "Initial
Notes"). The terms of the Exchange Notes are identical in all material
respects to those of the Initial Notes, except for certain transfer
restrictions and registration rights relating to the Initial Notes. The
Exchange Notes will be issued pursuant to, and entitled to the benefits of,
the Indenture (as defined) governing the Initial Notes. The Exchange Notes and
the Initial Notes are sometimes referred to collectively as the "Notes."
The Exchange Notes will be unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Debt (as
defined) of the Company. The Exchange Notes will rank pari passu in right of
payment with all other senior subordinated indebtedness of the Company and
will rank senior to all other subordinated indebtedness of the Company. The
Indenture permits the Company to incur additional indebtedness including
Senior Debt, subject to certain limitations. As of January 25, 1997, pro forma
for the Transactions (as defined), the Company had approximately $57.0 million
of Senior Debt outstanding (exclusive of unused commitments of approximately
$28.0 million).
The Exchange Notes will bear interest from February 6, 1997, the date of
issuance of the Initial Notes that are tendered in exchange for the Exchange
Notes (or the most recent Interest Payment Date (as defined) to which interest
on such Notes has been paid), at the rate of 10% per annum and will be payable
semi-annually in arrears on each January 15 and July 15, commencing on July
15, 1997. Upon the occurrence of a Change of Control (as defined), the Company
will be required to offer to repurchase the Notes. There is no assurance that
the Company will have, or will have access to, sufficient funds to repurchase
the Notes upon any such occurrence. See "Description of the Notes."
(Continued on Next Page)
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SEE "RISK FACTORS", WHICH BEGINS AT PAGE 13, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this Prospectus is June 5, 1997.
<PAGE>
(Continued from Cover)
The Company will accept for exchange any and all Initial Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on July 7, 1997, unless extended by the Company in its sole discretion
(the "Expiration Date"). Tenders of Initial Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date. In the event
the Company terminates the Exchange Offer and does not accept for exchange any
Initial Notes with respect to the Exchange Offer, the Company will promptly
return the Initial Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Initial Notes being tendered
for exchange, but is otherwise subject to certain customary conditions. The
Initial Notes may be tendered only in integral multiples of $1,000.
The Initial Notes were originally issued and sold on February 6, 1997 in a
transaction not registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemptions provided in Rule 144A and
Regulation D under the Securities Act. Accordingly, the Initial Notes may not
be reoffered, resold or otherwise pledged, hypothecated or transferred in the
United States unless so registered or unless an applicable exemption from the
registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement
dated February 6, 1997 (the "Registration Rights Agreement") between the
Company and BT Securities Corporation (the "Initial Purchaser"), with respect
to the sale of the Initial Notes. Based on interpretations by the staff of the
Securities and Exchange Commission (the "Commission") set forth in no-action
letters issued to third parties, the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Initial Notes may be offered for resale, resold
and otherwise transferred by respective holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided that the
Exchange Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and is not engaged in
and does not intend to engage in a distribution of the Exchange Notes. Each
broker-dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the Exchange Notes received in exchange for Initial Notes if
such Exchange Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has agreed that,
for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any Participating Broker-Dealer (as defined) for use
in connection with any such resale. See "Plan of Distribution."
There has not previously been any public market for the Initial Notes. The
Company does not intend to list the Exchange Notes on any securities exchange
or to seek approval for quotation through any automated quotation system.
There can be no assurance that an active market for the Exchange Notes will
develop.
The Company will not receive any proceeds from the Exchange Offer; however,
pursuant to the Registration Rights Agreement, the Company will pay the
expenses incident to the Exchange Offer.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-4 (the "Registration Statement") under the Securities Act, with respect to
the Exchange Notes. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference. Items of information omitted from this Prospectus but contained in
the Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the
Commission: Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material can be obtained by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 at prescribed rates. In addition, the Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
As a result of this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In the event that the
Company ceases to be subject to the informational requirements of the Exchange
Act, the Company has agreed that, so long as any Notes remain outstanding, it
will file with the Commission and distribute to holders of the Initial Notes
or the Exchange Notes, as applicable, copies of the financial information that
would have been contained in such annual reports and quarterly reports,
including management's discussion and analysis of financial condition and
results of operations, that would have been required to be filed with the
Commission pursuant to the Exchange Act. See "Description of the Notes--
Certain Covenants--Reports to Holders."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Market data used throughout this Prospectus were obtained from
internal Company data and various industry sources. Management believes that
the information obtained from such sources is reliable; however, the accuracy
and completeness of such information is not guaranteed. The Company has not
independently verified this market data. Similarly, internal Company data,
while believed by the Company to be reliable, have not been verified by any
independent sources. Except as otherwise indicated, the data referenced herein
refer to the United States market. References herein to years or fiscal years
mean, as to the Company, the fiscal year ended in January of the following
year.
THE COMPANY
The Company is the leading manufacturer of vinyl-backed commercial
floorcovering in the United States, with the number one market position in six-
foot roll carpet and the number three market position in modular carpet tile.
The Company markets its products to a wide variety of commercial end-markets,
including corporate office space, retail stores and education, health care and
government facilities. The Company differentiates itself through (i) superior
product features such as durability, long-term appearance retention and its
patented Powerbond RS "peel and stick" installation system, (ii) exceptional
customer-focused services, including the Company's Source One program, which
offers customers a complete turn-key package of floorcovering supply and
installation for single-site and multiple-site projects, (iii) leading design
capability and (iv) environmental leadership, including an advanced recycling
program. In the fiscal year ended January 25, 1997, the Company generated net
sales and pro forma EBITDA of $136.1 million and $27.3 million, respectively.
The U.S. commercial carpet market, which is comprised of the specified and
non-specified segments, is estimated by management to have generated sales of
approximately $3.1 billion in 1995, having grown at a compound annual growth
rate ("CAGR") of approximately 4.4% since 1990. Within the specified commercial
market, the Company competes in the six-foot roll and modular carpet tile
segments, which combined accounted for an estimated $510 million of industry
sales in 1995. Management believes the exceptional performance and unique
installation characteristics of the Company's products provide a superior long-
term investment for end-users relative to both broadloom carpet, which requires
more frequent replacement and higher maintenance costs, and hard surface
flooring products, which lack the aesthetics and comfort under foot of carpet.
As a result, the Company historically has been able to achieve sales growth in
excess of that in the general commercial carpet industry. The Company's net
sales have grown, without the benefit of acquisitions, from $75.3 million in
1991 to $136.1 million in 1996, representing a CAGR of 12.6%. As a result of
the Transactions (as defined), the Company has outstanding approximately $157
million of long-term debt and substantial debt service obligations.
Consequently, the Company's debt in relation to its cash flow is greater than
it has been historically.
The Company's commitment to employee involvement in the manufacturing process
and quality training programs throughout the organization have led to
significant reductions in scrap rates and non-conformance costs as well as
improved product quality. These factors have contributed to the improvement in
the Company's EBITDA margins from 13.0% in 1991 to 20.0% (on a pro forma basis)
in 1996. During this time, EBITDA grew from $9.8 million to $27.3 million (on a
pro forma basis), representing a CAGR of 22.7%. There can be no assurance that
net sales and EBITDA will continue to grow at the rate experienced in the past.
1
<PAGE>
COMPETITIVE STRENGTHS
The Company's market leadership and strong financial performance are
attributable to a number of factors including the following:
SUPERIOR PRODUCT TECHNOLOGY
The Company's proprietary vinyl cushion backing technology, Powerbond(R),
uses a closed-cell construction that is impermeable to moisture, exhibits
demonstrably superior durability, seamability and cleaning characteristics, and
provides comfort under foot, thereby combining the best attributes of both hard
surface and carpet floorcoverings. Powerbond(R) was enhanced in 1988 with the
patented Powerbond RS system, which employs a "peel and stick" dry adhesive for
installation and eliminates the fumes associated with wet adhesives generally
used in conventional carpet installation.
LEADING POSITIONS IN NICHE PRODUCTS
In 1967, the Company pioneered vinyl-backed flooring systems (which includes
six-foot roll and modular carpet tile) in the U.S. commercial carpet industry
as an alternative to hard surface flooring and broadloom carpet. The Company is
the leader in the vinyl-backed commercial carpet industry, with approximately
22% of the 1995 U.S. market. The Company has the number one position in the
fast-growing six-foot roll segment of the specified U.S. commercial carpet
market, with an estimated 1995 market share of approximately 36%, which the
Company believes is three times the size of its nearest competitor. Within the
modular carpet tile market, the Company has the number three position with an
estimated market share of approximately 12%.
UNIQUE MARKETING SEGMENTATION
The Company has implemented a segmented marketing strategy which targets the
Company's sales and marketing efforts to the specific needs (i.e., product,
service, performance, asthetics, distribution and budget), of each end-market
within a given geographic area. The segmentation strategy requires each account
manager to develop an expertise in a specific end-market, resulting in greater
customer-focused service, comprehensive market coverage and increased sales
productivity over time. This market-specific focus differentiates the Company
from its competitors which generally have a geographically-assigned sales
organization wherein the account managers are responsible for all end-use
markets.
LEADING RECYCLING CAPABILITY
The Company has developed a proprietary technology for recycling vinyl carpet
scrap and post-consumer, vinyl-backed floorcovering reclaimed from installation
sites. Through this technology, the Company produces backing for new carpet and
other value-added commercial products, such as industrial block flooring.
FLEXIBLE DISTRIBUTION
Customers have the flexibility to purchase the Company's products via three
channels: directly from the Company, through the Company's unique Source One
program or through independent dealers. These programs allow the Company's
sales and marketing personnel to (i) establish relationships within specific
market segments, (ii) continually improve and customize product characteristics
for specific applications and (iii) maximize total value delivered to
customers.
EXPERIENCED MANAGEMENT TEAM AND SIGNIFICANT EMPLOYEE INVOLVEMENT
The Company has an experienced and successful management team with an average
of 20 years of experience in the floorcovering industry and an average of over
10 years of experience with the Company. This management team has instituted
programs, including employee suggestions, which have increased net sales and
EBITDA at CAGRs of 12.6% and 22.7%, respectively, between 1991 and 1996.
2
<PAGE>
OPERATING STRATEGY
The Company has grown sales and EBITDA through a focused marketing and sales
strategy combined with cost management programs. Set forth below are the
components of the Company's operating strategy:
SPECIFIED COMMERCIAL MARKET FOCUS
The Company will continue to focus on niche segments of the specified
commercial market where sales are driven primarily by distinctive product
features and performance characteristics rather than price. The specified
market tends to be more driven by total product value including performance,
durability, aesthetics, customer-focused services and ease of maintenance and
installation when compared with more price-sensitive, non-specified segments of
the commercial carpet industry.
DIVERSIFIED END-MARKETS
The Company's sales and marketing strategy focuses on diversified end-markets
(corporate office space, retail stores and education, health care and
government facilities) in order to maximize its sales opportunities and to
continue to minimize the effects of cyclicality in the carpet industry. New
construction spending in the education, health care and government sectors
(which sectors accounted for over 60% of the Company's 1995 and 1996 domestic
carpet sales) steadily increased each year between 1990 and 1995, offsetting
the impact of more cyclical new construction in the corporate office space,
retail stores and lodging segments over the same period.
PRODUCT INNOVATION
Management believes the Company has developed a substantial competitive
advantage within its niche market segments through the continuous development
of products desired by end-users. The Company's Powerbond RS technology
provides customers with enhanced durability and performance, and low cost
installation and maintenance. Under the recently launched Infinity Initiative
program, management believes that the Company is the only manufacturer to
recycle reclaimed post-consumer, vinyl-backed floorcovering into backing for
commercial carpet products. The Company's Imaginations program offers the
design flexibility to create customized, dramatic visual effects. The Company's
recently introduced Jhane Barnes collection employs the industry's first
computer-aided design capability that will enable architects and designers to
customize pattern configurations for printed modular carpet tile.
COST REDUCTION
The Company will seek to reduce costs by monitoring and controlling its
manufacturing and administrative expenses. The Company continually tracks its
cost of non-conformance ("CONC"), which includes price discounts, product
returns and allowances. From 1991 to 1996, the Company reduced CONC by
approximately 18%, while net sales grew by approximately 81%. Supplementing its
efforts to reduce CONC, the Company has implemented an aggressive cost
improvement program. During fiscal 1996, the Company realized $1.2 million in
cost savings, which on an annualized basis represents approximately $2 million
in cost savings. For fiscal 1997, the Company has targeted an additional $2
million in annualized cost reductions.
STRATEGIC ALLIANCES AND ACQUISITIONS
The Company intends to pursue domestic and international alliances and
acquisitions that would add new product lines, enhance penetration of end-
markets or allow entry into new geographic markets.
3
<PAGE>
EQUITY SPONSORS
Quad-C, Inc. ("Quad-C") is a private investment firm based in
Charlottesville, Virginia focused on the leveraged acquisition of companies in
partnership with management. Quad-C was founded in 1990 by its Managing
Partner, Terrence D. Daniels, former Vice Chairman and director of W.R. Grace &
Co. While at W.R. Grace & Co., Mr. Daniels was responsible for the Specialty
Chemical, Health Care, Natural Resource, Restaurant, Retail and Corporate
Technical groups, which consisted of more than 100 individual businesses in
over 40 countries. Quad-C has completed fifteen private investments in a
variety of industries including manufacturing, restaurants, media, financial
institutions and health care. Among its portfolio investments, Quad-C currently
has eight private companies held through several affiliated partnerships.
Paribas Principal Partners ("Paribas") is the U.S. private equity group of
Groupe Paribas, which was founded in 1872. Groupe Paribas, headquartered in
Paris, is a global merchant bank with approximately 25,000 employees worldwide.
Through its direct equity investment arm, Paribas Affaires Industrielles,
Groupe Paribas has been making global investments for over 100 years and
currently has a private equity portfolio exceeding $6.5 billion invested in
over 250 companies primarily in Europe, North America and Asia. Paribas has
investments in approximately 30 companies in the U.S.
THE ACQUISITION
Pursuant to an agreement dated as of December 9, 1996 (the "Acquisition
Agreement"), entered into among CAF Holdings, Inc. ("Holdings"), a corporation
organized on behalf of affiliates of Quad-C and Paribas, CAF Acquisition
Corporation ("CAF"), a wholly-owned subsidiary of Holdings, the Company,
Collins & Aikman Products Co. ("C&A Products") and Collins & Aikman Floor
Coverings Group, Inc. ("Seller"), CAF agreed to acquire from Seller all of the
outstanding capital stock of the Company for a total purchase price of $197.0
million (including $27.0 million in consideration for a tradename license
agreement), subject to adjustment based upon the Company's level of net working
capital on the closing date of the Acquisition (the "Closing Date"). On the
Closing Date, February 6, 1997, CAF paid Seller $195.6 million based upon the
parties' preliminary estimate of net working capital. There was no further
adjustment to the purchase price based upon final determination of the net
working capital as of the Closing Date. Financing for the Acquisition was
provided by (i) $57.0 million of borrowings (the "Bank Financing") under an
$85.0 million senior secured credit facility (the "Credit Agreement") among
CAF, Holdings, certain lenders and Bankers Trust Company, as agent, (ii) $51.0
million of capital invested by affiliates of Quad-C, Paribas, management and
certain other investors in Holdings (the "Equity Financing") and (iii) the
proceeds of the offering of the Initial Notes (the "Initial Offering"). The
Acquisition, the Initial Offering, the Equity Financing and the Bank Financing
are collectively referred to herein as the "Transactions." See "The
Acquisition."
In connection with the Acquisition, Holdings and Collins & Aikman Corporation
made an election under Section 338(h)(10) of the Internal Revenue Code (the
"Code"), which had the effect of treating the Acquisition as a purchase of
assets for federal income tax purposes. As a result of the Section 338(h)(10)
election, the Company's tax basis in its assets was increased to the respective
fair market values of such assets. The newly allocated basis is amortizable for
tax purposes over the respective useful lives of the assets in accordance with
the provisions of the Code. The balance of the purchase price was allocated to
goodwill and other intangibles (including rights under a tradename license
agreement (the "Tradename License Agreement")), which is amortizable for tax
purposes over fifteen years.
Holdings is a Virginia corporation. The principal executive office of
Holdings is located at 230 East High Street, Charlottesville, Virginia 22902
and its telephone number is (804) 979-9122. The Company is a Delaware
corporation. The principal office of the Company is located at 311 Smith
Industrial Boulevard, Dalton, Georgia 30722 and its telephone number is (706)
259-9711.
4
<PAGE>
THE INITIAL OFFERING
The Initial Notes........... The Initial Notes were sold by the Company on
February 6, 1997 to the Initial Purchaser
pursuant to a Purchase Agreement, dated January
29, 1997 (the "Purchase Agreement"). The Initial
Purchaser subsequently resold the Initial Notes
to qualified institutional buyers pursuant to
Rule 144A under the Securities Act.
Registration Rights
Agreement.................. Pursuant to the Purchase Agreement, the Company
and the Initial Purchaser entered into a
Registration Rights Agreement, dated as of
February 6, 1997 (the "Registration Rights
Agreement"), which grants the holders of the
Initial Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy
such exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
The Exchange Notes.......... The forms and terms of the Exchange Notes are
identical in all material respects to the terms
of the Initial Notes for which they may be
exchanged pursuant to the Exchange Offer, except
for certain transfer restrictions and
registration rights relating to the Initial Notes
and except for certain penalty interest
provisions relating to the Initial Notes
described below under "--Terms of the Exchange
Notes."
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Initial Notes. As of
the date hereof, $100,000,000 aggregate principal
amount of Initial Notes are outstanding. The
Company will issue the Exchange Notes to holders
on or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Initial Notes may be
offered for resale, resold and otherwise
transferred by any holder thereof (other than any
such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions
of the Securities Act; provided that such
Exchange Notes are acquired in the ordinary
course of such holder's business and that such
holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes. Each holder accepting the Exchange Offer
is required to represent to the Company in the
Letter of Transmittal that, among other things,
(i) the Exchange Notes will be acquired by the
holder in the ordinary course of business, (ii)
the holder is not an "affiliate," as defined in
Rule 405 under the Securities Act, of the Company
and (iii) the holder is not participating, does
not intend to participate, and has no
5
<PAGE>
arrangement or understanding with any person to
participate, in the distribution of such Exchange
Notes.
Each Participating Broker-Dealer (as defined)
that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to
time, may be used by a broker-dealer in
connection with resale of Exchange Notes received
in exchange for Initial Notes where such Initial
Notes were acquired by such broker-dealer as a
result of market-making activities or other
trading activities. The Company has agreed that,
for a period of 180 days after the Expiration
Date, it will make this Prospectus available to
any Participating Broker-Dealer for use in
connection with any such resale; provided that
the Company has no obligation to amend or
supplement this Prospectus unless it has received
written notice from a Participating Broker-Dealer
of its prospectus delivery requirements under the
Securities Act within five business days
following consummation of the Exchange Offer. See
"Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose
of participating, in a distribution of the
Exchange Notes could not rely on the position of
the staff of the Commission enunciated in no-
action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any
resale transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities
Act for which the holder is not indemnified by
the Company.
Interest on the Exchange
Notes...................... The Exchange Notes will bear interest at the rate
of 10% per annum from February 6, 1997, the date
of issuance of the Initial Notes that are
tendered in exchange for the Exchange Notes (or
the most recent Interest Payment Date to which
interest on such Notes has been paid).
Accordingly, holders of Initial Notes that are
accepted for exchange will not receive interest
on the Initial Notes that is accrued but unpaid
at the time of tender, but such interest will be
payable on the first Interest Payment Date after
the Expiration Date. Interest on the Exchange
Notes will be payable semi-annually in arrears on
each January 15 and July 15, commencing July 15,
1997.
Expiration Date; Withdrawal
of Tender.................. The Exchange Offer will expire at 5:00 p.m., New
York City time, on July 7, 1997, or such later
date and time to which it is extended by the
Company (the "Expiration Date"). The tender of
Initial
6
<PAGE>
Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration
Date. Any Initial Notes not accepted for exchange
for any reason will be returned without expense
to the tendering holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Certain Conditions to the
Note Exchange Offer........ The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer--Certain
Conditions to the Exchange Offer."
Procedures for Tendering
Initial Notes.............. Each holder of Initial Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Initial Notes
and any other required documentation to the
Exchange Agent (as defined) at the address set
forth herein.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Initial Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Initial Notes in
the Exchange Offer should contact such registered
holder and promptly instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering his Initial Notes,
either make appropriate arrangements to register
ownership of the Initial Notes in such owner's
name or obtain a properly completed bond power
from the registered holder. The transfer of
registered ownership may take considerable time
and may not be able to be completed prior to the
Expiration Date.
Guaranteed Delivery
Procedure.................. Holders of Notes who wish to tender their Initial
Notes and whose Initial Notes are not immediately
available or who cannot deliver their Initial
Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal
to the Exchange Agent, prior to the Expiration
Date, must tender their Initial Notes according
to the guaranteed delivery procedures set forth
in "The Exchange Offer--Guaranteed Delivery
Procedures."
Registration Requirements... The Company has agreed to use its best efforts to
consummate by August 5, 1997, the registered
Exchange Offer pursuant to which holders of the
Initial Notes will be offered an opportunity to
exchange their Initial Notes for the Exchange
Notes which will be issued without legends
restricting the transfer thereof. In the event
that applicable interpretations of the staff of
the Commission do not permit the Company to
effect the Exchange Offer or in certain other
circumstances, the Company has agreed to file a
Shelf Registration Statement covering resales of
the Initial Notes and to use its best
7
<PAGE>
efforts to cause such Shelf Registration
Statement to be declared effective under the
Securities Act and, subject to certain
exceptions, keep such Shelf Registration
Statement effective until three years after the
original issuance of the Initial Notes.
Certain Federal Income Tax
Considerations............. There should be no U.S. federal income tax
consequences to holders exchanging Initial Notes
for Exchange Notes pursuant to the Exchange
Offer. See "Certain U.S. Federal Income Tax
Considerations."
Use of Proceeds............. There will be no cash proceeds to the Company
from the exchange of Notes pursuant to the
Exchange Offer.
Consequences of Exchanging
Initial Notes.............. As a result of the making of this Exchange Offer,
the Company will have fulfilled certain of its
obligations under the Registration Rights
Agreement, and holders of Initial Notes who do
not tender their Notes will generally not have
any further registration rights under the
Registration Rights Agreement or otherwise. Such
holders will continue to hold the untendered
Initial Notes and will be entitled to all the
rights and subject to all the limitations
applicable thereto under the Indentures, except
to the extent such rights or limitations, by
their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
All untendered Initial Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, if any Initial Notes are tendered
and accepted in the Exchange Offer, the trading
market for the untendered Initial Notes could be
adversely affected.
Exchange Agent.............. IBJ Schroder Bank & Trust Company is the Exchange
Agent. The address and telephone number of the
Exchange Agent are set forth in "The Exchange
Offer--Exchange Agent."
TERMS OF THE EXCHANGE NOTES
General..................... The form and terms of the Exchange Notes are the
same as the form and terms of the Initial Notes
(which they replace) except that (i) the Exchange
Notes bear a Series B designation, (ii) the
Exchange Notes have been registered under the
Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and
(iii) the holders of Exchange Notes will not be
entitled to certain rights under the Registration
Rights Agreement, including the provisions
providing for an increase in the interest rate on
the Initial Notes in certain circumstances
relating to the timing of the Exchange Offer,
which rights will terminate when the Exchange
Offer is consummated. See "The Exchange Offer--
Consequences of Failure to Exchange." The
Exchange Notes will evidence the same debt as the
Initial Notes and will be entitled to the
benefits of the Indenture. See "Description of
the Notes."
8
<PAGE>
Issuer...................... Collins & Aikman Floorcoverings, Inc.
Maturity Date............... January 15, 2007.
Interest Rate and Payment
Dates....................... The Notes will bear interest at a rate of 10% per
annum. Interest on the Notes will accrue from the
date of original issuance (the "Issue Date") and
will be payable semi-annually on each January 15
and July 15, commencing July 15, 1997.
Ranking..................... The Notes will be unsecured obligations of the
Company and will be subordinated in right of
payment to all existing and future Senior Debt
(as defined) of the Company. The Notes will rank
pari passu with any present and future senior
subordinated indebtedness of the Company and will
rank senior to all other subordinated
indebtedness of the Company. As of January 25,
1997, pro forma for the Transactions, the Company
had approximately $57.0 million of Senior Debt
outstanding (exclusive of unused commitments of
approximately $28.0 million).
Optional Redemption......... The Notes will be redeemable, in whole or in
part, at the option of the Company on or after
January 15, 2002, at the redemption prices set
forth herein, plus accrued interest to the date
of redemption. In addition, prior to January 15,
2000, the Company, at its option, may redeem up
to 35% of the aggregate principal amount of the
Notes originally issued with the net cash
proceeds of one or more Public Equity Offerings
at the redemption price set forth herein, plus
accrued interest to the date of redemption;
provided that at least 65% of the aggregate
principal amount of Notes originally issued
remains outstanding immediately after any such
redemption.
Change of Control........... Upon a Change of Control, the Company will be
obligated to make an offer to repurchase all
outstanding Notes at a price equal to 101% of the
principal amount thereof plus accrued interest to
the date of repurchase. The Credit Agreement
prohibits the purchase of the Notes by the
Company unless the indebtedness under the Credit
Agreement is repaid in full. There can be no
assurance that the Company will have, or will
have access to, sufficient funds to repurchase
the Notes and satisfy all of its obligations
under the Credit Agreement upon any such Change
of Control. See "Description of the Notes--Change
of Control" and "Risk Factors--Change of
Control."
Certain Covenants........... The Indenture governing the Notes (the
"Indenture") contains certain covenants that
limit the ability of the Company and its
subsidiary to, among other things, incur
additional indebtedness, pay dividends or make
certain other restricted payments, consummate
certain asset sales, enter into certain
transactions with affiliates, incur indebtedness
that is subordinate in right of payment to any
Senior Debt and senior in right of payment to the
Notes, incur liens, impose restrictions on the
ability of a subsidiary to pay dividends or make
certain payments to the Company and its
subsidiary, merge or
9
<PAGE>
consolidate with any other person or sell,
assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets
of the Company.
For additional information regarding the Notes, see "Description of the
Notes."
RISK FACTORS
See "Risk Factors," which begins at page 13, for a discussion of certain
factors that should be considered by participants in the Exchange Offer,
including that the Company has substantial leverage and debt service
obligations; the Notes are subordinated in right of payment to all existing and
future Senior Debt of the Company; breach of covenants in the Credit Agreement
could result in acceleration of the obligations due thereunder and there can be
no assurance that the Company's assets would be sufficient to repay in full
such obligations and the Notes; the Company effectively is controlled by Quad-C
and its principal shareholder; the Company's success largely is dependent on
its senior management; the Company currently relies on a single supplier for
its principal raw materials; the Company operates in an industry where sales
are affected by general business cycles; the commercial floorcoverings industry
is highly competitive; the Company has no experience operating as a stand-alone
company; there can be no assurance that the Company would have assets
sufficient to satisfy all of its obligations under the Credit Agreement and the
Notes in the event of a Change of Control; a determination by a court that the
Company did not receive fair consideration in connection with the issuance of
the Notes could void the Company's obligations under the Notes; there is no
public market for the Notes; and the Company is subject to environmental laws.
10
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following presents summary historical financial information of the
Company. The information in this table should be read in conjunction with
"Selected Consolidated Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
JANUARY 30, JANUARY 29, JANUARY 28, JANUARY 27, JANUARY 25,
1993(A) 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $88,598 $95,590 $108,039 $122,169 $136,124
Cost of goods sold...... 53,518 55,065 62,527 73,615 81,715
------- ------- -------- -------- --------
Gross profit............ 35,080 40,525 45,512 48,554 54,409
Selling, general and
administrative
expenses(b)............ 21,708 25,478 23,733 27,364 28,971
Corporate general and
administrative
allocated costs(c)..... 1,044 1,046 1,069 1,591 1,531
Operating income........ 12,254 10,347(d) 20,710 19,599 23,907
Loss on sale of accounts
receivable(e).......... -- -- 1,261 3,269 3,489
Interest expense(f)..... 775 755 2,454 3,098 2,854
Income before income
taxes.................. 11,479 9,592 16,995 13,232 17,564
Net income.............. 7,129 4,755 10,350 8,105 10,835
OTHER DATA:
EBITDA(g)............... $14,878 $20,646 $ 23,247 $ 23,371 $ 27,118
Depreciation and
amortization........... 2,582 2,398 2,237 2,154 2,201
Capital expenditures.... 1,420 2,147 1,823 4,290 7,897
CASH FLOWS DATA:
Net cash provided by
operating activities... $9,584 $10,057 $24,912 $11,744 $12,375
Net cash used in
investing activities... (1,414) (676) (972) (4,270) (7,856)
Net cash used in
financing
activities(h).......... (8,564) (9,474) (23,959) (7,347) (4,508)
</TABLE>
<TABLE>
<CAPTION>
AT JANUARY 25, 1997
-------------------
<S> <C>
BALANCE SHEET DATA:
Working capital(i).......................................... $ 6,485
Total assets(i)............................................. 39,614
Long-term debt, C&A Products(j)............................. 25,400
Stockholder's deficit(i).................................... (3,780)
</TABLE>
- -------
(a) The fiscal period ended January 30, 1993 included 53 weeks.
(b) Amounts include costs incurred by the Company relating to certain matters
retained by the Seller totaling $42,000 in fiscal 1992, $4,302,000 in
fiscal 1993, $300,000 in fiscal 1994, $1,618,000 in fiscal 1995 and
$1,010,000 in fiscal 1996. The above amounts represent costs, including
customer remediation, legal expenses, travel expenses and claim
settlements, incurred by the Company in connection with certain claims and
litigation that either are being retained by C&A Products pursuant to the
Acquisition Agreement or were incurred by the Company in anticipation of
the sale of the Company.
(c) Amounts relate to services provided by C&A Products and include tax,
treasury, risk management, employee benefits, legal, data processing,
application of cash receipts and other general corporate services. The
costs of the services provided by C&A Products were allocated to the
Company based upon a combination of estimated use and the relative sales of
the Company's business to the total consolidated operations of C&A
Products. In the opinion of management, the method of allocating these
costs is believed to be reasonable. However, the costs of these services
charged to the Company are not necessarily indicative of the costs that
would have been incurred if the Company had performed these functions. See
"Unaudited Pro Forma Financial Data" for management's estimate of the cost
of these services subsequent to the Acquisition.
(d) At October 30, 1993, Collins & Aikman Corporation wrote off all goodwill
related to its December 1988 acquisition of C&A Products based upon its
assessment that the asset was impaired. The write-off of $2.6 million that
was reported during the year ended January 29, 1994 represented the
Company's allocated portion of the goodwill. In addition, prior to the
Closing Date certain of the Company's employees participated in Collins &
Aikman Corporation's stock option plans which provide for the award of
options on Collins & Aikman Corporation common shares to employees,
exercisable over ten-year periods. Pursuant to such stock option plans,
Collins & Aikman Corporation granted certain employees of the Company stock
options with exercise prices below the then estimated fair value in
recognition of their prior service and recorded management equity plan
expense of $1.0 million. Such charges have been deducted in determining
operating income for the fiscal year ended January 29, 1994.
(e) Effective July 13, 1994, C&A Products entered into a Receivables Sale
Agreement with Carcorp, a wholly-owned, bankruptcy-remote subsidiary of C&A
Products. The accounts receivable were purchased by Carcorp at the face
amount of the accounts receivable less a defined discount. Upon closing of
the Acquisition, the Company was terminated as a seller under the
Receivables Sale Agreement. Management does not anticipate selling its
accounts receivable in the future and as a result, does not expect to incur
any losses related to third-party discounts associated with such sales.
(f) Substantially all of the Company's interest expense relates to the
allocated debt of C&A Products referred to in note (j) below.
(g) EBITDA represents earnings before deductions for interest expense, loss on
sale of accounts receivable, income tax expense, depreciation,
amortization, non-recurring charges related to the write-off of goodwill
and the management equity plan expense (see note (d) above) and the costs
incurred in connection with certain matters retained by the Seller (see
note (b) above). Because of certain of these adjustments, the measure
presented may not be comparable to similarly titled measures reported by
other companies. The Company understands that certain investors believe
EBITDA reflects a company's ability to satisfy principal and interest
obligations with respect to its indebtedness and to utilize cash for other
purposes. EBITDA does not represent and should not be considered as an
alternative to net income or cash flow from operations as determined by
generally accepted accounting principles.
(h) Net cash used in financing activities includes net cash transactions with
C&A Products.
(i) For periods after July 13, 1994, amounts exclude all domestic trade
accounts receivable sold by the Company pursuant to the Receivables Sale
Agreement referred to in note (e) above.
(j) Amount represents the debt of C&A Products that has been allocated to the
Company as a result of its guarantee of certain C&A Products debt. In
connection with the sale of the Company, the Company was released from this
guarantee, and accordingly, the Company was not required to repay any of
the allocated amounts.
11
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following presents summary unaudited pro forma financial data of the
Company, giving effect to the Transactions as if they had occurred on January
28, 1996. The summary unaudited pro forma financial data does not purport to
represent what the Company's results of operations actually would have been if
the Transactions had occurred as of the date indicated or what such results
will be for any future periods. The information in this table should be read in
conjunction with "Unaudited Pro Forma Financial Data," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 25, 1997
----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
OPERATING DATA:
Net sales.................................................... $136,124
Cost of goods sold........................................... 86,325
--------
Gross profit................................................. 49,799
Selling, general and administrative expenses................. 31,732
Corporate general and administrative allocated costs......... 1,393
--------
Operating income............................................. 16,674
Interest expense............................................. 16,001
--------
Income before income taxes................................... 673
Income tax expense........................................... 260
--------
Net income................................................... $ 413
========
OTHER DATA:
EBITDA(a).................................................... $ 27,256
Cash interest expense........................................ 14,861
Depreciation and amortization of intangible assets and the
increase to fair value of inventory......................... 11,799
Capital expenditures......................................... 7,897
Ratio of EBITDA to cash interest expense..................... 1.8x
Ratio of total long-term debt to EBITDA...................... 5.8x
<CAPTION>
AT
JANUARY 25, 1997
----------------
BALANCE SHEET DATA:
<S> <C>
Working capital.............................................. $ 25,915
Total assets................................................. 222,679
Long-term debt, including current maturities................. 157,000
Stockholder's equity......................................... 51,000
</TABLE>
- --------
(a) Pro-forma EBITDA represents earnings before deductions for interest
expense, income tax expense, depreciation, amortization and the increase to
fair value of inventory. The Company understands that certain investors
believe EBITDA reflects a company's ability to satisfy principal and
interest obligations with respect to its indebtedness and to utilize cash
for other purposes. EBITDA does not represent and should not be considered
as an alternative to net income or cash flows from operations as determined
by generally accepted accounting principles.
12
<PAGE>
RISK FACTORS
Holders of Initial Notes should carefully consider the following factors in
addition to the other information set forth in this Prospectus in connection
with the Exchange Offer.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
In connection with the Acquisition, the Company incurred a significant
amount of indebtedness. At January 25, 1997, the Company's indebtedness would
have been $157.0 million (exclusive of $28.0 million of available borrowings
under its Revolving Credit Facility) and its stockholder's equity would have
been $51.0 million, in each case on a pro forma basis after giving effect to
the Transactions. In addition, subject to the restrictions in the Credit
Agreement and the Indenture, the Company may incur additional senior or other
indebtedness from time to time to finance acquisitions or capital expenditures
or for other general corporate purposes. For the year ended January 25, 1997,
on a pro forma basis after giving effect to the Transactions as if they had
occurred on January 28, 1996, the Company's ratio of earnings to fixed charges
would have been 1.0 to 1.0.
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's
cash flow from operations must be dedicated to debt service and will not be
available for other purposes; (ii) the Company's future ability to obtain
additional debt financing for working capital, capital expenditures or
acquisitions may be limited; (iii) the Company's level of indebtedness could
limit its flexibility in reacting to changes in the industry and general
economic conditions; (iv) certain of the Company's borrowings (including but
not limited to the $85.0 million Credit Agreement) will be at variable rates
of interest, which could cause the Company to be vulnerable to increases in
interest rates; and (v) all of the indebtedness incurred in connection with
the Credit Agreement will become due prior to the time the principal payments
on the Notes will become due. Certain of the Company's competitors currently
operate on a less leveraged basis and have significantly greater operating and
financing flexibility than the Company.
The Company's ability to pay interest on the Notes and to satisfy its other
debt obligations will depend upon its future operating performance, which will
be affected by prevailing economic conditions and financial, business and
other factors, certain of which are beyond its control. If the Company is
unable to service its indebtedness, it will be forced to adopt an alternative
strategy that may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
SUBORDINATION OF NOTES; ASSET ENCUMBRANCE
The Notes are subordinated in right of payment to all existing and future
Senior Debt of the Company. In the event of bankruptcy, liquidation or
reorganization of the Company, the assets of the Company will be available to
pay obligations on the Notes only after all Senior Debt has been paid in full,
and there may not be sufficient assets remaining to pay amounts due on any or
all of the Notes then outstanding. In addition, under certain circumstances,
no payments may be made with respect to principal of or interest on the Notes
if a default exists with respect to Senior Debt. In addition, indebtedness
outstanding under the Credit Agreement is secured by substantially all of the
assets of the Company and its subsidiary. On a pro forma basis, after giving
effect to the Transactions, Senior Debt of the Company at January 25, 1997
would have been $57.0 million (exclusive of unused commitments of $28.0
million). Additional Senior Debt may be incurred by the Company from time to
time subject to certain restrictions contained in the Credit Agreement and the
Indenture. See "Description of Credit Agreement" and "Description of the
Notes."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Credit Agreement prohibits the Company from prepaying its indebtedness
(including the Notes), other than indebtedness incurred under the Credit
Agreement. The Credit Agreement also requires the Company to
13
<PAGE>
maintain specified financial ratios and satisfy certain financial condition
tests. The Company's ability to meet those financial ratios and tests can be
affected by events beyond its control, and there can be no assurance that the
Company will meet those tests. A breach of any of these covenants could result
in a default under the Credit Agreement and/or the Indenture. In the event of
an event of default under the Credit Agreement, the lenders thereunder could
elect to declare all amounts outstanding under the Credit Agreement, together
with accrued interest, to be immediately due and payable. If the Company were
unable to repay those amounts, the lenders could proceed against the
collateral granted to them to secure that indebtedness. If the Credit
Agreement indebtedness were to be accelerated, there can be no assurance that
the assets of the Company would be sufficient to repay in full that
indebtedness and the other indebtedness of the Company, including the Notes.
See "Description of Credit Agreement."
THE COMPANY IS CONTROLLED BY QUAD-C
Quad-C and Paribas and their respective affiliates, through their ownership
of substantially all of the voting stock of Holdings, effectively control the
Company and have the power to elect all directors of the Company, approve all
amendments to the Company's Certificate of Incorporation and effect
fundamental corporate transactions such as mergers and asset sales. Terrence
D. Daniels, President of Quad-C, effectively controls Quad-C and its
affiliates and therefore effectively controls the Company. See "Ownership of
Capital Stock."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success is largely dependent upon the
abilities and experience of its senior management team, which has an average
of 20 years of experience in the floorcovering industry and over 10 years of
experience with the Company. The loss of the services of one or more of these
senior executives could adversely affect the Company's results of operations.
See "Management."
RELIANCE ON PETROLEUM-BASED RAW MATERIALS; RELIANCE ON PRINCIPAL SUPPLIER
Petroleum-based products, including both nylon and vinyl, comprise the
predominant portion of the cost of raw materials used by the Company in
manufacturing. Large increases in the cost of such petroleum-based raw
materials could adversely affect the Company if the Company were unable to
pass these increased costs through to customers. E. I. DuPont de Nemours and
Company ("DuPont") currently supplies all of the Company's requirements for
nylon yarn, the principal raw material used in the Company's floorcovering
products. The unanticipated termination of the supply arrangement with DuPont
or a prolonged interruption in shipments from DuPont could have a material
adverse effect on the Company.
CYCLICAL NATURE OF INDUSTRY
Sales of the Company's principal products are related to the construction
and renovation of commercial buildings. Such activity is cyclical and can be
affected by the strength of the general economy, prevailing interest rates and
other factors that could lead to cost control measures and reduced spending by
businesses and other users of commercial space. A downturn in either new
construction or renovations could impact the overall demand for commercial
floorcovering products, which could adversely affect the Company's results of
operations.
THE COMMERCIAL FLOORCOVERINGS INDUSTRY IS HIGHLY COMPETITIVE
The commercial floorcoverings industry is highly competitive. The Company
competes with other carpet manufacturers and manufacturers of vinyl and other
types of floorcovering. While no competitor focuses solely on the same
products as the Company, a number of domestic and foreign competitors
manufacture six-foot roll goods and modular carpet tile as one segment of
their business. Certain of these competitors have greater financial resources
than the Company. See "Business--Competition."
Historically, the vast majority of the commercial carpet industry's sales
has been through independent carpet dealers. Recently, two of the Company's
competitors and DuPont, the Company's principal raw material
14
<PAGE>
supplier, initiated a strategy of purchasing or forming alliances with
selected carpet dealers primarily in large metropolitan markets. No assurance
can be given as to the effect, if any, the foregoing will have on the industry
in general or on the Company's results of operations in particular.
NEW STAND-ALONE COMPANY
Prior to the Transactions, the Company had been a member of a consolidated
group of companies and had not operated as a stand-alone company. C&A Products
historically provided a number of administrative and other services to the
Company. In addition, the Company participated in certain C&A Products
benefits and insurance programs. After the Transactions, the Company initially
is relying upon C&A Products under the Management Services Agreement described
in "The Acquisition" and "Certain Transactions" for certain services, such as
data processing, health care and employee benefits administration, treasury
and tax functions, and engineering for up to one year, and traffic services
for up to two years, following consummation of the Transactions. Prior to the
termination of the Management Services Agreement, the Company will need to
provide or procure these services independently. No assurance can be given as
to the impact, if any, of these changes on the Company's results of
operations.
NO ASSURANCE THAT THE COMPANY CAN SATISFY ITS REPURCHASE OBLIGATION UPON
CHANGE OF CONTROL
A Change of Control (as defined) could require the Company to refinance
substantial amounts of indebtedness. Upon the occurrence of a Change of
Control, the holders of the Notes would be entitled to require the Company to
purchase the Notes at a purchase price equal to 101% of the principal amount
of such Notes, plus accrued and unpaid interest, if any, to the date of
purchase. However, the Credit Agreement prohibits the purchase of the Notes by
the Company, unless and until such time as the indebtedness under the Credit
Agreement is repaid in full. In the event of a Change of Control, there can be
no assurance that the Company would have assets sufficient to satisfy all of
its obligations under the Credit Agreement and the Notes. See "Description of
Credit Agreement" and "Description of the Notes--Change of Control."
COURT FINDING OF FRAUDULENT CONVEYANCE COULD VOID THE COMPANY'S OBLIGATIONS
UNDER THE NOTES
If a court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or the Company as a debtor-in-
possession, were to find under relevant federal and state fraudulent
conveyance statutes that the Company did not receive fair consideration or
reasonably equivalent value for incurring certain of the indebtedness,
including the Notes, incurred by the Company in connection with the
Acquisition, and that, at the time of such incurrence, the Company (i) was
insolvent, (ii) was rendered insolvent by reason of such incurrence or grant,
(iii) was engaged in a business or transaction for which the assets remaining
with the Company constituted unreasonably small capital or (iv) intended to
incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, such court, subject to applicable statutes of
limitation, could void the Company's obligations under the Notes, subordinate
the Notes to obligations of the Company that do not otherwise constitute
Senior Debt or take other action detrimental to the holders of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than all that company's property at a fair valuation, or if the
present fair salable value of that company's assets is less than the amount
that will be required to pay its probable liability on its existing debts as
they become absolute and matured. Moreover, regardless of solvency, a court
could void an incurrence of indebtedness, including the Notes, if it
determined that such transaction was made with intent to hinder, delay or
defraud creditors, or a court could subordinate the indebtedness, including
the Notes, to the claims of all existing and future creditors on similar
grounds.
There can be no assurance as to what standard a court would apply in order
to determine whether the Company was "insolvent" upon consummation of the
Acquisition or the sale of the Notes or that, regardless of
15
<PAGE>
the method of valuation, a court would not determine that the Company was
insolvent upon consummation of the Acquisition or sale of the Notes.
Additionally, under federal bankruptcy or applicable state insolvency law,
if a bankruptcy or insolvency were initiated by or against the Company within
90 days after any payment by the Company with respect to the Notes, or if the
Company anticipated becoming insolvent at the time of such payment, all or a
portion of the payment could be avoided as a preferential transfer and the
recipient of such payment could be required to return such payment.
ABSENCE OF PUBLIC MARKET
The Initial Notes were issued to, and the Company believes are currently
owned by, a relatively small number of beneficial owners. Prior to the
Exchange Offer, there has not been any public market for the Initial Notes.
The Initial Notes have not been registered under the Securities Act and will
be subject to restrictions on transferability to the extent that they are not
exchanged for Exchange Notes by holders who are entitled to participate in
this Exchange Offer. The Exchange Notes will constitute a new issue of
securities with no established trading market. The Company does not intend to
list the Exchange Notes on any national securities exchange or seek approval
for quotation on the National Association of Securities Dealers Automated
Quotation System. No assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of the
trading market for the Exchange Notes. If a trading market does not develop or
is not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may be discontinued at any
time. If a public trading market develops for the Exchange Notes, future
trading prices of such securities will depend on many factors including, among
other things, prevailing interest rates, the Company's results of operations
and the market for similar securities. Depending on prevailing interest rates,
the market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from
their principal amount. Historically, the market for securities similar to the
Exchange Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Exchange Notes,
if such market develops, will not be subject to similar disruptions.
VIOLATION OF ENVIRONMENTAL LAWS COULD ADVERSELY AFFECT THE COMPANY
The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as
handling and disposal practices for solid and hazardous wastes, and (ii)
impose liability for response costs and certain damages resulting from past
and current spills, disposals or other releases of hazardous materials
(together, "Environmental Laws"). The Company's operations may result in
noncompliance with or liability for cleanup pursuant to Environmental Laws.
Environmental Laws have changed rapidly in recent years, and the Company may
be subject to more stringent Environmental Laws in the future. There can be no
assurance that more stringent Environmental Laws could not have a material
adverse effect on the Company's results of operations. See "Business--
Environmental Initiatives."
16
<PAGE>
THE ACQUISITION
Pursuant to the Acquisition Agreement, CAF purchased all of the issued and
outstanding capital stock of the Company on February 6, 1997. The purchase
price of $197.0 million (including $27.0 million in consideration of the
Tradename License Agreement) was subject to a purchase price adjustment based
upon the level of net working capital on the Closing Date. At the date of
closing, the preliminary estimated adjustment was a $1.4 million reduction in
the purchase price, resulting in a payment to the Seller on that date of
$195.6 million. There was no further adjustment to the purchase price based
upon final determination of the net working capital balance as of the Closing
Date.
In connection with the Acquisition, Holdings and Collins & Aikman
Corporation made an election under Section 338(h)(10) of the Code, which had
the effect of treating the Acquisition as a purchase of assets for federal
income tax purposes. As a result of the Section 338(h)(10) election, the
Company's tax basis in its assets was increased to the respective fair market
values of such assets. The newly allocated basis is amortizable for tax
purposes over the respective useful lives of the assets, in accordance with
the provisions of the Code. The balance of the purchase price was allocated to
goodwill and other intangibles (including rights under the Tradename License
Agreement), which is amortizable for tax purposes over fifteen years.
In connection with the Acquisition, the Company entered into the Tradename
License Agreement with C&A Products, pursuant to which C&A Products granted to
the Company a perpetual, exclusive, fully-paid, royalty-free license to use
the name "Collins & Aikman" in connection with the business of designing,
manufacturing and marketing carpet or other floorcoverings for installation in
buildings or other structures and other products currently manufactured and
distributed by the Company (the "Floorcoverings Business"). The term of the
license will continue indefinitely, subject to termination by C&A Products for
breach by the Company of its covenants under the Tradename License Agreement
or if the Company is acquired by a competitor of C&A Products.
In connection with the Acquisition, C&A Products and its parent corporation,
Collins & Aikman Corporation, entered into a Non-Competition Agreement with
Holdings and the Company pursuant to which they agreed not to compete with the
Company in the Floorcoverings Business anywhere in the world for a period of
seven years from the Closing Date (provided that the Non-Competition Agreement
does not restrict Collins & Aikman Corporation or C&A Products after the
second anniversary of the Closing Date from acquiring an entity that is
engaged in the Floorcoverings Business) and not to use, or allow the use of,
the name Collins & Aikman or the initials "C&A" in the Floorcoverings Business
at any time after the Closing Date. In addition, under the Non-Competition
Agreement, Collins & Aikman Corporation and C&A Products have agreed for a
period of five years after the Closing Date not to solicit or attempt to hire
certain employees of the Company.
To facilitate the transition of the Company from its position as a member of
a consolidated group of companies to a stand-alone entity, the Company entered
into a Management Services Agreement pursuant to which C&A Products agreed to
provide, at the Company's request, certain categories of services, such as
data processing, health care and employee benefit administration, treasury and
tax functions, and engineering and traffic services. The maximum aggregate
annual payments (other than for traffic services) under the Management
Services Agreement are expected to be approximately $324,000. The Company paid
C&A Products approximately $1.5 million for services (other than traffic
services) and certain other allocations in 1996. Management estimates that its
costs of providing these services independently will approximate $1.5 million
on an annual basis. Other than traffic services, which C&A Products has agreed
to provide for up to two years following the Closing Date, C&A Products'
obligation to provide services terminates one year after the Closing Date.
17
<PAGE>
USE OF PROCEEDS OF THE EXCHANGE NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive, in exchange, Initial Notes in like
principal amount. The form and terms of the Exchange Notes are identical in
all material respects to the form and terms of the Initial Notes, except as
otherwise described herein under "The Exchange Offer--Terms of the Exchange
Offer." The Initial Notes surrendered in exchange for the Exchange Notes will
be retired and cancelled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase in the outstanding debt of the
Company.
18
<PAGE>
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
on a pro forma basis giving effect to the Transactions as if they had occurred
on January 25, 1997. This table should be read in conjunction with the
"Selected Consolidated Financial Data," and "Unaudited Pro Forma Financial
Data" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 25, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Indebtedness:
Revolving credit facility(a)........................ $ 2,000
Term loan(a)........................................ 55,000
Initial Notes....................................... 100,000
--------
Total indebtedness................................ 157,000
Stockholder's equity.................................. 51,000
--------
Total capitalization.............................. $208,000
========
</TABLE>
- --------
(a) Reflects borrowings under the Credit Agreement necessary to consummate the
Transactions. The total availability under the revolving credit facility
is $30.0 million. See "Unaudited Pro Forma Financial Data" and
"Description of Credit Agreement."
19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet as of January
25, 1997 was prepared as if the Transactions had occurred on such date. The
following Unaudited Pro Forma Consolidated Statement of Operations gives
effect to the Transactions as if they had occurred on January 28, 1996. The
Unaudited Pro Forma Consolidated Statement of Operations does not purport to
represent what the Company's results of operations actually would have been if
the Transactions had occurred as of such date or what such results will be for
any future periods.
The Unaudited Pro Forma Consolidated Balance Sheet reflects the preliminary
allocation of the purchase price for the Acquisition to the Company's tangible
and intangible assets and liabilities. The final allocation of such purchase
price, and the resulting depreciation and amortization expense in the
accompanying Unaudited Pro Forma Consolidated Statement of Operations, will
differ from the preliminary estimates due to the final allocation being based
on: (a) actual closing date amounts of assets and liabilities and (b) final
appraised values of property, plant and equipment and other assets.
The unaudited pro forma financial data are based on the historical
financial statements of the Company and the assumptions and adjustments
described in the accompanying notes. The Company believes that such
assumptions are reasonable. The unaudited pro forma financial data should be
read in conjunction with the Consolidated Financial Statements of the Company
and the accompanying notes thereto appearing elsewhere in this Prospectus.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JANUARY 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING ACQUISITION
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash..................... $ 144 $200,700 (a) $(198,700)(b) $ 2,144
Accounts receivable,
net..................... 1,577 17,311 (c) 18,888
Inventories.............. 16,172 3,090 (c) 19,262
Deferred tax assets...... 1,433 (1,312)(c) 121
Prepaid expenses and
other................... 488 488
------- --------
Total current assets... 19,814 40,903
Property, plant and
equipment, net............ 19,521 17,583 (c) 37,104
Deferred tax assets........ 259 515 (c) 774
Goodwill and intangibles... -- 136,578 (c) 136,578
Other assets............... 20 20
Deferred financing costs... -- 7,300 (d) 7,300
------- --------
Total assets........... $39,614 $222,679
======= ========
LIABILITIES AND
STOCKHOLDER'S (DEFICIT)
EQUITY
Current Liabilities:
Accounts payable......... $ 8,659 $ 8,659
Accrued expenses......... 4,670 $ (1,341)(e) 3,329
Current portion of senior
credit facility......... -- $ 3,000 (a) 3,000
------- --------
Total current
liabilities........... 13,329 14,988
Noncurrent liabilities,
including post-retirement
benefit obligation........ 4,665 (1,974)(f) 2,691
Allocated debt of C&A
Products.................. 25,400 (25,400)(g) --
Senior credit facility..... -- 54,000 (a) 54,000
Notes...................... -- 100,000 (a) 100,000
------- --------
Total liabilities...... 43,394 171,679
------- --------
Stockholder's Equity:
Common stock............. -- --
Additional paid-in-
capital................. 7,821 51,000 (a) (7,821)(h) 51,000
Retained earnings........ 18,940 (18,940)(h) --
Investment and advances
to Collins & Aikman
Products Co............. (30,386) 30,386 (h) --
Foreign currency
translation adjustment.. 222 (222)(h) --
Pension equity
adjustment.............. (377) 377 (c) --
------- --------
Total stockholder's
(deficit) equity...... (3,780) 51,000
------- --------
Total liabilities and
stockholder's
(deficit) equity...... $39,614 $222,679
======= ========
</TABLE>
See accompanying notes.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
The Pro Forma Consolidated Balance Sheet reflects the Transactions as if they
had occurred as of January 25, 1997 (actual amounts may differ from amounts
estimated below).
(a) Reflects the issuance of the Notes, the Equity Financing and the Bank
Financing:
<TABLE>
<S> <C>
Issuance of the Notes.......................................... $100,000
Equity Financing............................................... 51,000
Senior credit facility:
Current portion.............................................. 3,000
Long-term portion............................................ 54,000
Issuance-related fees and expenses............................. (7,300)
--------
$200,700
========
</TABLE>
(b) Represents the following cash payments related to the Acquisition:
<TABLE>
<S> <C>
Purchase price................................................ $(197,000)
Preliminary purchase price adjustment......................... 1,400
Acquisition expenses.......................................... (3,100)
---------
$(198,700)
=========
</TABLE>
(c) The Acquisition will be accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations." The
purchase price is being allocated first to the tangible and identifiable
intangible assets and liabilities of the Company based upon preliminary
estimates of their fair market values, with the remainder allocated to goodwill
as follows:
<TABLE>
<S> <C>
Purchase price, net of preliminary purchase price adjustment.. $195,600
Acquisition expenses.......................................... 3,100
Reinstatement of amounts of accounts receivable previously
sold......................................................... (17,311)
Book value of net assets acquired............................. (21,997)
Adjustment to book value of net assets acquired
for liabilities retained by Seller in Acquisition:
Medical and product and general liability................... (611)
Current employee payroll and benefit liabilities............ (781)
Long-term employee benefit liabilities...................... (1,096)
Elimination of pension equity adjustment.................... 377
--------
Increase in basis............................................. $157,281
========
Allocation of increase in basis:
Increase to fair value of property, plant and equipment..... $ 17,583
Increase to fair value of inventories....................... 3,090
Increase in goodwill and intangibles........................ 136,578
Changes in deferred tax balances:
Current deferred tax assets............................... (1,312)
Noncurrent deferred tax assets............................ 515
Adjustments to liabilities for post-retirement costs........ 827
--------
$157,281
========
</TABLE>
(d) Reflects the deferred financing costs related to the Offering of the
Notes and the Bank Financing.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS)
(e) Reflects liabilities retained by Seller in the Acquisition:
<TABLE>
<S> <C>
Medical liability............................................... $ (560)
Current employee payroll and benefit liabilities................ (781)
-------
$(1,341)
=======
(f) Reflects the following:
Product and general liability retained by Seller................ $ (51)
Adjustments to liabilities for post-retirement costs............ (827)
Long-term employee benefit liabilities retained by
Seller in the Acquisition..................................... (1,096)
-------
$(1,974)
=======
</TABLE>
(g) Reflects the elimination of allocated debt of former parent.
(h) Reflects the elimination of historical equity balances.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 25, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OFFERING ACQUISITION
HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales..................... $136,124 $136,124
Cost of goods sold............ 81,715 $ 4,610 (a) 86,325
-------- --------
Gross profit.................. 54,409 49,799
Selling, general and
administrative expenses...... 28,971 2,761 (b) 31,732
Corporate general and
administrative allocated
costs........................ 1,531 (138)(c) 1,393
-------- --------
Operating income.............. 23,907 16,674
Interest expense.............. 2,854 $16,001 (d) (2,854)(e) 16,001
Loss on sale of accounts
receivable................... 3,489 (3,489)(f) --
-------- --------
Income before income taxes.... 17,564 673
Income tax expense............ 6,729 (6,128)(g) (341)(g) 260
-------- --------
Net income.................... $ 10,835 $ 413
======== ========
OTHER DATA:
EBITDA(h)..................... $ 27,118 $ 27,256
Depreciation and amortization
of intangible assets and the
increase to fair value of
inventory.................... 2,201 11,799
Ratio of earnings to fixed
charges...................... 6.6x 1.0x
</TABLE>
See accompanying notes.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
The Pro Forma Consolidated Statement of Operations reflects the Transactions
as if they had occurred on January 28, 1996.
(a) Reflects the following:
<TABLE>
<S> <C>
Additional depreciation on the increase to fair value of property,
plant and equipment................................................... $1,520
Amortization of the increase to fair value of inventory................ 3,090
------
$4,610
======
</TABLE>
(b) Reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 25, 1997
----------------
<S> <C>
Elimination of expenses for matters retained by Seller....... $(1,010)
Additional amortization of goodwill and intangibles.......... 3,414
Additional depreciation on the increase to fair value of
property, plant and equipment............................... 357
-------
$ 2,761
=======
</TABLE>
(c) Reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 25, 1997
----------------
<S> <C>
Estimated reduction in cost of performing functions previously
performed
by Seller's corporate office................................. $(488)
Sponsor's consulting fees to be incurred...................... 350
-----
$(138)
=====
</TABLE>
(d) Reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED
JANUARY 25, 1997
----------------
<S> <C>
Interest expense on the Notes.................................. $10,000
Interest expense on the senior credit facility at 8.15%........ 4,646
Unused commitment fees and agency fees......................... 215
-------
Total cash interest expense................................... 14,861
Amortization of deferred financing costs....................... 1,140
-------
Total interest expense........................................ $16,001
=======
</TABLE>
A change of 1/4% in the interest rate on the senior credit facility would
have an impact on pro forma interest expense of $143 for the year ended
January 25, 1997.
(e) Reflects the elimination of interest expense on allocated debt of former
parent, C&A Products.
(f) Reflects the elimination of the loss on sale of accounts receivable.
(g) Reflects the net additional income tax benefit as a result of the
Transactions, at the effective rate of 38.3% for the year ended January 25,
1997.
(h) Pro-forma EBITDA represents earnings before deductions for interest
expense, income tax expense, depreciation, amortization and the increase to
fair value of inventory. The Company understands that certain investors
believe EBITDA reflects a company's ability to satisfy principal and interest
obligations with respect to its indebtedness and to utilize cash for other
purposes. EBITDA does not represent and should not be considered as an
alternative to net income or cash flows from operations as determined by
generally accepted accounting principles.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following data is qualified in its entirety by the consolidated
financial statements of the Company and other information contained elsewhere
in this Prospectus. The financial data as of January 27, 1996 and January 25,
1997, and for the three years ended January 25, 1997, have been derived from
the audited financial statements of the Company contained elsewhere in this
Prospectus. The financial data as of and for the years ended January 30, 1993
and January 29, 1994 have been derived from the unaudited financial statements
of the Company. The historical consolidated financial statements of the
Company contained in this Prospectus are presented as if the Company were a
separate entity for all periods presented. The following financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------
JANUARY 30, JANUARY 29, JANUARY 28, JANUARY 27, JANUARY 25,
1993(A) 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $88,598 $95,590 $108,039 $122,169 $136,124
Cost of goods sold...... 53,518 55,065 62,527 73,615 81,715
------- ------- -------- -------- --------
Gross profit............ 35,080 40,525 45,512 48,554 54,409
Selling, general and
administrative
expenses(b)............ 21,708 25,478 23,733 27,364 28,971
Corporate general and
administrative
allocated costs(c)..... 1,044 1,046 1,069 1,591 1,531
Goodwill amortization
and write-off(d)....... 74 2,645 -- -- --
Management equity plan
expense(e)............. -- 1,009 -- -- --
------- ------- -------- -------- --------
Operating income........ 12,254 10,347 20,710 19,599 23,907
Loss on sale of accounts
receivable(f).......... -- -- 1,261 3,269 3,489
Interest expense(g)..... 775 755 2,454 3,098 2,854
------- ------- -------- -------- --------
Income before income
taxes.................. 11,479 9,592 16,995 13,232 17,564
Income tax expense...... 4,350 4,837 6,645 5,127 6,729
------- ------- -------- -------- --------
Net income.............. $ 7,129 $ 4,755 $ 10,350 $ 8,105 $ 10,835
======= ======= ======== ======== ========
OTHER DATA:
EBITDA(h)............... $14,878 $20,646 $ 23,247 $ 23,371 $ 27,118
Capital expenditures.... 1,420 2,147 1,823 4,290 7,897
Depreciation and
amortization........... 2,582 2,398 2,237 2,154 2,201
Ratio of earnings to
fixed charges(i)....... 13.9x 11.9x 7.5x 5.0x 6.6x
CASH FLOWS DATA:
Net cash provided by
operating activities... $ 9,584 $10,057 $ 24,912 $ 11,744 $ 12,375
Net cash used in
investing activities... (1,414) (676) (972) (4,270) (7,856)
Net cash used in
financing
activities(j).......... (8,564) (9,474) (23,959) (7,347) (4,508)
BALANCE SHEET DATA (END
OF PERIOD):
Working capital(k)...... $13,682 $14,512 $ 3,268 $ 3,805 $ 6,485
Total assets(k)......... 40,433 41,160 27,312 31,231 39,614
Long-term debt(l)....... 11,715 8,100 43,800 43,300 25,400
Stockholder's equity
(deficit)(k)........... 14,542 14,912 (32,999) (29,645) (3,780)
</TABLE>
- --------
(a) The fiscal period ended January 30, 1993 included 53 weeks.
(b) Amounts include costs incurred by the Company relating to certain matters
retained by the Seller totaling $42,000 in fiscal 1992, $4,302,000 in
fiscal 1993, $300,000 in fiscal 1994, $1,618,000 in fiscal 1995 and
$1,010,000 in fiscal 1996. The above amounts represent all costs,
including customer remediation, legal expenses, travel expenses and claim
settlements, incurred by the Company in connection with certain claims and
litigation that either are being retained by C&A Products pursuant to the
Acquisition Agreement or were incurred by the Company in anticipation of
the sale of the Company.
(c) Amounts relate to services provided by C&A Products and include tax,
treasury, risk management, employee benefits, legal, data processing,
application of cash receipts and other general corporate services. The
costs of the services provided by C&A Products were allocated to the
Company based upon a
26
<PAGE>
combination of estimated use and the relative sales of the Company's
business to the total consolidated operations of C&A Products. In the
opinion of management, the method of allocating these costs is believed to
be reasonable. However, the costs of these services charged to the Company
are not necessarily indicative of the costs that would have been incurred if
the Company had performed these functions. See "Unaudited Pro Forma
Financial Data" for management's estimates of the cost of these services
subsequent to the Acquisition.
(d) At October 30, 1993, Collins & Aikman Corporation wrote off all goodwill
related to its December 1988 acquisition of C&A Products based upon its
assessment that the asset was impaired. The write-off reported for the
year ended January 29, 1994 represented the Company's allocated portion of
the goodwill.
(e) Certain of the Company's employees participated in Collins & Aikman
Corporation's stock option plans which provide for the award of options on
Collins & Aikman Corporation common shares to employees, exercisable over
ten-year periods. Pursuant to such stock option plans, Collins & Aikman
Corporation granted certain employees of the Company stock options with
exercise prices below the then estimated fair value in recognition of
their prior service.
(f) Effective July 13, 1994, C&A Products entered into a Receivables Sale
Agreement with Carcorp, a wholly-owned, bankruptcy-remote subsidiary of
C&A Products. The accounts receivable were purchased by Carcorp at the
face amount of the accounts receivable less a defined discount. Upon
closing of the Acquisition, the Company was terminated as a seller under
the Receivables Sale Agreement. Management does not anticipate selling its
accounts receivable in the future and as a result, does not expect to
incur any losses related to third-party discounts associated with such
sales.
(g) Substantially all of the Company's interest expense relates to the
allocated debt of C&A Products referred to in note (l) below.
(h) EBITDA represents earnings before deductions for interest expense, loss on
sale of accounts receivable, income tax expense, depreciation,
amortization, non-recurring charges related to the write-off of goodwill
(see note (d) above), the management equity plan expense (see note (e)
above) and the costs incurred in connection with certain matters retained
by the Seller (see note (b) above). Because of certain of these
adjustments, the measure presented may not be comparable to similarly
titled measures reported by other companies. The Company understands that
certain investors believe EBITDA reflects a company's ability to satisfy
principal and interest obligations with respect to its indebtedness and to
utilize cash for other purposes. EBITDA does not represent and should not
be considered as an alternative to net income or cash flow from operations
as determined by generally accepted accounting principles.
(i) For purposes of this calculation, earnings are defined as income before
income taxes plus fixed charges. Fixed charges consist of interest expense
on all indebtedness and the interest portion of operating lease rental
expense.
(j) Net cash used in financing activities includes net cash transactions with
C&A Products.
(k) For periods after July 13, 1994, amounts exclude all domestic trade
accounts receivable sold by the Company pursuant to the Receivables Sale
Agreement referred to in note (f) above.
(l) Amounts represent the debt of C&A Products that has been allocated to the
Company as a result of its guarantee of certain C&A Products debt. In
connection with the sale of the Company, the Company was released from
this guarantee, and accordingly, the Company was not required to repay any
of the allocated amounts.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is the leading U.S. manufacturer of six-foot roll carpet and the
third largest manufacturer of modular carpet tiles within the specified
commercial carpet market. The Company markets its products directly to the
end-user utilizing its national sales force and other distribution channels.
The Company's products are marketed to a wide variety of commercial end-
markets, including corporate office space, retail stores and education, health
care and government facilities. The Company believes that the diversity of its
target markets softens the impact of economic downturns.
Prior to 1990, the Company manufactured conventional twelve-foot broadloom
carpet in addition to its six- foot roll goods and modular carpet tile. The
Company discontinued its broadloom product offerings in 1992, which allowed
management to focus on its vinyl-backed roll and tile products where the
Company enjoys a more advantageous market position.
At the end of 1993, management implemented a focused sales strategy, which
assigns Company account managers to one or two specific end-markets (corporate
office space, retail stores and health care, education and government
facilities) within a geographic area. This segmentation strategy allows the
account managers to best service the unique product and design needs of the
end-user. Also in late 1992, the Company established the Source One program,
which offers customers a complete turn-key package of product supply and
project management for single- and multiple-site requirements. Through Source
One, the customer has one point of contact and one source of responsibility
for product procurement and installation.
The Company has significantly increased net sales and earnings since 1993.
Management believes these improvements resulted from a number of factors,
including strengthened customer relationships, the segmentation strategy,
various cost reduction programs, efficiency enhancements, reduction in the
number of yarn suppliers and product re-engineering. The benefits of the
Company's segmentation strategy are most evident in the education and health
care markets where 10 specialists have been assigned since 1994. In addition,
as part of the segmentation strategy, the Company targeted a new market,
retail stores. The Company's sales have grown rapidly in this segment and
management believes this to be an attractive target market which is indicative
of the opportunities it can realize through Source One.
During 1994 and 1995, the Company operated at close to capacity in its
tufting and finishing operations. To prepare for future growth and to
alleviate periodic capacity constraints, the Company began a $13.0 million
expansion and modernization program. The program included the replacement of
two-thirds of its tufting machines, the replacement of all warping equipment,
the completion of a 60,000 square foot addition to its finishing plant and the
installation of a second vinyl production line. The expansion and
modernization program is substantially complete. Management believes that as a
result of the program, production capacity will be sufficient to allow for
growth for the foreseeable future.
Primary raw materials, including yarn, primary backing and various coater
materials, represent the single largest component of costs. Yarn comprises
about one-third of the carpet's cost structure and in excess of 50% of total
raw material costs. See "Risk Factors--Reliance on Petroleum-Based Raw
Materials; Reliance on Principal Supplier." Raw material costs per square yard
decreased each year from 1990 through 1994, at a cumulative 12.9%, primarily
as a result of the elimination of multiple yarn suppliers and a change in the
mix in the Company's product line. However, during 1995, raw material costs
per square yard increased by approximately 7% primarily due to product mix,
including more complex styles and general vendor price increases related to
primary backing and coater materials. Raw material costs per square yard
increased at less than 1% during 1996. Historically, the Company has been able
to pass on yarn price increases in the ordinary course of business in response
to published increases by major yarn suppliers.
Cost containment is a focus at the Company. Two programs exist which have
reduced manufacturing and administrative costs. The first program seeks to
reduce Cost of Non-Conformance ("CONC"), which includes price discounts and
sales returns and allowances. From 1991 to 1996, the Company reduced CONC by
approximately 18%, while net sales grew by approximately 81%. The second
program is a cost improvement
28
<PAGE>
program, which focuses on eliminating or reducing costs for the Company. These
programs help minimize the cost impact of inflation and new Company
initiatives. During fiscal 1996, the Company realized $1.2 million in cost
savings, which on an annualized basis represents approximately $2 million in
cost savings.
Pursuant to the Acquisition Agreement, CAF purchased all of the issued and
outstanding capital stock of the Company on February 6, 1997. The purchase
price, after adjustment for the amount of net working capital as of the
Closing Date, was $195.6 million (including $27.0 million in consideration of
the Tradename License Agreement). See "The Acquisition."
RESULTS OF OPERATIONS
The following table sets forth certain operating results as a percentage of
net sales for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
(PERCENTAGE OF NET SALES)
<S> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0%
Cost of goods sold................ 57.9 60.3 60.0
----- ----- -----
Gross profit...................... 42.1 39.7 40.0
Selling, general and
administrative expenses.......... 22.0 22.4 21.3
Corporate general and
administrative allocated costs... 1.0 1.3 1.1
----- ----- -----
Operating income.................. 19.2 16.0 17.6
Interest expense allocated from
C&A Products..................... 2.3 2.5 2.1
Loss on sale of accounts
receivable....................... 1.2 2.7 2.6
----- ----- -----
Income before income taxes........ 15.7 10.8 12.9
Income tax expense................ 6.2 4.2 4.9
----- ----- -----
Net income........................ 9.6% 6.6% 8.0%
===== ===== =====
EBITDA margin..................... 21.5% 19.1% 19.9%
===== ===== =====
</TABLE>
FISCAL YEAR ENDED JANUARY 25, 1997 ("FISCAL 1996")
COMPARED WITH FISCAL YEAR ENDED JANUARY 27, 1996 ("FISCAL 1995")
Net sales. Net sales represent gross sales less product returns, customer
allowances and various customer discounts, all generated in the ordinary
course of business. Sales are comprised of six-foot roll goods, modular carpet
tile and other products, including adhesives and walk-off mats. The Company's
net sales increased to $136.1 million in fiscal 1996, an increase of $14.0
million or 11.4% over fiscal 1995. The increase in net sales in fiscal 1996
was due to strength in most of the Company's end-markets. Total volume
increased 12.8%. The Company experienced strong volume increases in six-foot
roll goods and other product categories. The increase in six-foot roll sales
was due to continued strong volume growth in the education and health care
markets, offset by a minor decrease in average selling price per square yard.
Tile sales in fiscal 1996 were up slightly, a result of a slight increase in
unit pricing offset by a slight decrease in volume. The Company achieved this
level of growth in net sales despite the fact that net sales (and net income)
declined in January 1997 versus January 1996. Management believes that the
decrease in net sales in January was due to the timing of certain shipments of
the Company's products, as evidenced by a significant increase in backlog as
of January 25, 1997 versus January 27, 1996. This is further evidenced by the
increase in net sales of over 15% in February and March of 1997 versus the
same period in 1996.
Gross profit. The Company's gross profit increased to $54.4 million in
fiscal 1996, an increase of $5.9 million or 12.1% over fiscal 1995. Gross
margin increased to 40.0% in fiscal 1996 from 39.7% in fiscal 1995. The
increase in gross profit and gross margin were the result of increased sales
and manufacturing efficiencies associated with higher volumes, offset by a
$0.5 million inventory write-off booked in January 1997 resulting from the
year-end physical inventory. Gross margin improved in fiscal 1996 in both the
six-foot roll and modular carpet tile categories.
29
<PAGE>
Selling, general and administrative ("SG&A") expenses. The Company's SG&A
expenses increased to $29.0 million in fiscal 1996, an increase of $1.6
million or 5.9% over fiscal 1995. As a percentage of sales, SG&A expenses
decreased to 21.3% during fiscal 1996 from 22.4% in fiscal 1995. Excluding
expenses related to certain matters retained by the Seller of $1.0 million in
fiscal 1996 and $1.6 million in fiscal 1995, SG&A expenses would have been
$28.0 million in fiscal 1996, an increase of $2.2 million or 8.6% over fiscal
1995. See Note (b) to "Selected Consolidated Financial Data." As a percentage
of sales, SG&A expenses (excluding expenses relating to the matters retained
by the Seller) decreased to 20.5% during fiscal 1996 from 21.1% in fiscal
1995. SG&A expenses (excluding expenses relating to the matters retained by
the Seller) increased due to (i) personnel additions to handle growth under
the Company's segmentation marketing strategy and (ii) higher sales
commissions due to the increase in sales. The Company's expenses relating to
the matters retained by the Seller decreased to $1.0 million in fiscal 1996, a
decrease of $0.6 million from fiscal 1995. These costs relate to the
settlement of a patent dispute and three matters for which C&A Products has
agreed to indemnify the Company. See "Business--Litigation."
Corporate general and administrative allocated costs. Corporate general and
administrative allocated costs include costs associated with services provided
by C&A Products. Services provided include tax, treasury, risk management,
employee benefits administration, legal, data processing, application of cash
receipts and other general corporate services. The Company has the option to
continue receiving certain of these services from C&A Products under a
Management Services Agreement, generally for up to a one-year period.
Allocated costs in fiscal 1996 were slightly lower than comparable charges in
fiscal 1995. As a percentage of sales, the allocated costs decreased to 1.1%
during fiscal 1996 from 1.3% in fiscal 1995.
Interest expense allocated from C&A Products. Because of the Company's
guarantee of certain debt of C&A Products, interest expense has been allocated
based upon the ratio of the Company's net assets to the consolidated invested
capital of C&A Products. Allocated interest expense of $2.9 million in fiscal
1996 decreased from the fiscal 1995 level of $3.1 million. This decrease
resulted primarily from C&A Products' 1996 offering of senior subordinated
debentures that had the effect of reducing the debt guaranteed by the Company.
In connection with the sale of the Company, the Company was released from all
guarantees.
Loss on sale of accounts receivable. Effective July 13, 1994, C&A Products
entered into a Receivables Sale Agreement with Carcorp, a wholly-owned,
bankruptcy-remote subsidiary of C&A Products. Under the terms of the
Receivables Sale Agreement, Carcorp purchased on a revolving basis, without
recourse, virtually all trade accounts receivable generated by C&A Products
and its subsidiaries, including the Company. The accounts receivable were
purchased by Carcorp at the face amount of the accounts receivable less a
defined discount. Upon closing of the Acquisition, the Company was terminated
as a seller under the Receivables Sale Agreement and as a result will no
longer incur a loss on the sale of its accounts receivable related thereto.
Loss on sale of accounts receivable increased to $3.5 million in fiscal 1996,
an increase of $0.2 million or 6.7% over fiscal 1995. The increase in net
sales resulted in a higher level of accounts receivable which, in turn, led to
greater sales of accounts receivable to Carcorp.
Net income. The Company's net income of $10.8 million in fiscal 1996 was
$2.7 million or 33.7% higher than the $8.1 million in fiscal 1995. The
increase was a result of the factors described above, offset by $1.6 million
in higher taxes from the increase in pretax earnings. The Company's effective
tax rate was 38.3% in fiscal 1996 and 38.7% in fiscal 1995.
EBITDA. The Company's EBITDA of $27.1 million in fiscal 1996 was $3.7
million or 16.0% higher than the $23.4 million in fiscal 1995. As a percentage
of sales, EBITDA increased to 19.9% in fiscal 1996 from 19.1% in fiscal 1995.
The increase in EBITDA and the increase in EBITDA margin was the combined
result of the factors described above.
FISCAL YEAR ENDED JANUARY 27, 1996 ("FISCAL 1995")
COMPARED WITH FISCAL YEAR ENDED JANUARY 28, 1995 ("FISCAL 1994")
Net sales. The Company's net sales increased to $122.2 million in fiscal
1995, an increase of $14.1 million or 13.1% over fiscal 1994. The increase in
net sales in fiscal 1995 was due to growth in all of the Company's
30
<PAGE>
end-markets, with the exception of corporate office space. Volume increased
15.0% across all product lines. The Company experienced significant sales
growth in the six-foot roll, modular carpet tile and other product categories.
The increase in six-foot roll sales was due to strong sales in the education,
health care and retail store
markets. The increase in modular carpet tile sales in fiscal 1995 was a result
of strong volume growth in the government and, to a lesser extent, the
international market. Volume increases in all categories were slightly offset
by minor decreases in average selling price per square yard.
Gross profit. The Company's gross profit increased to $48.6 million in
fiscal 1995, an increase of $3.0 million or 6.7% over fiscal 1994. Gross
margin decreased to 39.7% in fiscal 1995 from 42.1% in fiscal 1994. Gross
profit increased due to higher sales volumes and manufacturing efficiencies.
As a percentage of sales, however, gross profit declined due to an increase in
raw material costs and a change in the Company's sales mix. The cost of yarn
per square yard increased in fiscal 1995 primarily due to the production of
more complex styles. In addition, the cost of primary backing and coater
materials increased due to general vendor price increases which were not
passed on to the customer. Excluding raw materials, manufacturing costs per
square yard decreased by approximately 7.3% in fiscal 1995 versus fiscal 1994,
which was a result of volume increases and the Company's ongoing focus on
manufacturing cost reductions.
SG&A expenses. SG&A expenses increased to $27.4 million in fiscal 1995, an
increase of $3.6 million or 15.3% over fiscal 1994. As a percentage of sales,
SG&A expenses increased to 22.4% in fiscal 1995 from 22.0% in fiscal 1994.
Excluding expenses relating to the matters retained by the Seller of $1.6
million in fiscal 1995 and $0.3 million in fiscal 1994, SG&A expenses
increased to $25.7 million in fiscal 1995, an increase of $2.3 million or 9.9%
over fiscal 1994. As a percentage of sales, SG&A expenses (excluding expenses
relating to the matters retained by the Seller) decreased to 21.1% in fiscal
1995 from 21.7% in fiscal 1994. The increase in SG&A expenses was a result of
higher sales, increased Source One staffing, additional sample expense, new
product introductions and higher travel and entertainment expenses due to the
expansion of the sales force during implementation of the Company's
segmentation marketing strategy.
Corporate general and administrative allocated costs. The Company's
allocated costs increased to $1.6 million in fiscal 1995, an increase of $0.5
million over fiscal 1994. The increase is primarily related to increased
overhead levels at the parent company which resulted in a higher allocation of
costs to the Company.
Interest expense allocated from C&A Products. The allocated interest expense
of $3.1 million in fiscal 1995 represents an increase of $644,000 from the
fiscal 1994 amount of $2.5 million. This increase relates primarily to the
fiscal 1994 refinancing by C&A Products that increased the level of the
Company's guarantee, and to the fact that fiscal 1995 was the first full year
in which the Company was a guarantor at the increased levels. In connection
with the sale of the Company, the Company was released from all guarantees.
Loss on sale of accounts receivable. Loss on sale of accounts receivable
increased to $3.3 million in fiscal 1995, an increase of $2.0 million or
159.2% over fiscal 1994. Fiscal 1995 was the first full year under the
Receivables Sale Agreement with Carcorp. Fiscal 1994 includes only 28 weeks
under the Carcorp agreement.
Net Income. The Company's net income of $8.1 million in fiscal 1995 was $2.2
million or 21.7% lower than the $10.4 million in fiscal 1994. The decrease was
the result of the increases in legal expenses, corporate general and allocated
costs and loss on sale of accounts receivable, offset by the higher gross
profit discussed above. The Company's effective tax rate of 38.7% in fiscal
1995 was 0.4 percentage points lower than the 39.1% effective tax rate in
fiscal 1994.
EBITDA. The Company's EBITDA of $23.4 million in fiscal 1995 was $0.1
million or 0.5% higher than the $23.2 million in EBITDA in fiscal 1994. As a
percentage of sales, EBITDA decreased to 19.1% from 21.5%. The increase in
EBITDA and the decrease in EBITDA margin was the combined result of the
factors described above.
31
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs have historically been for operating
expenses, working capital and capital expenditures. The Company has financed
its cash requirements primarily through internally-generated cash flow and
inter-company advances from C&A Products.
Net cash provided by operating activities in fiscal 1996 was $12.4 million
as compared with $11.7 million in fiscal 1995, primarily as a result of the
$2.7 million increase in net income, offset by a relatively larger increase in
working capital, particularly inventory, in 1996 versus 1995.
Net cash provided by operating activities in fiscal 1995 decreased to $11.7
million from $24.9 million in fiscal 1994. This decrease resulted primarily
from the increase in cash flow from a reduction in accounts receivable
included in fiscal 1994 results due to the Company's sale of accounts
receivable to Carcorp described in Note 7 to the Consolidated Financial
Statements. As fiscal 1994 was the Company's first year of participation in
this program, the large decrease in accounts receivable resulted in an
increase of approximately $12.6 million in net cash from operating activities
in fiscal 1994. Excluding this initial cash flow benefit, cash provided by
operating activities decreased from $12.3 million in fiscal 1994 to $11.7
million in fiscal 1995 due to a decrease in net income of $2.2 million offset
by certain other items.
The Company invested $1.8 million, $4.3 million and $7.9 million in capital
expenditures during fiscal 1994, 1995 and 1996, respectively. The Company
anticipates spending approximately $4.0 million to $5.0 million on capital
expenditures in each of fiscal 1997 and fiscal 1998. Increases in capital
expenditures in fiscal 1995 and fiscal 1996 reflect the expansion and
modernization program discussed above.
The Company incurred significant indebtedness in connection with the
Acquisition. At January 25, 1997, pro forma for the Transactions, the Company
would have had approximately $157.0 million of indebtedness outstanding,
consisting of $100.0 million of Notes, $55.0 million in term loan borrowings
and approximately $2.0 million in revolving credit borrowings under the Credit
Agreement, with no other debt or capital lease obligations. In addition, on a
pro forma basis, the Company had approximately $28.0 million in availability
under the revolving credit portion of the Credit Agreement and $2.1 million of
cash. The term loan portion of the Credit Agreement will mature on June 30,
2002 and will require annual principal payments (payable in quarterly
installments) totaling $3.0 million in 1997, $5.0 million in 1998, $9.0
million in 1999, $15.0 million in each of 2000 and 2001 and $8.0 million in
2002. The revolving credit portion of the Credit Agreement will mature on June
30, 2002 and may be repaid and reborrowed from time to time. For a description
of the Credit Agreement, see "Description of Credit Agreement." No principal
payments are required on the Notes prior to their scheduled maturity.
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance its indebtedness (including the Notes), depends
on its future performance, which, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors
beyond its control. Based upon the current level of operations and anticipated
growth, management of the Company believes that cash flow from operations,
together with available borrowings under the Credit Agreement, will be
adequate to meet the Company's anticipated future requirements for capital
expenditures and debt service. There can be no assurance that the Company's
business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable the Company to
service its indebtedness, including the Notes, or to make necessary capital
expenditures.
EFFECTS OF THE ACQUISITION
Following the Acquisition, the Company, in accordance with the purchase
accounting rules under generally accepted accounting principles, adjusted to
fair value the Company's assets and liabilities. On a pro forma basis, such
adjustments would have resulted in incremental depreciation and amortization
(excluding amortization of deferred financing fees and the increase to fair
value of inventory) estimated to be $5.4 million in fiscal 1996,
32
<PAGE>
which would have the effect of increasing cost of sales and SG&A expenses. The
Company will also adjust to fair value certain elements of inventory, which
will reduce gross profit in the year of the Acquisition by $3.1 million on a
pro forma basis. In addition, as part of the Acquisition, the Company incurred
additional debt, which would have resulted in a net increase in cash interest
expense in the amount of $14.9 million in fiscal 1996 on a pro forma basis. On
a stand-alone basis, the Company estimates that it will incur approximately
$1.5 million annually in additional general and administrative expenses, which
includes an annual consulting fee payable to Quad-C of $350,000. These costs
will replace the corporate general and administrative allocated costs
previously allocated to it by C&A Products, which totalled $1.5 million in
fiscal 1996. In addition, the Company has ceased to be a seller under the C&A
Products Receivables Sale Agreement and thus will no longer incur losses on
the sale of accounts receivable related thereto. See "Unaudited Pro Forma
Financial Data." The purchase price allocation reflected in the pro forma
financial data is based on preliminary estimates. The actual purchase
accounting adjustments will finally be determined following the Acquisition
and may vary from the amounts reflected in the "Unaudited Pro Forma Financial
Data" included elsewhere herein.
EFFECTS OF INFLATION
The impact of inflation on the Company's operations has not been significant
in recent years. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.
SEASONALITY
The Company experiences seasonal fluctuations, with generally lower sales
and gross profit in the first quarter of the fiscal year and higher sales and
gross profit in the second quarter of the fiscal year. The seasonality of
sales and profitability is primarily a result of disproportionately higher
education segment sales during the summer months while schools generally are
closed and floorcovering can be installed.
33
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement by and among the Company and
the Initial Purchaser, the Company has agreed (i) to file a registration
statement with respect to an offer to exchange the Initial Notes for senior
debt securities of the Company with terms substantially identical to the
Initial Notes (except that the Exchange Notes will not contain terms with
respect to transfer restrictions) within 60 days after the date of original
issuance of the Initial Notes and (ii) to use best efforts to cause such
registration statement to become effective under the Securities Act within 120
days after such issue date. In the event that applicable law or
interpretations of the staff of the Commission do not permit the Company to
file the registration statement containing this Prospectus or to effect the
Exchange Offer, or if certain holders of the Initial Notes notify the Company
that they are not permitted to participate in, or would not receive freely
tradeable Exchange Notes pursuant to, the Exchange Offer, the Company will use
its best efforts to cause to become effective the Shelf Registration Statement
with respect to the resale of the Initial Notes and to keep the Shelf
Registration Statement effective until three years after the original issuance
of the Initial Notes. The interest rate on the Initial Notes is subject to
increase under certain circumstances if the Company is not in compliance with
its obligations under the Registration Rights Agreement. See "Initial Notes
Registration Rights."
Each holder of the Initial Notes who wishes to exchange such Initial Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations in the Letter of Transmittal, including representations that
(i) any Exchange Notes to be received by it will be acquired in the ordinary
course of its business, (ii) it is not participating, does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and (iii) it is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Company or,
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable. See
"Initial Notes Registration Rights."
RESALE OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that, except as
described below, Exchange Notes issued pursuant to the Exchange Offer in
exchange for Initial Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than a holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act; provided that such Exchange Notes are acquired in the
ordinary course of such holder's business and such holder does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such Exchange Notes. Any holder who tenders
in the Exchange Offer with the intention or for the purpose of participating
in a distribution of the Exchange Notes cannot rely on such interpretation by
the staff of the Commission and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. Unless an exemption from registration is
otherwise available, any such resale transaction should be covered by an
effective registration statement containing the selling security holders
information required by Item 507 of Regulation S-K under the Securities Act.
This Prospectus may be used for an offer to resell, resale or other retransfer
of Exchange Notes only as specifically set forth herein. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Initial
Notes, where such Initial Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Initial Notes properly tendered and not withdrawn prior to 5:00 p.m., New
York City time, on the Expiration Date. The Company will issue $1,000
principal amount of
34
<PAGE>
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Initial Notes surrendered pursuant to the Exchange Offer. Initial Notes may be
tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Initial Notes except the Exchange Notes will be registered under
the Securities Act and hence will not bear legends restricting the transfer
thereof. The Exchange Notes will evidence the same debt as the Initial Notes.
The Exchange Notes will be issued under and entitled to the benefits of the
Indenture, which also authorized the issuance of the Initial Notes, such that
both series will be treated as a single class of debt securities under the
Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Initial Notes being tendered for exchange.
As of the date of this Prospectus, $100 million aggregate principal amount
of the Initial Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Initial
Notes. There will be no fixed record date for determining registered holders
of Initial Notes entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Initial Notes which are not tendered for exchange in
the Exchange Offer will remain outstanding and continue to accrue interest and
will be entitled to the rights and benefits such holders have under the
Indenture and the Registration Rights Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 2 of
the Registration Rights Agreement. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the Exchange Notes from
the Company. The Company expressly reserves the right to amend or terminate
the Exchange Offer, and not to accept for exchange any Initial Notes not
theretofore accepted for exchange, upon the occurrence of any of the
conditions specified below under "--Certain Conditions to the Exchange Offer."
Holders who tender Initial Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Initial
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time on July
7, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders of Initial Notes an announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the then
effective Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Initial Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"--Certain Conditions of the Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of Initial Notes. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, the Company
will promptly disclose such amendment by means of a prospectus supplement that
will be distributed to the registered holders,
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and the Company will extend the Exchange Offer, depending upon the
significance of the amendment and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 10% per annum from
February 6, 1997, the date of issuance of the Initial Notes that are tendered
in exchange for the Exchange Notes (or the most recent Interest Payment Date
(as defined) to which interest on such Notes has been paid). Accordingly,
Holders of Initial Notes that are accepted for exchange will not receive
interest on the Initial Notes that is accrued but unpaid at the time of
tender, but such interest will be payable on the first Interest Payment Date
after the Expiration Date. Interest on the Exchange Notes will be payable
semi-annually in arrears on each January 15 and July 15, commencing July 15,
1997.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for, any
Initial Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of any Initial Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Initial Notes, by giving oral or
written notice of such extension to the holders thereof. During any such
extensions, all Initial Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Initial
Notes not accepted for exchange for any reason will be returned without
expense to the tendering holder thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Initial Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified above. The Company will give oral or written notice
of any extension, amendment, non-acceptance or termination to the holders of
the Initial Notes as promptly as practicable, such notice in the case of any
extension to be issued no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
and from time to time in its reasonable judgment. The failure by the Company
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Initial Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Initial Notes, if at such time any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939 (the "TIA").
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PROCEDURES FOR TENDERING
Only a holder of Initial Notes may tender such Initial Notes in the Exchange
Offer. To tender in the Exchange Offer, a holder must complete, sign and date
the Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent
prior to 5:00 p.m., New York City time, on the Expiration Date. In addition,
either (i) Initial Notes must be received by the Exchange Agent along with the
Letter of Transmittal, or (ii) a timely confirmation of book-entry transfer (a
"Book-Entry Confirmation") of such Initial Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Letter of
Transmittal and other required documents must be received by the Exchange
Agent at the address set forth below under "--Exchange Agent" prior to 5:00
p.m., New York City time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF INITIAL NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR INITIAL NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Initial Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder of Initial Notes to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such owner's own behalf,
such owner must, prior to completing and executing the Letter of Transmittal
and delivering such owner's Initial Notes, either make appropriate
arrangements to register ownership of the Initial Notes in such owner's name
or obtain a properly completed bond power from the registered holder of
Initial Notes. The transfer of registered ownership may take considerable time
and may not be able to be completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as
defined below) unless the Initial Notes tendered pursuant thereto are tendered
(i) by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantor must be a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Initial Notes listed therein, such Initial Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Initial
Notes with the signature thereon guaranteed by an Eligible Institution.
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If the Letter of Transmittal or any Initial Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Initial Notes and withdrawal of tendered
Initial Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Initial Notes not properly tendered or any Initial
Notes the Company's acceptance of which would, in the opinion of counsel for
the Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Initial
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Initial Notes must be cured
within such time as the Company shall determine. Although the Company intends
to notify holders of defects or irregularities with respect to tenders of
Initial Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Initial Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Initial Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holder, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In all cases, issuance of Exchange Notes for Initial Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of Notes or a timely Book-Entry Confirmation of
such Initial Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Initial Notes
are not accepted for exchange for any reason set forth in the terms and
conditions of the Exchange Offer or if Initial Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or non-exchanged Initial Notes will be returned without expense to the
tendering holder thereof (or, in the case of Initial Notes tendered by book-
entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described below, such
non-exchanged Notes will be credited to an account maintained with such Book-
Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Initial Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Initial Notes by causing the
Book-Entry Transfer Facility to transfer such Initial Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees and any other required documents, must, in
any case, be transmitted to and received by the Exchange Agent at the address
set forth below under "--Exchange Agent" on or prior to the Expiration Date
or, if the guaranteed delivery procedures described below are to be complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Initial Notes and (i) whose Initial Notes
are not immediately available or (ii) who cannot deliver their Initial Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Dates, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Initial Notes and the principal amount of Initial Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
three (3) New York Stock Exchange trading days after the Expiration Date,
the Letter of Transmittal (or facsimile thereof) together with the Initial
Notes or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Initial Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Initial Notes to be withdrawn, identify the Initial
Notes to be withdrawn (including the principal amount of such Initial Notes),
and (where certificates for Initial Notes have been transmitted) specify the
name in which such Initial Notes were registered, if different from that of
the withdrawing holder. If certificates for Initial Notes have been delivered
or otherwise identified to the Exchange Agent, then, prior to the release of
such certificates the withdrawing holder must also submit the serial numbers
of the particular certificates to be withdrawn and a signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Initial Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice
of withdrawal must specify the name and number of the account at the Book-
Entry Transfer Facility to be credited with the withdrawn Initial Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Initial Notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer.
Any Initial Notes which have been tendered for exchange but which are not
exchanged for any reason will be returned to the holder thereof without cost
to such holder (or, in the case of Initial Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above, such Initial
Notes will be credited to an account maintained with such Book-Entry Transfer
Facility for the Initial Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Initial Notes may be retendered by following one of the procedures described
under "--Procedures for Tendering" above at any time on or prior to the
Expiration Date.
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EXCHANGE AGENT
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent of
the Exchange Offer. Questions and request for assistance, request for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
For Information by Telephone:
(212) 858-2103
By Registered or By Facsimile Transmission By Hand or Overnight
Certified Mail: (for Eligible Institutions only): Delivery Service:
P.O. Box 84 (212) 858-2611 One State Street New
Bowling Green Station New York, New York 10004
New York, New York 10274-0084 Facsimile Confirmation: Attn: Securities
Attn: Reorganization Operations (212) 858-2103 Processing Window,
Department Subcellar One (SC-1)
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, and related fees and expenses.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates
representing Initial Notes for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of Notes tendered, or if tendered
Notes are registered in the name of any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason
other than the exchange of Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Initial Notes, as set forth (i) in the
legend thereon as a consequence of the issuance of the Initial Notes pursuant
to the exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws and
(ii) otherwise set forth under "Transfer Restrictions" in the Offering
Memorandum dated January 29, 1997 distributed in connection with the Initial
Offering. In general, the Initial Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant to an exemption from, or
in a transaction not subject to, the
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Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Initial Notes under the
Securities Act. Based on interpretations by the staff of the Commission set
forth in no-action letters issued to third parties, Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act; provided that such Exchange Notes are
acquired in the ordinary course of such holders' business and such holders
have no arrangement or understanding with respect to the distribution of the
Exchange Notes to be acquired pursuant to the Exchange Offer. Any holder who
tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. In addition, to comply with
the securities laws of certain jurisdictions, if applicable, the Exchange
Notes may not be offered or sold unless they have been registered or such
securities laws have been complied with. The Company has agreed, pursuant to
the Registration Rights Agreement and subject to certain specified limitations
therein, to register or qualify the Exchange Notes for offer or sale under the
securities or blue sky laws of such jurisdictions as any holder of the
Exchange Notes reasonably requests in writing.
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BUSINESS
GENERAL
The Company is the leading manufacturer of vinyl-backed commercial
floorcovering in the United States, with the number one market position in
six-foot roll carpet and the number three market position in modular carpet
tile. The Company markets its products to a wide variety of commercial end-
markets, including corporate office space, retail stores and education, health
care and government facilities. The Company differentiates itself through (i)
superior product features such as durability, long-term appearance retention
and its patented Powerbond RS "peel and stick" installation system, (ii)
exceptional customer-focused services, including the Company's Source One
program, which offers customers a complete turn-key package of floorcovering
supply and installation for single-site and multiple-site projects, (iii)
leading design capability and (iv) environmental leadership, including an
advanced recycling program which converts plant scrap and reclaimed post-
consumer, vinyl-backed carpeting into backing for certain of its carpet
products and other commercial uses, such as industrial block flooring. In the
fiscal year ended January 25, 1997, the Company generated net sales and pro
forma EBITDA of $136.1 million and $27.3 million, respectively.
The U.S. commercial carpet market, which is comprised of the specified and
non-specified segments, is estimated by management to have generated sales of
approximately $3.1 billion in 1995, having grown at a CAGR of approximately
4.4% since 1990. The specified commercial market, which represents
approximately $1.8 billion of the total U.S. commercial carpet market, is
differentiated from the non-specified market, in that products are specified
by architects, designers and owners rather than being purchased off the shelf.
While competition in the non-specified market is based largely on price, the
key differentiating factors in the specified market are product durability,
appearance retention, product design and service, as well as price.
Within the specified commercial market, the Company competes in the six-foot
roll and modular carpet tile segments, which combined accounted for an
estimated $510 million of industry sales in 1995. The Company's focus on these
niche products provides a competitive advantage as these products tend to have
proprietary specifications and generally cannot be produced on standard
broadloom carpet manufacturing equipment utilized by the majority of
manufacturers in the carpet industry. Management believes the exceptional
performance and unique installation characteristics of the Company's products
provide a superior long-term investment for end-users relative to both
broadloom carpet, which requires more frequent replacement and higher
maintenance costs, and hard surface flooring products, which lack the
aesthetics and comfort under foot of carpet. The Company believes it has a
reputation for outstanding product quality and innovative, problem-solving
products. As a result, the Company historically has been able to achieve sales
growth in excess of that in the general commercial carpet industry. The
Company's net sales have grown, without the benefit of acquisitions, from
$75.3 million in 1991 to $136.1 million in 1996, representing a CAGR of 12.6%.
As a result of the Transactions (as defined), the Company has outstanding
approximately $157 million of long-term debt and substantial debt service
obligations. Consequently, the Company's debt in relation to its cash flow is
greater than it has been historically.
The Company has successfully reduced manufacturing costs without sacrificing
the Company's proprietary product qualities. Further, the Company's commitment
to employee involvement in the manufacturing process and quality training
programs throughout the organization have led to significant reductions in
scrap rates and non-conformance costs as well as improved product quality.
These factors have contributed to the improvement in the Company's EBITDA
margins from 13.0% in 1991 to 20.0% (on a pro forma basis) in 1996. During
this time, EBITDA grew from $9.8 million to $27.3 million (on a pro forma
basis), representing a CAGR of 22.7%. There can be no assurance that net sales
and EBITDA will continue to grow at the rate experienced in the past.
The Company believes that the diversity of its end-markets provides
significant stability to its revenue base. The Company's focus on market
segments which are characterized by high renovation rates, as opposed to new
construction, reduces its exposure to economic fluctuations. Historically,
renovation activity has been significantly less cyclical than new
construction. Management estimates that approximately 75% of the
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Company's sales are related to renovation projects, and approximately 25% are
attributable to new construction. As a result, sales of the Company's products
have increased steadily despite the volatility in new commercial construction
since 1990.
COMPETITIVE STRENGTHS
The Company's market leadership and strong financial performance are
attributable to a number of factors including the following:
SUPERIOR PRODUCT TECHNOLOGY
The Company has demonstrated an ability to develop value-added products that
differentiate it from its competition. The Company's proprietary vinyl cushion
backing technology, Powerbond(R), which uses a closed-cell construction that
is impermeable to moisture, exhibits demonstrably superior durability,
seamability and cleaning characteristics, and provides comfort under foot,
thereby combining the best attributes of both hard surface and carpet
floorcoverings. Powerbond(R) was enhanced in 1988 with the patented Powerbond
RS system, which employs a "peel and stick" dry adhesive for installation.
Management believes the RS system substantially reduces total installation
costs and eliminates the fumes associated with wet adhesives generally used in
conventional carpet installation. Management believes that the combination of
the Powerbond(R) and RS systems provides it with a distinct competitive
advantage in the marketplace.
LEADING POSITIONS IN NICHE PRODUCTS
In 1967, the Company pioneered vinyl-backed flooring systems (which includes
six-foot roll and modular carpet tile) in the U.S. commercial carpet industry
as an alternative to hard surface flooring and broadloom carpet. The Company
is the leader in the vinyl-backed commercial carpet industry, with
approximately 22% of the 1995 U.S. market. The Company has the number one
position in the fast-growing six-foot roll segment of the specified U.S.
commercial carpet market, with an estimated 1995 market share of approximately
36%, which the Company believes is three times the size of its nearest
competitor. Within the modular carpet tile market, the Company has the number
three position with an estimated market share of approximately 12%. Management
believes that the six-foot roll market will continue to grow significantly
faster than the commercial carpet industry as a whole. Management expects to
maintain its leading position in the six-foot roll market and believes its
innovative products in the modular carpet tile segment will result in
increased market share. The Company's long history of superior product
performance and design capability provide it with a competitive advantage and
a loyal customer base for recurring sales.
UNIQUE MARKETING SEGMENTATION
The Company has implemented a segmented marketing strategy which targets the
Company's sales and marketing efforts to the specific needs of each end-market
within a given geographic area. Management believes that each end-market
(corporate office space, retail stores and education, health care and
government facilities) has distinct product, service, performance, aesthetics,
distribution and budgetary requirements. The segmentation strategy requires
each account manager to develop an expertise in a specific end-market,
resulting in greater
customer-focused service, comprehensive market coverage and increased sales
productivity over time. The size of the Company's sales organization has
nearly doubled since the implementation of the segmentation strategy in 1993
from 45 to 82 account managers. Management expects to benefit from this
investment because, historically, the productivity of the sales force has
increased significantly with experience. This market-specific focus
differentiates the Company from its competitors which generally have a
geographically-assigned sales organization wherein the account managers are
responsible for all end-use markets.
LEADING RECYCLING CAPABILITY
The Company has developed a proprietary technology for recycling vinyl
carpet scrap and post-consumer, vinyl-backed floorcovering reclaimed from
installation sites. This unique capability eliminates the need for
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landfill disposal or incineration of these waste products. Through this
technology, the Company produces backing for new carpet and other value-added
commercial products, such as industrial block flooring. The Company is leading
the industry in recycling initiatives at a time when many end-users, including
government agencies and professional designers, increasingly prefer and/or
require products with recycled content.
FLEXIBLE DISTRIBUTION
The Company has developed a flexible three-channeled distribution system
which focuses on the needs of the end-user. Customers have the flexibility to
purchase the Company's products directly from the Company, through the
Company's unique Source One program or through independent dealers. These
programs allow the Company's sales and marketing personnel to (i) establish
relationships within specific market segments, (ii) continually improve and
customize product characteristics for specific applications and (iii) maximize
total value delivered to customers. Although the majority of industry sales
have traditionally been through local dealers, management believes its
emphasis on flexible distribution and direct marketing provide the Company
more influence in the specification process, thus affording it a distinct
competitive advantage. The Company will continue to market its products to
floorcovering specifiers and end-users through programs which emphasize one-
on-one contact between its account managers and key decision-makers.
EXPERIENCED MANAGEMENT TEAM AND SIGNIFICANT EMPLOYEE INVOLVEMENT
The Company has an experienced and successful management team with an
average of 20 years of experience in the floorcovering industry and an average
of over 10 years of experience with the Company. This management team has
instituted programs which have increased net sales and EBITDA at CAGRs of
12.6% and 22.7%, respectively, between 1991 and 1996. Additionally, management
has promoted company-wide employee involvement in every phase of the
manufacturing and selling process, which has resulted in the implementation of
over 3,500 suggestions from both hourly and salaried associates regarding the
Company's operations. Manufacturing employees are cross-trained in several
functions and have access to ongoing internal training programs as well as
external educational programs.
OPERATING STRATEGY
The Company has grown sales and EBITDA through a focused marketing and sales
strategy combined with cost management programs. Set forth below are the
components of the Company's operating strategy:
SPECIFIED COMMERCIAL MARKET FOCUS
The Company will continue to focus on niche segments of the specified
commercial market where sales are driven primarily by distinctive product
features and performance characteristics rather than price. The Company's
products are manufactured in response to customer orders rather than mass
produced for inventory. The specified market tends to be more driven by total
product value including performance, durability, aesthetics, customer-focused
services and ease of maintenance and installation when compared with more
price-sensitive, non-specified segments of the commercial carpet industry.
Management believes that the Company has a significant opportunity to convert
users of traditional broadloom carpet and hard surface flooring to its niche
vinyl-backed floorcovering product. The specified commercial broadloom market
and the commercial hard surface flooring markets represented approximately
$1.3 billion and $1.6 billion, respectively, of sales in 1995.
DIVERSIFIED END-MARKETS
The Company's sales and marketing strategy focuses on diversified end-
markets (corporate office space, retail stores and education, health care and
government facilities) in order to maximize its sales opportunities
44
<PAGE>
and to continue to minimize the effects of cyclicality in the carpet industry.
During the most recent downturn in commercial construction between 1990 and
1993, in which new construction declined at a compounded rate of approximately
4% per annum, net sales of the Company's six-foot and tile products grew at a
CAGR of 5.6%. New construction spending in the education, health care and
government sectors (which sectors accounted for over 60% of the Company's 1995
and 1996 domestic carpet sales) steadily increased each year between 1990 and
1995, while new construction in the corporate office space, retail stores and
lodging segments has been cyclical over the same period.
PRODUCT INNOVATION
Management believes the Company has developed a substantial competitive
advantage within its niche market segments through the continuous development
of products desired by end-users. The Company's Powerbond RS technology
provides customers with enhanced durability and performance, and low cost
installation and maintenance. Under the recently launched Infinity Initiative
program, management believes that the Company is the only manufacturer to
recycle reclaimed post-consumer, vinyl-backed floorcovering into backing for
commercial carpet products. Capitalizing on Powerbond(R)'s unique seam welding
capabilities, the Company's Imaginations program offers the design flexibility
to create customized, dramatic visual effects. The Company's recently
introduced Jhane Barnes collection combines the internationally-known
designer's signature style with the industry's first computer-aided design
capability that will enable architects and designers to customize pattern
configurations for printed modular carpet tile. The Company intends to
continue developing innovative, value-added products which contribute to the
Company's growth in revenues and profitability.
COST REDUCTION
The Company will seek to reduce costs by monitoring and controlling its
manufacturing and administrative expenses. The Company continually tracks its
cost of non-conformance ("CONC"), which includes price discounts, product
returns and allowances. From 1991 to 1996, the Company reduced CONC by
approximately 18%, while net sales grew by approximately 81%. Supplementing
its efforts to reduce CONC, the Company has implemented an aggressive cost
improvement program, which targets specific initiatives to achieve cost
reductions throughout the organization. During 1996, the Company realized $1.2
million in cost savings, which on an annualized basis represents approximately
$2.0 million in cost savings. For fiscal 1997, the Company has targeted an
additional $2.0 million in annualized cost reductions. In addition, the
Company has completed a $13.0 million manufacturing modernization program
which management believes, in conjunction with the Company's extensive
employee training, will result in continued material yield and labor
productivity improvements.
STRATEGIC ALLIANCES AND ACQUISITIONS
The commercial carpet industry remains highly fragmented, with many
specialized manufacturers serving numerous market segments. The Company
intends to pursue domestic and international alliances and acquisitions that
would add new product lines, enhance penetration of end-markets or allow entry
into new geographic markets.
INDUSTRY OVERVIEW
The domestic floorcoverings industry is comprised of several product types
designed for both commercial and residential end-uses. Management believes
total 1995 sales in the U.S. floorcovering industry approximated $14.5
billion. Total sales within the floorcovering market can be segmented into
several categories: (i) carpet and area rugs, which accounted for 68.3% or
$9.9 billion of sales, (ii) resilient sheet, tile and rubber products, which
accounted for 15.9% or $2.3 billion of sales, (iii) ceramic floor and wall
tile products, which accounted
45
<PAGE>
for 9.0% or $1.3 billion of sales, and (iv) hardwood flooring products, which
accounted for 6.6% or $951.3 million of sales.
Of the $9.9 billion of domestic carpet sales in 1995, management believes
that 68.7% or $6.8 billion of sales were made to the residential sector and
31.3% or $3.1 billion of sales were made to commercial end-users. Commercial
carpet is manufactured in two basic forms, roll products and modular carpet
tile. Roll carpet products are manufactured in one of two principal types:
conventional twelve-foot broadloom carpet or six-foot roll carpet.
The general commercial carpet market can be further divided into two
segments related to their distribution characteristics: the estimated $1.3
billion non-specified commercial segment and the estimated $1.8 billion
specified commercial segment. The $1.3 billion non-specified segment of the
commercial market is characterized by off the shelf sales with product
selection determined primarily by price, style and availability within the
dealer network. Non-specified sales tend to be smaller one-time transactions
for commodity products, which are purchased through independent dealers. The
$1.8 billion specified segment of the commercial carpet market is
characterized by demanding, high traffic product applications and unique
specifications typically written by facility owners, professional architects
or designers. As a result, end-users in this segment tend to be more
sophisticated and quality-conscious in the product selection process, and
therefore require more extensive service and responsiveness from the supplier.
Management estimates that broadloom, six-foot roll goods and modular carpet
tile accounted for approximately $1.3 billion, $210 million and $300 million,
respectively, of 1995 specified commercial carpet market sales.
Historically, six-foot roll goods were primarily used in the education and
health care markets. These products in recent years have been accepted in new
market segments such as corporate office space, where handling and transport
of twelve-foot broadloom is not always practical or feasible, and retail
stores and public spaces (such as airports) where comfort under foot and
durability are important criteria.
Modular carpet tile is offered in a variety of sizes to accommodate the full
range of domestic and international requirements. Because of its flexibility
within open office landscape systems, the primary uses of modular carpet tile
are for the corporate office space and government markets. Office systems are
often reconfigured to react to ever-changing office dynamics. For example,
modular carpet tile is particularly well-suited to the use of raised floor
systems in which continual access to underfloor power systems is required.
Tiles are simply removed to reveal the access panel and replaced when work is
completed. Broadloom carpet cannot withstand this activity as it must be cut
open and cannot adequately be repaired.
In general, the domestic carpet industry can be characterized as a cyclical
business with revenues directly related to swings in the economic cycle, and
specifically, to the economic vitality of both residential and commercial new
construction. During the 1991 economic recession, the domestic carpet industry
declined by approximately 8%. During the recent period of economic expansion,
the domestic carpet industry grew at a CAGR of approximately 6% from 1991 to
1995. Despite the cyclicality of the domestic carpet industry, the CAGR for
the period from 1990 to 1995 was approximately 3%.
The Company estimates that from 1991 to 1995, sales in the six-foot roll
goods segment grew at a CAGR of approximately 34% and sales in the modular
carpet tile segment declined at a CAGR of approximately 4%. Management
believes that the growth in six-foot comes largely at the expense of broadloom
carpet and hard surface floors. Management believes that the decline in the
sales of modular carpet tile since 1991 is partially due to the contraction of
the corporate office space market. The Company believes that within the
commercial floorcovering market, the demand for six-foot roll goods and
modular carpet tile will increase (i) as more end-users recognize the
advantages of vinyl-backed products, including durability and design
flexibility, and (ii) as corporate office demand continues to recover.
46
<PAGE>
SALES, MARKETING AND DISTRIBUTION
Sales. In 1993, the Company implemented a highly focused sales and marketing
strategy, under which each account manager targets specific market segments
within a particular geographic area. Prior to that time, the Company's account
managers, as is typical in the floorcovering industry, were assigned as
generalists covering all end-markets within a particular geographic area.
Management believes that this generalist strategy results in limited market
coverage, inadequate customer and product expertise within the sales force and
lower levels of customer service. The Company believes that each market
segment (corporate office space, retail stores and education, health care and
government facilities) has specific product, service, performance, aesthetics,
distribution and budgetary requirements and that purchasing decisions are
unique to each segment. The Company's segmentation strategy allows the account
managers to develop specific expertise in a particular market segment, which
management believes results in higher customer service levels and more
comprehensive market coverage and increased sales productivity over time.
The majority of the Company's sales are specified by the facility owner,
whose purchasing decision frequently is influenced by interior designers and
architects. Since each market has distinct performance, design and
installation requirements, the Company's account managers focus on educating
the facility owners and their design professionals on (i) the technical
specifications and proprietary advantages of its products, (ii) the Company's
unique design capabilities for specific market segments, (iii) the Company's
dedication to responsive delivery of customer service and (iv) the Company's
environmental initiatives. Management believes this end market-oriented
strategy has resulted in an improvement in service and greater sales.
Management implemented the segmentation strategy to achieve comprehensive
market coverage of the nation's leading markets. The Company has eight
domestic sales offices, each directed by a regional manager. The size of the
Company's sales organization has nearly doubled since the implementation of
the segmentation strategy in 1993 from 45 account managers and 7 regional
managers to 82 account managers and 10 regional managers currently.
Historically, the productivity of the sales force has increased significantly
with experience. During 1995, the Company's account managers with four or more
years of experience produced an average of approximately 80% more in sales
than did the Company's account managers with three or fewer years of
experience. Management believes this increased sales productivity is the
result of (i) increased awareness of individual market requirements, (ii)
improved product knowledge, (iii) enhanced customer service and (iv) increased
customer trust and reliance.
Marketing. As part of the segmentation strategy, each market segment has a
dedicated in-house marketing director responsible for the identification of
market opportunities, communications and program implementation. Marketing
personnel provide account managers with important market information,
including demographic profiles, competitive analyses, and merchandising
support in the form of brochures, advertising and videos. The marketing group
also provides specific input into product development for each market segment.
The Company recently hired a three-person, in-house design team dedicated to
developing new, innovative designs for each of the Company's primary end-
markets:
Corporate Office Space. The corporate office space market involves project-
----------------------
oriented work and/or multi-site purchasing agreements. Management has focused
on projects where the Company tends to excel on the basis of product
performance, customer service and lower life cycle cost rather than pricing.
As part of its strategy to increase penetration of this market, the Company
recently implemented a national accounts program that targets the country's
largest corporations.
Education. The education market has been a primary focus for the Company
---------
since the development of Powerbond(R) in 1967. Powerbond(R)'s long-term
appearance retention characteristics have been the principal factor behind the
Company's success in this segment. Customers in the education segment tend to
be particularly
47
<PAGE>
sensitive to durability, longevity and ongoing maintenance costs.
Historically, the Company has focused on the kindergarten through twelfth
grade market. Powerbond(R) in many of these installations has been in use for
more than 20 years. The Company aggressively uses this track record in its
marketing to potential customers.
Health Care. Powerbond RS is particularly well-suited to the health care
-----------
market because of its moisture impermeability and quick, safe installation.
Powerbond RS, which is installed without wet adhesives, facilitates use
immediately following installation, a critical concern within the health care
market. With the growth and consolidation of national health care
organizations, the Company's Source One program, providing project management
services and single source responsibility, is well-suited to serve this
market.
Government. The Company sells to federal, state and local governments. The
----------
Company is a supplier to the federal government's purchasing arm, the General
Services Administration, which establishes product categories and related
minimum product specifications for various budget levels and aesthetic
requirements. State and local governments purchase floorcovering products
independently through contracts with approved suppliers. The Company is
currently an approved supplier to several states and municipalities.
Management believes that its success in the government market is due in part
to the Company's environmental initiatives, including both the Powerbond RS
"peel and stick" backing system, and its recently-introduced recycled content
product offerings.
Retail Stores. Retail store planning is the Company's newest market segment
-------------
with a focus on major retail chains which have the potential for large,
nationwide volumes. A significant portion of these sales flow directly through
the Company's Source One program. The Company's "on time every time"
installation commitments and Powerbond RS' ease of installation are critical
to meet short construction schedules and to minimize business interruption and
loss of revenues in the retail sector.
International Markets. The Company established its first international sales
---------------------
office in 1989 in the United Kingdom and currently distributes throughout
South East Asia, China, Korea, Taiwan and North and South America. In 1996,
the Company was awarded the primary contract for the Kuala Lumpur City Centre
in Malaysia (upon its completion, the tallest building in the world). Sales to
international customers constituted less than 10% of the Company's revenues
during 1996. The Company plans to add distributors and dedicated sales
personnel in international markets.
Distribution. The Company's products are sold and distributed through three
------------
primary channels: direct to end-user, Source One and through dealers. Although
a majority of the Company's invoicing is through dealers, the Company's
primary marketing efforts are focused on the end-user and professional
designers and architects who create specifications for its products. The
Company operates with a flexible distribution philosophy to meet the needs of
the customer. These channels are outlined below:
Direct. Direct distribution allows end-users to purchase floorcovering
------
directly from the Company. The Company's account managers work directly with
the customer to educate and make recommendations for the selection and
specification of the right product for the particular application. The
customer is responsible for project management and installation.
Source One. Introduced in late 1992, the Company's in-house project
----------
management department provides the first single-source coordination and turn-
key project management service offered by a floorcovering manufacturer. The
department was established to provide a "one phone call," "single-source"
project management service to meet the specific needs of the Company's
customer base. The service includes facility measurement, project
coordination, order entry, delivery and installation of a wide range of
interior finishes, including the Company's products. Installation is provided
by approximately 900 Company-certified installers throughout the nation.
48
<PAGE>
Dealer. The carpet industry traditionally has sold products to customers
------
through local dealers, who typically broker products from manufacturers and
subcontract installation through local installers. Many of the Company's
customers request that the product be delivered through a local dealer who
provides a range of project management services, including carpet removal,
staging and installation.
PRODUCTS AND PRODUCT FEATURES
The Company's products are available in a wide variety of textures,
densities, colors and patterns designed to meet both the performance and
aesthetic requirements of a broad spectrum of commercial end-users. The
product offerings are available in both six-foot roll and modular carpet tile,
which enables the Company to market an integrated system of product solutions
to address the specific requirements of end-users. Each of these products
offers distinctive characteristics for use and application. Management
believes that the ability to offer both systematically is a distinct
competitive advantage since each product provides unique features and benefits
as follows:
Products
Six-Foot Roll Goods. The Company is the leading U.S. manufacturer of six-
-------------------
foot roll products, which provide performance advantages over twelve-foot
broadloom and hard surface flooring. All of the Company's six-foot products
utilize the proprietary Powerbond(R) backing technology which it pioneered in
1967. Management believes this cushion system and the patented RS technology
enhancement give the Company a sustainable competitive advantage. In addition
to superior performance characteristics, the six-foot roll product provides
handling and transport advantages over twelve-foot rolls as well as cost
advantages over modular carpet tiles. Sales of six-foot roll goods increased
at a CAGR of approximately 17% from 1991 to 1996. Management estimates the
Company's 1995 market share at approximately 36% of the specified commercial
segment's $210 million domestic market for six-foot roll goods.
Modular Carpet Tile. The Company was the first manufacturer in the U.S. to
-------------------
introduce vinyl-backed modular carpet tile technology in 1969 and today is the
third largest domestic producer. The Company recently introduced a tile
product utilizing the Powerbond(R) cushion technology, which provides the end-
user with improved durability and an extended life cycle as compared to
competitive non-cushioned tile products. The Company's sales of modular carpet
tile have increased at a CAGR of approximately 7% from 1991 to 1996.
Management estimates the Company's 1995 market share at approximately 12% of
the specified commercial segment's $300 million domestic market for modular
carpet tile. The Company's modular carpet tile system is specifically
engineered to have a monolithic appearance on the floor and is marketed as the
most seamless tile in the industry. It is often difficult to discern whether
an installation is tile or roll goods because of the product's unique
seamability. The Company's modular carpet tile products are offered in a
variety of sizes to accommodate a range of domestic and international
requirements.
Product Features
Powerbond(R). In 1967, the Company introduced Powerbond(R), the industry's
------------
first cushioned vinyl backing system. This closed-cell backing technology is
moisture impermeable, exhibits superior durability, seamability and cleaning
characteristics, and provides comfort under foot, thereby combining the best
attributes of both hard surface and carpet floorcoverings. Powerbond(R)
eliminates problems associated with traditional broadloom carpet, including
delamination (separation of carpet backing), zippering and unraveling. In
addition, these products are installed using chemically-welded seams rather
than conventional glued seams to provide a homogeneous, impermeable moisture
barrier (particularly important to health care facilities), so that fluid
spills and soil are isolated at the surface where they can easily be removed.
Other Powerbond(R) features include its ease of repair, long-term appearance
retention, a 50% to 100% longer life cycle than conventional broadloom and 15
to 20 year non-prorated warranties against delamination, edge ravel,
zippering, loss of cushion resiliency and watermarking. The incidence of
warranty claims has been rare and several of the Company's customers have had
Powerbond(R) in use for over 20 years.
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<PAGE>
Powerbond RS. In 1988, the Company introduced its RS technology, a patented
------------
pre-applied "peel and stick" adhesive system for both six-foot roll products
and modular carpet tile. The RS technology enables products to be bonded to a
surface without the use of wet adhesives thus minimizing disruption to end-
users during the installation process. Conventional installations with wet
adhesives normally require significant downtime for the adhesive to cure prior
to installation. The RS technology also addresses carpet-related indoor air
quality concerns by eliminating the fumes typically associated with wet
adhesives. The RS technology is widely accepted by customers as a value-added
feature since minimizing or eliminating operational downtime is critical in
many end-markets such as health care and government facilities and retail
stores. The Company's patent on the RS technology expires in 2008.
Infinity Initiative. In order to address increasing environmental concerns
-------------------
regarding solid waste disposal, sustainable design and resource utilization,
the Company recently introduced a closed-loop recycling program in which plant
scrap and reclaimed post-consumer, vinyl-backed floorcovering material is
recycled into the backing for its carpet tile or converted into other value-
added products. The Company is the only floorcovering manufacturer to have a
fully-operational commercial recycling program of this type. Management
believes that offering a proprietary product with recycled content will give
it a competitive advantage, particularly in the government and corporate
office space markets, as well as with architects and designers.
Imaginations. Capitalizing on the unique seam welding capabilities of
------------
Powerbond(R), the Company's Imaginations program offers substantial design
flexibility to create dramatic inlaid visual effects with the Company's six-
foot roll products. This capability has been particularly successful within
the education segment where the Company has created maps, geometric shapes and
a learning circle used for teaching the alphabet, counting, colors and telling
time. The Company has also developed custom designs for the retail market
segment, such as college logos for campus book stores.
Symtex. The Company's Symtex technology, developed in 1986, uses micro-
------
shearing to replicate the plush appearance of cut pile carpet (which is
constructed from a collection of yarn columns rather than loops) with loop
construction. Symtex eliminates the problems typically associated with cut
pile carpet such as crushing, watermarking, pilling (shedding), fuzzing and
shading.
ENVIRONMENTAL INITIATIVES
The Company is committed to environmental initiatives throughout the
organization, which include vendor sourcing, product design, manufacturing and
recycling. As a result, the Company is a leader in environmental solutions.
This leadership began with the introduction of Powerbond RS in 1988, which
eliminates conventional wet adhesives and related volatile organic compound
fumes which have been associated with indoor air quality problems.
The Company is the first floorcovering manufacturer to implement a fully-
operational, commercial recycling program. Under the Infinity Initiative
program, the Company recycles reclaimed post-consumer, vinyl-backed carpet
products into backing for certain of its carpet products and other uses, such
as industrial block flooring. Management believes that the recycling
capability provides the Company a significant competitive advantage in the
market, and will also reduce manufacturing costs. With a focus on recycling,
the Company was able to reduce its landfill use by approximately 72% between
1990 and 1996.
PRODUCT DEVELOPMENT AND DESIGN
Leadership in product development and design is important in the commercial
floorcovering marketplace as designers and customers seek up-to-date product
aesthetics. Management believes that the ability of its creative and technical
professionals to consistently introduce new designs and styles, coupled with
the technical strength of the Company's products, provides it with a key
competitive advantage. The Company develops specific products tailored to the
requirements of different market segments, unlike many of its competitors
which manufacture standard products that serve a wide cross-section of
markets. This process begins with feedback
50
<PAGE>
from leading designers and customers in each segment relating to product
features such as color, texture and pattern. This process is vital as the
product/styling needs may be very different for each segment. The Company's
Product Development Group is highly integrated with its sales organization and
customer base, which increases the effectiveness of the product development
process.
In the development of each new style, the Company implements a process of
quality assurance called "fabric adoption." Through this process, the Company
evaluates each style and color for seamability, color mix, overall aesthetics
and manufacturing feasibility. This process increases customer satisfaction
and lowers off-quality costs. The Company offers 52 standard styles in
approximately 1,000 colors.
Approximately 30% of the Company's sales involve custom colors or designs
which require accurate interpretation of customer needs and timely conversion
into a sample fabric. The Company has dedicated sample equipment which
facilitates quick turnaround of custom design requests, and management
believes that its custom design capability is a competitive advantage,
particularly in the corporate office market.
The Company's recently introduced Jhane Barnes collection combines the
internationally-known designer's signature style with the industry's first
interactive design tool allowing designers to individually customize pattern
configurations for printed modular carpet tile. It is expected that Jhane
Barnes will enhance the Company's visibility in the corporate design
community.
COMPETITION
The commercial floorcovering industry is highly competitive. The Company
competes with other manufacturers of vinyl-backed carpet, as well as
manufacturers of twelve-foot broadloom carpet and other types of commercial
floorcovering. Although the industry recently has experienced consolidation, a
large number of manufacturers remain. Management believes that the Company is
the largest manufacturer of six-foot roll goods in the U.S., with a market
share over three times that of its nearest competitor, and is the third
largest manufacturer of modular carpet tile in the U.S. While no company
focuses solely on the same products as the Company, a number of the Company's
domestic and foreign competitors manufacture six-foot roll goods and modular
carpet tile as one segment of their business. Certain of these competitors
have greater financial resources than the Company.
The Company believes the principal competitive factors in its primary
floorcovering markets are performance, durability, service, style and price.
In the specified commercial market, six-foot roll goods and modular carpet
tile compete with various floorcoverings, of which broadloom carpet has the
largest market share. The performance, durability, customer service, and ease
of installation and maintenance of the Company's six-foot roll goods and
modular carpet tile are its principal competitive advantages.
Some of the Company's major competitors have significantly higher commercial
carpet sales than the Company since broadloom carpet products comprise the
majority of their sales. The market for commercial broadloom products is
substantially larger than the commercial vinyl-backed carpet market in which
the Company specializes. In addition, unlike some larger industry
participants, the Company has not made any acquisitions.
Historically, the vast majority of the commercial carpet industry's sales
has been through independent carpet dealers. Recently, two of the Company's
competitors and DuPont, the Company's principal raw material supplier, each
initiated a strategy of purchasing or forming alliances with selected carpet
dealers primarily in large metropolitan markets. See "Risk Factors--
Competition."
MANUFACTURING AND FACILITIES
The Company owns manufacturing facilities in Dalton, Georgia, located
approximately 70 miles north of Atlanta. These facilities consist of (i) a
yarn processing plant with carpet dyeing capabilities, (ii) a carpet tufting
51
<PAGE>
plant, (iii) a carpet finishing and tile cutting plant (which includes
printing and recycling operations) and (iv) a customer service center and
distribution warehouse. The Company is geographically well-positioned to
attract and maintain an experienced workforce and a knowledgeable supplier
base with several of the carpet industry's major manufacturers located in the
Dalton and greater Atlanta area. In addition to the four Dalton facilities,
the Company leases eight sales and service facilities and one warehouse in the
U.S. and one sales and service facility in the U.K.
The Company has completed a $13.0 million expansion and modernization
program, including (i) the replacement of two-thirds of all existing tufting
equipment with new high speed machines, (ii) the replacement of all warping
equipment, (iii) the installation of a second vinyl production line, which
doubled the Company's finishing capacity and (iv) a 60,000 square foot
building expansion of the finishing plant. Management believes its
manufacturing capacity is sufficient to meet the Company's requirements for
the foreseeable future.
Management believes that employee involvement is a significant factor in the
Company's increased profitability. Management initiated a Company-wide system
of measuring and improving manufacturing quality in 1989. This system includes
extensive training, the establishment of quality checkpoints during the
manufacturing process and the formation of quality leadership and improvement
teams. Various quality measurements are taken each month and displayed
graphically in each plant so that employees can track progress; results are
reviewed each month in planning meetings involving all employees. An employee
suggestion system called Opportunity For Involvement was implemented in 1991
to provide a vehicle for suggestions related to product quality, employee
safety, manufacturing costs and workplace environment. Since the program's
inception, over 4,200 suggestions have been received with over 3,500
suggestions implemented.
The following table summarizes the Company's manufacturing, distribution and
sales facilities:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION OPERATION OWNED/LEASED SQUARE FEET
- -------- --------- ------------ -----------
<S> <C> <C> <C>
Dalton, Georgia........... Distribution Warehouse Owned 133,200
Sales Service Office
Finance and Administration
Dalton, Georgia........... Yarn Plant Owned 161,500
Carpet Dyeing
Dalton, Georgia........... Tufting Owned 110,000
Corporate Offices
Dalton, Georgia........... Six-Foot Finishing Owned 187,400
Tile Finishing
Tile Printing
Recycling
Dalton, Georgia........... Warehouse Leased 46,200
Atlanta, Georgia.......... Sales / Showroom Leased 1,815
Chicago, Illinois......... Sales / Showroom Leased 5,498
Dallas, Texas............. Sales / Showroom Leased 1,960
Denver, Colorado.......... Sales / Showroom Leased 1,318
Fairfax, Virginia......... Sales / Showroom Leased 1,783
Newport Beach, Sales / Showroom Leased 1,600
California...............
New York, New York........ Sales / Showroom Leased 5,000
San Francisco, Sales / Showroom Leased 140
California...............
Milton Keynes, United Sales / Showroom Leased 5,500
Kingdom..................
</TABLE>
BACKLOG
The Company's backlog was $14.8 million at January 25, 1997, as compared to
$9.3 million at January 27, 1996. The Company believes that all of these
orders will be shipped in fiscal 1997.
52
<PAGE>
RAW MATERIALS
The manufacturing of carpet involves the purchasing or manufacturing of
yarn, which comprises about one-third of the carpet's typical cost structure
and in excess of 50% of total raw material costs. The Company uses DuPont 6,6
continuous filament yarn for all of its products. Yarn is either purchased
directly from DuPont to be processed through the yarn and dye plant in Dalton
or from outside yarn processors who process DuPont yarn prior to delivery.
Approximately 50% of the Company's yarn requirements are processed in-house.
Other significant raw materials used by the Company in its manufacturing
process include coater materials, such as vinyl resins, and primary backing.
See "Risk Factors--Reliance on Petroleum-Based Raw Materials; Reliance on
Principal Supplier."
The Company has never experienced a problem sourcing nylon, processed yarn
or any other raw material used in the manufacture of carpet from its suppliers
and does not anticipate any difficulties in sourcing these raw materials in
the future.
PATENTS AND TRADEMARKS
The Company owns numerous patents in the United States including its
Powerbond RS patent which expires in 2008. The Company considers its know-how
and technology more important to its current business than patents and,
accordingly, believes that expiration of existing patents or nonissuance of
patents under pending applications would not have a material adverse effect on
its operations. However, the Company maintains an active patent and trade
secret program in order to protect its proprietary technology, know-how and
trade secrets. The Company also owns numerous registered trademarks in the
United States, including Powerbond(R).
EMPLOYEES
At January 25, 1997, the Company had a total of 715 employees of which 441
were hourly and 274 salaried. The Company has experienced no work stoppages
and believes that its employee relations are good. All of the Company's
employees are non-union. Management is not aware of any discussions or
attempts to organize the workforce within any of the Company's facilities.
The Company has made a significant investment in its employees. In addition
to ongoing quality training seminars, the Company also offers General
Equivalency Diploma (GED) tutoring and a college tuition refund program.
Management believes the Company's employee turnover and absentee rates are low
compared to its competitors. Benchmarking surveys of quality performance and
monthly meetings of employees to share manufacturing initiatives and ideas are
reflective of a motivated workforce and a unique partnership culture within
the Company. A 1994 survey completed by Scarlett & Associates awarded the
Company the "High Morale Work Group" award for attaining the highest morale
index among the 150 companies or divisions surveyed across 1,000 different
textile and textile-related work sites.
LITIGATION
The Company from time to time is subject to claims and suits arising in the
ordinary course of business, including workers' compensation and product
liability claims which may or may not be covered by insurance. It is the
opinion of management that the various asserted claims and litigation in which
the Company is currently involved will not have a material adverse effect on
its financial position.
The Company is a party in several cases involving the use by the Company of
a plasticizer purchased by the Company for use in the manufacture of vinyl
backing for carpet tiles between 1990 and 1993 and claims for personal injury
allegedly resulting from the use of a floorcovering product which the Company
ceased to sell after April 1996. The Company also is a party to an arbitration
proceeding brought by a former sales agent who alleges that he was wrongfully
terminated. Pursuant to the Acquisition Agreement, the Seller and C&A Products
indemnified the Company against liabilities in connection with the proceedings
described in the preceding sentences of this paragraph, assumed the defense of
such litigation and retained the rights to all recoveries relating thereto.
53
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each director
or executive officer of the Company. The directors of the Company are also the
directors of Holdings. Each director of the Company will hold office until the
next annual meeting of shareholders of the Company or until his successor has
been elected and qualified. Officers of the Company are elected by the Board
of Directors of the Company and serve at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---- --- ---------
<S> <C> <C>
Edgar M. Bridger........... 45 President, Chief Executive Officer and Director
Lee H. Schilling........... 55 Senior Vice President of Marketing & Sales
Darrel V. McCay............ 36 Chief Financial Officer
Jeffrey Raabe.............. 35 Vice President of Sales
Wallace J. Hammel.......... 50 Vice President of Manufacturing
Henry L. Millsaps, Jr...... 41 Vice President of Human Resources
Terrence D. Daniels........ 53 Chairman of the Board
Gary A. Binning............ 36 Director
Stephen M. Burns........... 35 Director
Stephen Eisenstein......... 35 Director
J. Hunter Reichert......... 30 Director
R. Ted Weschler............ 35 Director
</TABLE>
Edgar M. (Mac) Bridger, President, Chief Executive Officer and Director,
joined the Company in 1987 as the Midwest District Manager. Prior to being
appointed President and Chief Executive Officer in December 1993, he served as
the Company's Vice President of Sales and as National Sales Manager.
Lee H. Schilling, Senior Vice President of Marketing & Sales, joined the
Company in 1985 as National Sales Manager. In 1987, he was promoted to Vice
President of Marketing & Sales, and in December 1993 he was promoted to his
present position.
Darrel V. McCay, Chief Financial Officer, joined the Company in March 1989
as Division Controller and became Vice President of Administration & Control
in August 1994. Mr. McCay was appointed Chief Financial Officer following the
Acquisition.
Jeffrey Raabe, Vice President of Sales, joined the Company in 1990 as a
Contract Specialist in Atlanta, Georgia. Prior to being promoted to his
present position with the Company in February 1996, he served as the Southeast
District Sales Manager and Director of North American Sales.
Wallace J. Hammel, Vice President of Manufacturing, joined the Company in
March 1983 as Finishing Manager. Mr. Hammel served as Director of Customer
Service and Claims from July 1991 through April 1994 when he assumed his
present position.
Henry L. Millsaps, Jr., Vice President of Human Resources, joined the
Company in 1980. Mr. Millsaps was Human Resource Director from March 1988
until 1995, when he was promoted to his present position.
Terrence D. Daniels, Chairman of the Board, has served as a director and as
Chairman of the Board of Holdings since 1996 and became the Chairman of the
Board of Directors of the Company upon consummation of the Acquisition. Since
1990, Mr. Daniels has been President of Quad-C. During 1989 and prior thereto,
Mr. Daniels was a Vice Chairman and director of W.R. Grace & Co. with
responsibility for the Specialty Chemical, Health Care, Natural Resource,
Restaurant, Retail and Corporate Technical groups. Mr. Daniels is also a
director of DSG International Ltd., Eskimo Pie Corporation, IGI, Inc.,
Stimsonite Corporation and several privately-held corporations.
54
<PAGE>
Gary A. Binning, Director, has served as a director and as a Vice President
of Holdings since 1996 and became a director of the Company upon consummation
of the Acquisition. Since 1992, Mr. Binning has been employed by Banque
Paribas where he is currently a Partner with Paribas Principal Partners and an
officer and director of Paribas Principal Inc. Mr. Binning is also a director
of several privately-held corporations.
Stephen M. Burns, Director, has served as a director of Holdings since 1996
and became a director of the Company upon consummation of the Acquisition.
Since 1994, Mr. Burns has been a Vice President of Quad-C. Prior to joining
Quad-C, Mr. Burns was a Vice President of Paribas North America and Banque
Paribas. Mr. Burns is also a director of several privately-held corporations.
Stephen Eisenstein, Director, became a director of the Company following the
Acquisition. Since 1990, Mr. Eisenstein has been employed by Banque Paribas
where he is currently a Partner with Paribas Principal Partners and an officer
and director of Paribas Principal Inc. Mr. Eisenstein is also a director of
several privately-held corporations.
J. Hunter Reichert, Director, became a director of the Company following the
Acquisition. Since 1994, Mr. Reichert has been a Staff Vice President of Quad-
C. Prior to joining Quad-C, Mr. Reichert was an Associate with RFE Investment
Partners. Mr. Reichert is also a director of a privately-held corporation.
R. Ted Weschler, Director, became a director of the Company following the
Acquisition. Since 1990, Mr. Weschler has been Vice President, Secretary and
Treasurer of Quad-C. Mr. Weschler is also a director of WSFS Financial
Corporation, Wireless Cable of Atlanta, Inc. and several privately-held
corporations.
DIRECTOR COMPENSATION
The Company pays no additional remuneration to its employees or to
executives of Quad-C or Paribas for serving as directors. There are no family
relationships among any of the directors or executive officers.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and each of the other four most
highly compensated executive officers during the fiscal year ended January 25,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION($) LONG-TERM COMPENSATION
---------------------- --------------------------
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(A) COMPENSATION(B) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- ----------- --------------------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edgar M. Bridger........ 1996 $ 190,000 $ 73,200 -- 25,000(c) $6,462(d)
President and Chief
Executive Officer
Lee H. Schilling........ 1996 $ 137,084 $ 27,160 -- -- $3,905(e)
Senior Vice President
of Marketing & Sales
Jeffrey Raabe........... 1996 $ 108,000 $ 20,952 -- -- $3,250(f)
Vice President of
Sales
Wallace J. Hammel....... 1996 $ 100,250 $ 19,788 -- -- $3,385(g)
Vice President of
Manufacturing
Darrel V. McCay......... 1996 $ 85,000 $ 16,490 -- -- $2,297(h)
Vice President of
Administration &
Control
</TABLE>
55
<PAGE>
- --------
(a) In connection with the Acquisition, in February 1997, Collins & Aikman
Products Co., the Company's parent prior to the Acquisition, paid bonuses
conditioned upon the sale of the Company in the approximate amounts of
$287,500, $147,500, $118,750, $108,750 and $118,750 to Messrs. Bridger,
Schilling, Raabe, Hammel and McCay, respectively, and may pay additional
bonuses to such officers based upon the finally determined purchase price
after final determination of the net working capital as of the Closing
Date.
(b) Less than the lesser of (i) 10% of total annual salary and bonus and (ii)
$50,000.
(c) Shares of Collins & Aikman Corporation, the Company's parent prior to the
Acquisition. The options, which had an exercise price of $7.00 per share,
were exercised by Mr. Brider on February 11, 1997 when the Collins &
Aikman Corporation Common Stock had a market value of $7.625 per share,
resulting in a gain of $15,625.
(d) Reflects $5,550 profit sharing plan contributions and $912 premiums for
life insurance made on Mr. Bridger's behalf.
(e) Reflects $3,395 profit sharing plan contributions and $510 premiums for
life insurance made on Mr. Schilling's behalf.
(f) Reflects $2,835 profit sharing plan contributions and $415 premiums for
life insurance made on Mr. Raabe's behalf.
(g) Reflects $2,468 profit sharing plan and $554 401(k) plan contributions
and $362 premiums for life insurance made on Mr. Hammel's behalf.
(h) Reflects $2,051 profit sharing plan contributions and $246 premiums for
life insurance made on Mr. McCay's behalf.
MANAGEMENT STOCK INCENTIVE PLAN
Following consummation of the Acquisition, Holdings adopted a stock option
plan under which grants have been and will be made to certain members of
management and other employees of the Company of options to purchase an
aggregate of between 504,396 and 728,571 Common Shares of Holdings,
representing between 9.0% and 12.5% of the Common Shares which were
outstanding at the time of the Acquisition on a fully-diluted basis. The
exercise price will be $1.00 per share. Vesting of the options will be subject
(i) to the Company's achieving its five-year EBITDA target, (ii) to the
principal investors in Holdings achieving a specified internal rate of return
upon sale of the Company or a public offering of Common Shares, or (iii) in
any event, options for 504,396 Common Shares will vest on the ninth
anniversary of the grant.
No options were granted by Holdings during the fiscal year ended January 25,
1997. The following table sets forth certain information concerning share
options granted by Holdings on February 24, 1997 to the officers named in the
Summary Compensation Table above:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF SHARE
NUMBER OF TOTAL OPTIONS PRICE APPRECIATION FOR
SHARES GRANTED TO OPTION TERM(A)
UNDERLYING EMPLOYEES IN ----------------------
NAME OPTIONS GRANTED FISCAL YEAR EXERCISE PRICE EXPIRATION DATE 5 PERCENT 10 PERCENT
---- --------------- ------------- -------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Edgar M. Bridger........ 205,020(b) 33.5% $1.00 1/31/08 $ 145,634 $ 379,926
Lee H. Schilling........ 97,920(b) 16.0% $1.00 1/31/08 $ 69,556 $ 181,457
Jeffrey Raabe........... 88,740(b) 14.5% $1.00 1/31/08 $ 63,036 $ 164,446
Wallace J. Hammel....... 88,740(b) 14.5% $1.00 1/31/08 $ 63,036 $ 164,446
14.5%
Darrel V. McCay......... 88,740(b) $1.00 1/31/08 $ 63,036 $ 164,446
</TABLE>
- --------
(a) Amounts represent hypothetical gains that could be achieved if exercised
at end of the option term. The dollar amounts under these columns assume
5% and 10% compounded annual appreciation in the Common Shares from the
date the respective options were granted. These calculations and assumed
realizable values are required to be disclosed under Securities and
Exchange Commission rules and, therefore, are not intended to forecast
possible future appreciation of Holdings' Common Shares or amounts that
may be ultimately realized upon exercise.
56
<PAGE>
(b) Options with respect to 150,198 shares, 71,736 shares, 65,011 shares,
65,011 shares and 65,011 shares, respectively, vest January 31, 2006, or
earlier in the event certain EBITDA or internal rate of return targets are
achieved. The balance of the options vest only if certain higher EBITDA or
internal rate of return targets are achieved.
COLLINS & AIKMAN CORPORATION PLANS
Prior to the Acquisition, the Company was an indirect wholly-owned
subsidiary of Collins & Aikman Corporation ("C&A Corporation") and the
Company's employees participated in certain compensation plans sponsored by
C&A Corporation.
C&A Corporation Plan. Provided certain eligibility requirements were met, at
the end of each calendar month, pay credits were applied to a participant's
account under the Collins & Aikman Corporation Employees' Pension Account Plan
(the "C&A Corporation Plan") based on the participant's length of credited
service and compensation (as defined) during that month. For participants aged
50 or older, the monthly pay credit was based on either credited service and
compensation or age and compensation, whichever resulted in the higher amount.
The following chart sets forth how pay credits were determined under the C&A
Corporation Plan:
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPENSATION
USED TO DETERMINE PAY
ELIGIBILITY REQUIREMENTS CREDITS
------------------------------------------- -----------------------------
YEARS OF UP TO 1/3 OVER 1/3
CREDITED OF THE S.S. OF THE S.S.
SERVICE AGE WAGE BASE WAGE BASE
------------ OR ------------ --------- -----------
<S> <C> <C> <C> <C>
less than 10 less than 50 2.5% 4.5%
10 - 14 50 - 54 3.0% 5.5%
15 - 19 55 - 59 4.0% 6.5%
20 - 24 60 - 64 5.0% 8.0%
25 or more 65 or more 6.0% 10.0%
</TABLE>
The dollar amounts that resulted from these percentages were added together
and the total was the pay credit for the month.
In addition, interest credits were applied each month to the account
balance. Participants made no contributions to the C&A Corporation Plan.
Employer contributions were 100% vested after five years of service or at age
65, whichever was earlier, and might have vested under certain other
circumstances as set forth in the C&A Corporation Plan. The estimated annual
benefits payable upon retirement at normal retirement age under the C&A
Corporation Plan for Messrs. Bridger, Schilling, Raabe, Hammel and McCay are
$56,541, $82,126, $38,246, $39,684 and $24,598, respectively. Participants in
the C&A Corporation Plan have the option, however, of receiving the value of
their vested account in a lump sum following termination of employment.
C&A Corporation Excess Plan. The Excess Benefit Plan of Collins & Aikman
Corporation (the "C&A Corporation Excess Plan") worked in conjunction with the
C&A Corporation Plan and provided to the employee any benefit which the C&A
Corporation Plan would have provided but for certain legal limitations under
the Employee Retirement Income Security Act of 1974 and Internal Revenue
Service Regulations. The pay credits and interest credits were determined as
described with respect to the C&A Corporation Plan as if no legal limitations
existed, and then this plan provided any benefit which was in excess of the
benefit provided under the C&A Corporation Plan. The estimated annual benefits
payable upon retirement at normal retirement age under the C&A Corporation
Excess Plan for Messrs. Bridger, Schilling and Raabe were $17,486, $4,302 and
$246, respectively. Messrs. Hammel and McCay were not participants in this
plan.
C&A Corporation Stock Options. Shown below is information with respect to
the year-end value of unexercised options to purchase C&A Corporation Common
Stock granted to the Named Executive Officers and
57
<PAGE>
held by them as of January 25, 1997. The value of the in-the-money options is
based on the difference between the exercise price of such options and the
closing price of the C&A Corporation Common Stock on the New York Stock
Exchange on January 24, 1997 (the last trading day of the fiscal year ended
January 25, 1997), which was $7.625.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT FY-END(#) MONEY OPTIONS AT FY-END($)
ACQUIRED ON VALUE ------------------------- ----------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edgar M. Bridger........ -- -- 92,298 -- $ 260,253 --
34,851 (a)
Lee H. Schilling........ -- -- 22,246 -- $ 80,864 --
Jeffrey Raabe........... -- -- 10,000 -- (a) --
Wallace J. Hammel....... -- -- 15,000 -- (a) --
Darrel V. McCay......... -- -- 8,000 -- (a) --
</TABLE>
- --------
(a) Options were not in-the-money at fiscal year-end because the exercise
price of such options exceeded the closing price of the Common Stock on
January 24, 1997 (the last trading day of the fiscal year).
58
<PAGE>
OWNERSHIP OF CAPITAL STOCK
Following the Transactions, the Company became a wholly-owned subsidiary of
Holdings. Holdings' authorized capital stock consists of 50 million common
shares, no par value (the "Common Shares"), and 5 million preferred shares, no
par value, including 2 million Series A Preferred Shares (the "Preferred
Shares"). Holdings has outstanding 5,100,000 Common Shares and 459,000
Preferred Shares. The table below sets forth certain information regarding
equity ownership of Holdings following the Transactions by (i) each person or
entity who beneficially owns 5% or more of the Common Shares or Preferred
Shares, (ii) each director or executive officer of Holdings who owns Common
Shares or Preferred Shares and (iii) all directors and executive officers of
Holdings as a group. There is no established public trading market for the
securities of Holdings.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF NUMBER OF PERCENTAGE OF
COMMON COMMON PREFERRED PREFERRED
NAME SHARES SHARES SHARES SHARES
- ---- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Quad-C Partners II, L.P.(a).... 190,000 3.73% 17,100 3.73%
Quad-C Partners III, L.P.(a)... 360,000 7.06 32,400 7.06
Quad-C Partners IV, L.P.(a).... 2,295,000 45.00 206,550 45.00
Paribas Principal Inc.(b)...... 2,000,000 39.22 180,000 39.22
Edgar M. Bridger............... 30,000 .59 2,700 .59
Lee H. Schilling............... 17,500 .34 1,575 .34
Jeffrey Raabe.................. 12,500 .25 1,125 .25
Wallace J. Hammel.............. 12,500 .25 1,125 .25
Darrel V. McCay................ 10,000 .20 900 .20
Henry L. Millsaps, Jr.......... 8,000 .16 720 .16
Terrence D. Daniels(a)(c)...... 2,915,000 57.16 262,350 57.16
Gary A. Binning(b)(d).......... 2,000,000 39.22 180,000 39.22
Stephen M. Burns............... 15,000 .29 1,350 .29
Stephen Eisenstein(b)(d)....... 2,000,000 39.22 180,000 39.22
J. Hunter Reichert............. 4,000 .08 360 .08
R. Ted Weschler................ 15,000 .29 1,350 .29
All directors and executive
officers as a group
(12 persons) (c)(d)........... 5,039,500 98.81 453,555 98.81
</TABLE>
- --------
(a) The address of Quad-C Partners II, L.P., Quad-C Partners III, L.P., Quad-
C Partners IV, L.P., and Mr. Daniels is 230 East High Street,
Charlottesville, Virginia 22902.
(b) The address of Paribas Principal Inc. and Messrs. Binning and Eisenstein
is 787 Seventh Avenue, New York, New York 10019.
(c) Includes 2,845,000 Common Shares and 256,050 Preferred Shares held by
Quad-C Partners II, L.P., Quad-C Partners III, L.P. and Quad-C Partners
IV, L.P., as to which shares Mr. Daniels disclaims beneficial ownership
except to the extent of his interests in such partnerships, and 20,000
Common Shares and 1,800 Preferred Shares held by children of Mr. Daniels,
as to which shares Mr. Daniels disclaims beneficial ownership.
(d) Represents the Common Shares and Preferred Shares held by Paribas
Principal Inc., as to which shares Messrs. Binning and Eisenstein disclaim
beneficial ownership.
Preferred Shares
The Preferred Shares provide for the payment of dividends, if, when and as
declared by the Board of Directors of Holdings at the rate of $10.00 per share
per annum. Unpaid dividends will cumulate but will not compound. The Preferred
Shares have a liquidation value of $100.00 per share and are redeemable at the
option of Holdings at any time and from time to time at $100.00 per share plus
unpaid dividends. There is no sinking fund or other provision requiring the
mandatory redemption of the Preferred Shares, and the Preferred Shares are not
redeemable at the option of the holders thereof.
59
<PAGE>
Shareholders Agreement
Quad-C, Paribas and the other shareholders of Holdings entered into a
shareholders agreement effective as of February 6, 1997 which provides for,
among other things, the matters described below. Subject to certain
requirements, each shareholder will vote the Common Shares held by it so as to
elect to the Board of Directors of Holdings four designees of Quad-C (the
"Quad-C Directors"), two designees of Paribas (the "Paribas Directors"), and
the chief executive officer of the Company. Although most action by the Board
of Directors requires only the vote of a majority of the directors, certain
significant corporate actions require the approval of a majority of the Quad-C
Directors and at least one Paribas Director.
Under the shareholders agreement, subject to certain exceptions, transfers
of Holdings' Common Shares and Holdings' Preferred Shares are subject to
rights of first refusal in favor of the Company and the other shareholders. In
addition, the other shareholders are entitled to require the transferee of
shares from Quad-C or Paribas to purchase a certain percentage of the shares
held by such shareholder, and, subject to certain limitations, each
shareholder is obligated to transfer all of its shares to a third party to
whom the holders of a majority of the outstanding Common Shares wish to sell
their shares.
The shareholders agreement will terminate, with certain limitations, upon
the earlier of a transfer of control of Holdings to a third party or a
qualified public offering (as defined therein) of Common Shares.
60
<PAGE>
CERTAIN TRANSACTIONS
Quad-C and Paribas. In connection with the Transactions, Holdings paid Quad-
C a fee of $1.5 million, plus out-of-pocket expenses, for, among other things,
its services in analyzing and negotiating the Acquisition and for analyzing,
arranging and negotiating the financing for the Acquisition. In addition,
Holdings entered into an agreement with Quad-C pursuant to which Holdings
retained Quad-C to render consulting services to it regarding the Company, its
financial and business affairs, its relationship with its lenders and
securityholders, and the operation and expansion of its business. The
agreement provides for payment to Quad-C of an annual fee of $350,000, payable
quarterly and reimbursement of out-of-pocket expenses. The agreement will
expire in 1999, but will be automatically renewed for successive one-year
terms unless either party provides written notice of termination 60 days prior
to the scheduled renewal date. Paribas was reimbursed and will be reimbursed
for its out-of-pocket expenses associated with the Transactions and the
operations of the Company.
C&A Products. The Company, together with other subsidiaries of C&A Products,
was a guarantor of certain indebtedness of C&A Products. C&A Products has
pledged the stock of its significant subsidiaries, which included the Company,
as security for debt of C&A Products. Prior to the Closing Date, the Company
had also pledged a portion of the stock and intercompany balances of its
foreign subsidiary as additional security for these borrowings. This guarantee
by the Company and such liens were released in connection with the closing of
the Acquisition.
The Company, together with C&A Products and its other subsidiaries,
participated in benefits, risk management and other corporate-wide programs.
The Company's allocated costs relating to such programs are reflected in the
financial statements. C&A Products performs certain services in connection
with these programs and other corporate administrative functions, including
tax, treasury, risk management, employee benefits administration, legal, data
processing, application of cash receipts and other general corporate services.
Costs allocated to the Company for these services totaled $1.1 million, $1.6
million and $1.5 million for fiscal 1994, fiscal 1995 and fiscal 1996,
respectively. C&A Products will continue to provide certain of such services
for up to one year after the closing of the Acquisition for aggregate annual
payments, based upon the services requested by the Company, of up to $324,000.
See "The Acquisition."
The Company utilizes certain showroom facilities and services at C&A
Products' New York office. The Company is allocated a portion of the cost for
these facilities based upon the actual facilities and services utilized. Costs
for these facilities and services totaled $94,000, $103,000 and $171,000 in
fiscal 1994, fiscal 1995 and fiscal 1996, respectively. In connection with the
closing of the Acquisition, the Company entered into a license with C&A
Products to continue the use of the facilities for a term of ten years for a
monthly rent of $14,265. The license is terminable by the Company upon 90
days' notice, or after the third anniversary of the closing of the
Acquisition, upon 90 days' notice by C&A Products.
Policy. As required by Delaware law, the material facts as to the
relationship or interest of any person or entity that is affiliated with the
Company with respect to a proposed future transaction between the Company and
such person or entity will be disclosed to the Company's board of directors or
the transaction will be fair to the Company at the time of authorization by
the board of directors. Furthermore, under the Shareholders Agreement among
Holdings and its shareholders, any transaction with an affiliate must be
approved by a majority of the Quad-C directors and at least one Paribas
director.
61
<PAGE>
DESCRIPTION OF CREDIT AGREEMENT
The Company entered into the Credit Agreement with various lending
institutions and Bankers Trust Company, as agent, which provides for senior
secured credit facilities consisting of (a) a term loan facility (the "Term
Loan Facility") in the amount of $55.0 million and (b) a revolving credit
facility (the "Revolving Credit Facility") in the amount of $30.0 million
which includes a letter of credit sublimit of $8.0 million.
Loans under the Term Loan Facility ("Term Loans") and $2.0 million under the
Revolving Credit Facility were borrowed to finance the Acquisition. The Term
Loans will amortize quarterly until June 30, 2002, the final maturity date.
Amounts repaid or prepaid in respect of the Term Loans may not be reborrowed.
Loans under the Revolving Credit Facility will mature on June 30, 2002 and may
be repaid and reborrowed prior to the final maturity date. The Company will be
required to pay the lenders under the Credit Agreement a commitment fee of 1/2
of 1% per annum, payable on a quarterly basis, on the daily average unused
portion of the Aggregate Unutilized Commitment (as defined in the Credit
Agreement). The Company will also be required to pay the lenders participating
in the Revolving Credit Facility letter of credit fees equal to 2.50% per
annum on the daily stated amount of each outstanding letter of credit and to
each lender issuing a letter of credit a facing fee of 1/4 of 1% on the daily
stated amount of such letter of credit and its customary administrative
charges in connection with the issuance of such letter of credit.
The obligations of the Company under the Credit Agreement have been
unconditionally and irrevocably guaranteed by Holdings. In addition, the
obligations of the Company under the Credit Agreement have been secured by a
first priority perfected security interest in (a) all the capital stock and
the tangible and intangible assets of the Company and (b) 65% of the capital
stock of, or equity interests in, each foreign subsidiary of the Company. Upon
the request of the Administrative Agent, any domestic subsidiary of the
Company formed in the future that has material assets will also be required to
issue a guarantee of the obligations of the Company under the Credit Agreement
which will be secured by a first priority security interest in substantially
all personal property of such subsidiary, and, upon the request of the
Administrative Agent, the Company will be required to pledge the issued and
outstanding capital stock of such subsidiary owned by the Company or any of
its subsidiaries or up to 65% of the issued and outstanding capital stock of
any foreign subsidiary owned by the Company or any of its subsidiaries that
has material assets to secure indebtedness under the Credit Agreement.
At the Company's option, the interest rates per annum applicable to amounts
outstanding under the Credit Agreement will be either (a) an adjusted rate
based on the Eurodollar Rate (as defined in the Credit Agreement) plus 2.50%
or (b) Base Rate (as defined in the Credit Agreement) plus 1.50%.
The Credit Agreement requires the Company to meet certain financial tests,
including minimum levels of consolidated EBITDA (as defined in the Credit
Agreement), minimum interest coverage and maximum leverage ratios. The Credit
Agreement also contains covenants which, among other things, limit the
incurrence of additional indebtedness, dividends, transactions with
affiliates, asset sales, acquisitions, mergers, prepayments of other
indebtedness, liens and encumbrances and other matters customarily restricted
in loan agreements.
The Credit Agreement contains customary events of default, including payment
defaults, breach of representations and warranties, covenant defaults, cross-
defaults, certain events of bankruptcy and insolvency, ERISA, judgment
defaults, failure of any guaranty or security agreement supporting the
Company's obligations under the Credit Agreement to be in full force and
effect and a change of control of Holdings or the Company.
62
<PAGE>
DESCRIPTION OF THE NOTES
The Exchange Notes will be issued, and the Initial Notes were issued, under
an Indenture dated as of February 6, 1997 (the "Indenture") among the Company
and IBJ Schroder Bank & Trust Company, as trustee (the "Trustee"). For
purposes of the following summary, the Initial Notes and the Exchange Notes
are collectively referred to as the "Notes." The terms and conditions of the
Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA") as in effect on the date of the Indenture. The following statements are
summaries of the provisions of the Notes and the Indenture and do not purport
to be complete. Such summaries make use of certain terms defined in the
Indenture and are qualified in their entirety by express reference to the
Indenture. A copy of the Indenture is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Notes will be unsecured obligations of the Company, ranking subordinate
in right of payment to all Senior Debt of the Company.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be
presented for registration or transfer and exchange at the offices of the
Registrar, which initially will be the Trustee's corporate trust office. The
Company may change any Paying Agent and Registrar without notice to holders of
the Notes (the "Holders"). The Company will pay principal (and premium, if
any) on the Notes at the Trustee's corporate trust office in New York, New
York. At the Company's option, interest may be paid at the Trustee's corporate
trust office or by check mailed to the registered address of Holders. Any
Initial Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture.
See "The Exchange Offer" and "Initial Notes Registration Rights."
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $100.0 million and
will mature on January 15, 2007. Interest on the Notes will accrue at the rate
of 10% per annum and will be payable semiannually in cash on each January 15
and July 15, commencing on July 15, 1997, to the persons who are registered
Holders at the close of business on the January 1 and July 1 immediately
preceding the applicable interest payment date. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from and including the date of issuance.
The Notes are not entitled to the benefit of any mandatory sinking fund.
REDEMPTION
Optional Redemption. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after January 15,
2002, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof)
if redeemed during the twelve-month period commencing on January 15 of the
year set forth below, plus, in each case, accrued and unpaid interest thereon,
if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................... 105.000%
2003........................................................... 103.333%
2004........................................................... 101.667%
2005 and thereafter............................................ 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to January 15, 2000, the Company may, at its option, use
the net cash proceeds of one or more Public Equity
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Offerings (as defined below) to redeem up to 35% of the aggregate principal
amount of Notes originally issued at a redemption price equal to 110% of the
principal amount thereof plus accrued and unpaid interest thereon, if any, to
the date of redemption; provided that at least 65% of the principal amount of
Notes originally issued remains outstanding immediately after any such
redemption. In order to effect the foregoing redemption with the proceeds of
any Public Equity Offering, the Company shall make such redemption not more
than 120 days after the consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of Holdings or the
Company pursuant to a registration statement filed with the Commission in
accordance with the Securities Act; provided that, in the event of a Public
Equity Offering by Holdings, Holdings contributes to the capital of the
Company the portion of the net cash proceeds of such Public Equity Offering
necessary to pay the aggregate redemption price (plus accrued interest to the
redemption date) of the Notes to be redeemed pursuant to the preceding
paragraph.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which such Notes are listed or, if such Notes are not
then listed on a national securities exchange, on a pro rata basis, by lot or
by such method as the Trustee shall deem fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be
redeemed in part; provided, further, that if a partial redemption is made with
the proceeds of a Public Equity Offering, selection of the Notes or portions
thereof for redemption shall be made by the Trustee only on a pro rata basis
or on as nearly a pro rata basis as is practicable (subject to DTC
procedures), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days
before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Debt shall
first be paid in full in cash or Cash Equivalents, or such payment duly
provided for to the satisfaction of the holders of Senior Debt, before any
payment or distribution of any kind or character is made on account of any
Obligations on the Notes, or for the acquisition of any of the Notes for cash
or property or otherwise. If any default occurs and is continuing in the
payment when due, whether at maturity, upon any redemption, by declaration or
otherwise, of any principal of, interest on, unpaid drawings for letters of
credit issued in respect of, or regularly accruing fees with respect to, any
Senior Debt, no payment of any kind or character shall be made by or on behalf
of the Company or any other Person on its or their behalf with respect to any
Obligations on the Notes or to acquire any of the Notes for cash or property
or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default
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to the Trustee (a "Default Notice"), then, unless and until all events of
default have been cured or waived or have ceased to exist or the Trustee
receives notice from the Representative for the respective issue of Designated
Senior Debt terminating the Blockage Period (as defined below), during the 180
days after the delivery of such Default Notice (the "Blockage Period"),
neither the Company nor any other Person on its behalf shall (x) make any
payment of any kind or character with respect to any Obligations on the Notes
or (y) acquire any of the Notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a Blockage
Period extend beyond 180 days from the date the payment on the Notes was due
and only one such Blockage Period may be commenced within any 360 consecutive
days. No event of default which existed or was continuing on the date of the
commencement of any Blockage Period with respect to the Designated Senior Debt
shall be, or be made, the basis for commencement of a second Blockage Period
by the Representative of such Designated Senior Debt whether or not within a
period of 360 consecutive days, unless such event of default shall have been
cured or waived for a period of not less than 90 consecutive days (it being
acknowledged that any subsequent action, or any breach of any financial
covenants for a period commencing after the date of commencement of such
Blockage Period that, in either case, would give rise to an event of default
pursuant to any provisions under which an event of default previously existed
or was continuing shall constitute a new event of default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt,
including the Holders of the Notes, may recover less, ratably, than holders of
Senior Debt.
As of January 25, 1997, on a pro forma basis after giving effect to the
Transactions, the Company would have had approximately $57.0 million of Senior
Debt outstanding.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, each
Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase. The Company
presently does not have outstanding any indebtedness which is pari passu with
the Notes and which also contains Change of Control provisions. The definition
of Change of Control includes the "sale, lease, exchange or other transfer of
all or substantially all of the assets of the Company," which, under New York
law, generally is determined based upon the facts and circumstances of a
particular transaction and the condition of the selling entity upon
consummation of the transaction. Consequently, a holder of Notes may be
required to establish that a sale, lease, exchange or other transfer of all or
substantially all of the Company's assets has occurred before being entitled
to compel the repurchase of its Notes in connection with a Change of Control.
The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement
and all other such Senior Debt and to repay the Indebtedness owed to each
lender which has accepted such offer or (ii) obtain the requisite consents
under the Credit Agreement and all other Senior Debt to permit the repurchase
of the Notes as provided below. The Company shall first comply with the
covenant in the immediately preceding sentence before it shall be required to
repurchase Notes pursuant to the provisions described below. The Company's
failure to comply with the immediately preceding sentence shall constitute an
Event of Default described in clause (iii) and not in clause (ii) under
"Events of Default" below.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier
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than 30 days nor later than 45 days from the date such notice is mailed, other
than as may be required by law (the "Change of Control Payment Date"). Holders
electing to have a Note purchased pursuant to a Change of Control Offer will
be required to surrender the Note, with the form entitled "Option of Holder to
Elect Purchase" on the reverse of the Note completed, to the Paying Agent at
the address specified in the notice prior to the close of business on the
third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not
have available funds to meet its purchase obligations. However, there can be
no assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company
and its Restricted Subsidiaries to incur additional Indebtedness, to grant
Liens on its property, to make Restricted Payments and to make Asset Sales may
also make more difficult or discourage a takeover of the Company, whether
favored or opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or repurchase of
the Notes, and there can be no assurance that the Company or the acquiring
party will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Subsidiaries by the
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of the Notes to require
that the Company repurchase the Notes in the event of a takeover,
recapitalization or similar transaction.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible
for payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) and Restricted
Subsidiaries of the Company may incur Acquired Indebtedness, in each case if
on the date of the incurrence of such Indebtedness, after giving effect to the
incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the
Company is greater than 2.0 to 1.0.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other
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than dividends or distributions payable in Qualified Capital Stock of the
Company) on or in respect of shares of the Company's Capital Stock to holders
of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for
value any Capital Stock of the Company or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock, (c) make any
principal payment on, purchase, defease, redeem, prepay, decrease or otherwise
acquire or retire for value, prior to any scheduled final maturity, scheduled
repayment or scheduled sinking fund payment, any Indebtedness of the Company
that is subordinate or junior in right of payment to the Notes or (d) make any
Investment (other than Permitted Investments) (each of the foregoing actions
set forth in clauses (a), (b) (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after
giving effect thereto, (i) a Default or an Event of Default shall have
occurred and be continuing or (ii) the Company is not able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional Indebtedness"
covenant or (iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market value
of such property as determined reasonably and in good faith by the Board of
Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative
Consolidated Net Income (or if cumulative Consolidated Net Income shall be a
loss, minus 100% of such loss) of the Company earned subsequent to the Issue
Date and on or prior to the date the Restricted Payment occurs (the "Reference
Date") (treating such period as a single accounting period); plus (x) 100% of
the aggregate net cash proceeds received by the Company from any Person (other
than a Subsidiary of the Company) from the issuance and sale subsequent to the
Issue Date and on or prior to the Reference Date of Qualified Capital Stock of
the Company; plus (y) without duplication of any amounts included in clause
(iii)(x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the Company's Capital
Stock; plus (z) without duplication, the sum of (1) the aggregate amount
returned in cash on or with respect to Investments (other than Permitted
Investments) made subsequent to the Issue Date whether through interest
payments, principal payments, dividends or other distributions or payments,
(2) the net cash proceeds received by the Company or any Restricted Subsidiary
from the disposition of all or any portion of such Investments (other than to
a Subsidiary of the Company) and (3) upon redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary, the fair market value of such
Subsidiary; provided, however, that with respect to all Investments made in
any Unrestricted Subsidiary or joint venture, the sum of clauses (1), (2) and
(3) above with respect to such Investment shall not exceed the aggregate
amount of all such Investments made subsequent to the Issue Date in such
Unrestricted Subsidiary or joint venture.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) the acquisition of any shares
of Capital Stock of the Company, either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of shares of Qualified Capital Stock of the
Company; (3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (A) shares of Qualified Capital
Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no
Default or Event of Default shall have occurred and be continuing, payments
for the purpose of and in an amount equal to the amount required to permit
Holdings to redeem or repurchase Common Stock of Holdings or options in
respect thereof from employees or officers of Holdings or any of its
Subsidiaries or their estates or authorized representatives upon the death,
disability or termination of employment of such employees or officers in an
aggregate amount not to exceed $3.0 million; (5) the making of distributions,
loans or advances in an amount not to exceed $250,000 per annum sufficient to
permit Holdings to pay the ordinary operating expenses of Holdings related to
Holdings' ownership of Capital Stock of the Company (other than to the
Principals or their Related Parties); and (6) the payment of any amounts
pursuant to the Tax Allocation Agreement. In determining the aggregate amount
of Restricted Payments made subsequent to the Issue Date in accordance with
clause (iii) of the immediately preceding paragraph, amounts expended pursuant
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to clauses (1), (2) and (4) shall be included in such calculation and amounts
expended pursuant to clauses (3), (5) and (6) shall be excluded from such
calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations
may be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents (provided
that the amount of any liabilities (as shown on the Company's or such
Restricted Subsidiary's most recent balance sheet) of the Company or any such
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee of any such
assets shall be deemed to be cash for purposes of this provision) and is
received at the time of such disposition; and (iii) upon the consummation of
an Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to
apply, the Net Cash Proceeds relating to such Asset Sale within 360 days of
receipt thereof either (A) to prepay any Senior Debt and, in the case of any
Senior Debt under any revolving credit facility, effect a permanent reduction
in the availability under such revolving credit facility, (B) to make an
investment in properties and assets that replace the properties and assets
that were the subject of such Asset Sale or in properties and assets that will
be used in the business of the Company and its Restricted Subsidiaries as
existing on the Issue Date or in businesses the same, similar or reasonably
related thereto ("Replacement Assets"), or (C) a combination of prepayment and
investment permitted by the foregoing clauses (iii)(A) and (iii)(B). Subject
to the last sentence of this paragraph, on the 361st day after an Asset Sale
or such earlier date, if any, as the Board of Directors of the Company or of
such Restricted Subsidiary determines not to apply the Net Cash Proceeds
relating to such Asset Sale as set forth in clause (iii)(A), (iii)(B) or
(iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger
Date"), such aggregate amount of Net Cash Proceeds which have not been applied
on or before such Net Proceeds Offer Trigger Date as permitted in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date
(the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days
following the applicable Net Proceeds Offer Trigger Date, from all Holders on
a pro rata basis, that amount of Notes equal to the Net Proceeds Offer Amount
at a price equal to 100% of the principal amount of the Notes to be purchased,
plus accrued and unpaid interest thereon, if any, to the date of purchase;
provided, however, that if at any time any non-cash consideration received by
the Company or any Restricted Subsidiary of the Company, as the case may be,
in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed
to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall
be applied in accordance with this covenant. The Company may defer the Net
Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $5.0 million resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not
just the amount in excess of $5.0 million, shall be applied as required
pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold
the properties and assets of the Company and its Restricted Subsidiaries not
so transferred for purposes of this covenant, and shall comply with the
provisions of this covenant with respect to such deemed sale as if it were an
Asset Sale. In addition, the fair market value of such properties and assets
of the Company or its Restricted Subsidiaries deemed to be sold shall be
deemed to be Net Cash Proceeds for purposes of this covenant.
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Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). To the extent that the aggregate amount of the Notes tendered
pursuant to a Net Proceeds Offer is less than the Net Proceeds Offer Amount,
the Company may use such excess Net Proceeds Offer Amount for general
corporate purposes or for any other purpose not prohibited by the Indenture.
Upon completion of any such Net Proceeds Offer, the Net Proceeds Offer Amount
shall be reset at zero. A Net Proceeds Offer shall remain open for a period of
20 business days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment
provisions of any contract or lease governing a leasehold or ownership
interest of any Restricted Subsidiary of the Company; (4) any instrument
governing Acquired Indebtedness, which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired; (5)
agreements existing on the Issue Date (including, without limitation, the
Credit Agreement) to the extent and in the manner such agreements are in
effect on the Issue Date; or (6) an agreement governing Indebtedness incurred
to Refinance the Indebtedness issued, assumed or incurred pursuant to an
agreement referred to in clause (2), (4) or (5) above; provided, however, that
the provisions relating to such encumbrance or restriction contained in any
such Indebtedness are no less favorable to the Company in any material respect
as determined by the Board of Directors of the Company in their reasonable and
good faith judgment than the provisions relating to such encumbrance or
restriction contained in agreements referred to in such clause (2), (4) or
(5).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any of its Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary of the
Company) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary of the Company) to own any Preferred Stock of any
Restricted Subsidiary of the Company.
Limitation on Liens. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries
whether owned on the Issue Date or acquired after the Issue Date, or any
proceeds therefrom, or assign or otherwise convey any right to receive income
or profits therefrom unless (i) in the case of Liens securing Indebtedness
that is expressly subordinate or junior in right of payment to the Notes, the
Notes are secured by a Lien on such property, assets or proceeds that is
senior in priority to such Liens and (ii) in all other cases, the Notes are
equally and ratably secured, except for (A) Liens existing as of the Issue
Date to the extent and in the manner such Liens are in effect on the Issue
Date; (B) Liens securing Senior Debt and Liens on assets of Restricted
Subsidiaries securing guarantees of Senior
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Debt; (C) Liens securing the Notes; (D) Liens of the Company or a Wholly Owned
Restricted Subsidiary of the Company on assets of any Restricted Subsidiary of
the Company; (E) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under
the Indenture and which has been incurred in accordance with the provisions of
the Indenture; provided, however, that such Liens (A) are no less favorable to
the Holders and are not more favorable to the lienholders with respect to such
Liens than the Liens in respect of the Indebtedness being Refinanced and (B)
do not extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F)
Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will not
incur or suffer to exist Indebtedness that is senior in right of payment to
the Notes and subordinate in right of payment to any other Indebtedness of the
Company.
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the
Company and its Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and
its Restricted Subsidiaries substantially as an entirety (the "Surviving
Entity") (x) shall be a corporation organized and validly existing under the
laws of the United States or any State thereof or the District of Columbia and
(y) shall expressly assume, by supplemental indenture (in form and substance
reasonably satisfactory to the Trustee), executed and delivered to the
Trustee, the due and punctual payment of the principal of and premium, if any,
and interest on all of the Notes and the performance of every covenant of the
Notes, the Indenture and, if applicable, the Registration Rights Agreement on
the part of the Company to be performed or observed; (ii) immediately after
giving effect to such transaction and the assumption contemplated by clause
(i)(2)(y) above (including giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving Entity, as the
case may be, shall be able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the "--Limitation on
Incurrence of Additional Indebtedness" covenant; (iii) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including, without limitation, giving
effect to any Indebtedness and Acquired Indebtedness incurred or anticipated
to be incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and (iv) the Company or the Surviving Entity, as the case may be,
shall have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that such consolidation, merger, sale, assignment,
transfer, lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture comply with the applicable provisions of the Indenture and that all
conditions precedent in the Indenture relating to such transaction have been
satisfied.
Notwithstanding the foregoing, the merger of the Company with an Affiliate
incorporated solely for the purpose of reincorporating the Company in another
jurisdiction is permitted.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the
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continuing corporation, the successor Person formed by such consolidation or
into which the Company is merged or to which such conveyance, lease or
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture and the Notes with
the same effect as if such surviving entity had been named as such.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates (each an "Affiliate Transaction"), other
than (x) Affiliate Transactions permitted under paragraph (b) below and (y)
Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate of the Company
or such Restricted Subsidiary. All Affiliate Transactions (and each series of
related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value in
excess of $250,000 shall be approved by the Board of Directors of the Company
or such Restricted Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If
the Company or any Restricted Subsidiary of the Company enters into an
Affiliate Transaction (or a series of related Affiliate Transactions related
to a common plan) that involves an aggregate fair market value or payments to
an Affiliate, as the case may be, of more than $2.5 million, the Company or
such Restricted Subsidiary, as the case may be, shall, prior to the
consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted Subsidiary, as the case may be, from a financial point of view,
from an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees, compensation and out-of-pocket expenses paid to and indemnity
provided on behalf of, officers, directors, employees or consultants of the
Company or any Restricted Subsidiary of the Company as determined in good
faith by the Company's Board of Directors or senior management; (ii)
transactions between or among the Company and any of its Restricted
Subsidiaries or exclusively between or among such Restricted Subsidiaries,
provided that such transactions are not otherwise prohibited by the Indenture;
(iii) any agreement as in effect as of the Issue Date or any amendment thereto
or any transaction contemplated thereby (including pursuant to any amendment
thereto) in any replacement agreement thereto so long as any such amendment or
replacement agreement is not more disadvantageous to the Holders in any
material respect than the original agreement as in effect on the Issue Date;
(iv) any Paribas Related Party acting as a lender under the Credit Agreement
or purchasing or holding any Notes; and (v) Restricted Payments and Permitted
Investments permitted by the Indenture.
Limitation of Guarantees by Restricted Subsidiaries. The Company will not
permit any of its domestic Restricted Subsidiaries, directly or indirectly, by
way of the pledge of any intercompany note or otherwise, to assume, guarantee
or in any other manner become liable with respect to any Indebtedness of the
Company or any other Restricted Subsidiary (other than (A) Indebtedness and
other obligations under the Credit Agreement, (B) Permitted Indebtedness of a
Restricted Subsidiary, (C) Senior Debt that is incurred in reliance on clause
(xiv) of the definition of "Permitted Indebtedness" and that is secured, (D)
Indebtedness under Currency Agreements incurred in reliance on clause (v) of
the definition of Permitted Indebtedness, or (E) Interest Swap Obligations
incurred in reliance on clause (iv) of the definition of Permitted
Indebtedness), unless, in any such case (a) such Restricted Subsidiary
executes and delivers a supplemental indenture to the Indenture, providing a
guarantee of payment of the Notes by such Restricted Subsidiary (the
"Guarantee") and (b) (x) if any such assumption, guarantee or other liability
of such Restricted Subsidiary is provided in respect of Senior Debt, the
guarantee or other instrument provided by such Restricted Subsidiary in
respect of such Senior Debt may be superior to the Guarantee pursuant to
subordination provisions no less favorable to the Holders of the Notes than
those contained in the Indenture and (y) if such assumption, guarantee or
other liability of such Restricted Subsidiary is provided in respect of
Indebtedness that is expressly subordinated to the Notes, the guarantee or
other instrument provided by such Restricted Subsidiary in respect of such
subordinated Indebtedness shall be subordinated to the
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Guarantee pursuant to subordination provisions no less favorable to the
Holders of the Notes than those contained in the Indenture.
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required
on the part of the Trustee or any Holder, upon: (i) the unconditional release
of such Restricted Subsidiary from its liability in respect of the
Indebtedness in connection with which such Guarantee was executed and
delivered pursuant to the preceding paragraph; or (ii) any sale or other
disposition (by merger or otherwise) to any Person which is not a Restricted
Subsidiary of the Company of all of the Company's Capital Stock in, or all or
substantially all of the assets of, such Restricted Subsidiary; provided that
(a) such sale or disposition of such Capital Stock or assets is otherwise in
compliance with the terms of the Indenture and (b) such assumption, guarantee
or other liability of such Restricted Subsidiary has been released by the
holders of the other Indebtedness so guaranteed.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably related
to the businesses in which the Company and its Restricted Subsidiaries are
engaged on the Issue Date.
Reports to Holders. The Indenture provides that so long as the Notes are
outstanding the Company will deliver to the Trustee within 15 days after the
filing of the same with the Commission, copies of the quarterly and annual
reports and of the information, documents and other reports, if any, which the
Company is required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. The Indenture further provides that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, so long as the Notes
are outstanding the Company will file with the Commission, to the extent
permitted, and provide the Trustee and Holders with such annual reports and
such information, documents and other reports specified in Sections 13 and
15(d) of the Exchange Act. The Company will also comply with the other
provisions of TIA (S) 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer) (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes;
(iv) the failure to pay at final stated maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness for borrowed money of the Company or any Restricted
Subsidiary of the Company and such failure continues for a period of 20
days or more, or the acceleration of the final stated maturity of any such
Indebtedness (which acceleration is not rescinded, annulled or otherwise
cured within 20 days of receipt by the Company or such Restricted
Subsidiary of notice of any such acceleration) if the aggregate principal
amount of such Indebtedness, together with the principal amount of any
other such Indebtedness in default for failure to pay principal at final
maturity or which has been accelerated, in each case with respect to which
the 20-day period described above has passed, aggregates $5.0 million or
more at any time;
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(v) one or more judgments for the payment of money in an aggregate amount
in excess of $5.0 million shall have been rendered against the Company or
any of its Restricted Subsidiaries and such judgments remain undischarged,
unpaid or unstayed for a period of 60 days after such judgment or judgments
become final and non-appealable; and
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding
Notes may declare the principal of and accrued interest on all the Notes to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit
Agreement, shall become immediately due and payable upon the first to occur of
an acceleration under the Credit Agreement or 5 business days after receipt by
the Company and the Representative under the Credit Agreement of such
Acceleration Notice but only if such Event of Default is then continuing. If
an Event of Default specified in clause (vi) above with respect to the Company
occurs and is continuing, then all unpaid principal of and premium, if any,
and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of acceleration
with respect to the Notes as described in the preceding paragraph, the Holders
of a majority in principal amount of the Notes may, on behalf of the Holders
of all of the Notes, rescind and cancel such declaration and its consequences
(i) if the rescission would not conflict with any judgment or decree, (ii) if
all existing Events of Default have been cured or waived except nonpayment of
principal or interest that has become due solely because of the acceleration,
(iii) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid, (iv) if the
Company has paid the Trustee its reasonable compensation and reimbursed the
Trustee for its expenses, disbursements and advances and (v) in the event of
the cure or waiver of an Event of Default of the type described in clause (vi)
of the description above of Events of Default, the Trustee shall have received
an officers' certificate and an opinion of counsel that such Event of Default
has been cured or waived. No such rescission shall affect any subsequent
Default or impair any right consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest
on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge
of any Default or Event of Default (provided that such officers shall provide
such certification at least annually whether or not they know of any Default
or Event of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee or stockholder of the Company, as such, shall
have any liability for any obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by
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reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Notes.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for (i) the rights of Holders to receive payments in
respect of the principal of, premium, if any, and interest on the Notes when
such payments are due, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payments, (iii) the rights, powers, trust, duties and immunities of the
Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders, cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
Notes on the stated date for payment thereof or on the applicable redemption
date, as the case may be; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the
deposit was not made by the Company with the intent of preferring the Holders
over any other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Company or
others; (vii) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with; (viii) the Company shall have delivered to
the Trustee an opinion of counsel to the effect that (A) the trust funds will
not be subject to any rights of holders of Senior Debt, including, without
limitation, those arising under the Indenture and (B) assuming no intervening
bankruptcy of the Company between the date of deposit and the 91st day
following the deposit and that no Holder is an insider of the Company, after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization
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or similar laws affecting creditors' rights generally; and (ix) certain other
customary conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when: (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together
with irrevocable instructions from the Company directing the Trustee to apply
such funds to the payment thereof at maturity or redemption, as the case may
be; (ii) the Company has paid all other sums payable under the Indenture by
the Company; and (iii) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent
under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does
not, in the opinion of the Trustee, adversely affect the rights of any of the
Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose
Holders must consent to an amendment; (ii) reduce the rate of or change or
have the effect of changing the time for payment of interest, including
defaulted interest, on any Notes; (iii) reduce the principal of or change or
have the effect of changing the fixed maturity of any Notes, or change the
date on which any Notes may be subject to redemption or repurchase, or reduce
the redemption or repurchase price therefor; (iv) make any Notes payable in
money other than that stated in the Notes; (v) make any change in provisions
of the Indenture protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting Holders of a majority in
principal amount of Notes to waive Defaults or Events of Default (other than
Defaults or Events of Default with respect to the payment of principal of, or
interest on, the Notes); (vi) amend, change or modify in any material respect
the obligation of the Company to make and consummate a Change of Control Offer
in the event of a Change of Control or make and consummate a Net Proceeds
Offer with respect to any Asset Sale that has been consummated or modify any
of the provisions or definitions with respect thereto after a Change of
Control has occurred or the subject Asset Sale has been consummated; or (vii)
modify or change any provision of the Indenture or the related definitions
affecting the subordination or ranking of the Notes in a manner which
adversely affects the Holders in any material respect.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
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Trustee will exercise such rights and powers vested in it by the Indenture,
and use the same degree of care and skill in its exercise as a prudent person
would exercise or use under the circumstances in the conduct of his own
affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
TIA, the Trustee will be permitted to engage in other transactions; provided
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
of the Company or at the time it merges or consolidates with the Company or
any of its Restricted Subsidiaries or assumed in connection with the
acquisition of assets from such Person and in each case not incurred by such
Person in connection with, or in anticipation or contemplation of, such Person
becoming a Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other
than a Restricted Subsidiary of the Company) which constitute all or
substantially all of the assets of such Person or comprises any division or
line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted
Subsidiary of the Company; or (b) any other property or assets of the Company
or any Restricted Subsidiary of the Company other than in the ordinary course
of business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $500,000
and (ii) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company as permitted under "Merger,
Consolidation and Sale of Assets."
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
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"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Service ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances maturing within
one year from the date of acquisition thereof issued by any bank organized
under the laws of the United States of America or any state thereof or the
District of Columbia or any U.S. branch of a foreign bank having at the date
of acquisition thereof combined capital and surplus of not less than
$250,000,000; (v) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (i) above
entered into with any bank meeting the qualifications specified in clause (iv)
above; and (vi) investments in money market funds which invest substantially
all their assets in securities of the types described in clauses (i) through
(v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company or Holdings to any Person or group of related Persons for purposes
of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture) other than to one or both of the Principals or their respective
Related Parties; (ii) the approval by the holders of Capital Stock of the
Company or Holdings, as the case may be, of any plan or proposal for the
liquidation or dissolution of the Company or Holdings, as the case may be
(whether or not otherwise in compliance with the provisions of the Indenture);
(iii) any Person or Group (other than one or both of the Principals or their
respective Related Parties) shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 40% of the
aggregate ordinary voting power represented by the issued and outstanding
Capital Stock (the "Voting Stock") of the Company or Holdings and the
Principals and their respective Related Parties beneficially own, directly or
indirectly, in the aggregate a lesser percentage of the Voting Stock of the
Company or Holdings, as the case may be, than such other Person or Group; or
(iv) the replacement of a majority of the Board of Directors of the Company or
Holdings over a two-year period from the directors who constituted the Board
of Directors of the Company or Holdings, as the case may be, at the beginning
of such period, and such replacement shall not have been approved by a vote of
at least a majority of the Board of Directors of the Company or Holdings, as
the case may be, then still in office who either were members of such Board of
Directors at the beginning of such period or whose election as a member of
such Board of Directors was previously so approved or who were nominated by,
or designees of, either of the Principals or their respective Related Parties.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without
limitation, all series and classes of such common stock.
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"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes
of such Person and its Restricted Subsidiaries paid or accrued in accordance
with GAAP for such period, (B) Consolidated Interest Expense and (C)
Consolidated Non-cash Charges less any non-cash items increasing Consolidated
Net Income for such period, all as determined on a consolidated basis for such
Person and its Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges
of such Person for the Four Quarter Period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving
effect on a pro forma basis for the period of such calculation to (i) the
incurrence or repayment of any Indebtedness of such Person or any of its
Restricted Subsidiaries (and the application of the proceeds thereof) giving
rise to the need to make such calculation and any incurrence or repayment of
other Indebtedness (and the application of the proceeds thereof), other than
the incurrence or repayment of Indebtedness in the ordinary course of business
for working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of
the Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the
proceeds thereof), occurred on the first day of the Four Quarter Period and
(ii) any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a result
of such Person or one of its Restricted Subsidiaries (including any Person who
becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Indebtedness and
also including any Consolidated EBITDA (including any pro forma expense and
cost reductions calculated on a basis consistent with Regulation S-X under the
Securities Act) attributable to the assets which are the subject of the Asset
Acquisition or Asset Sale during the Four Quarter Period) occurring during the
Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale
or Asset Acquisition (including the incurrence, assumption or liability for
any such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding sentence
shall give effect to the incurrence of such guaranteed Indebtedness as if such
Person or any Restricted Subsidiary of such Person had directly incurred or
otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of
the Transaction Date and which will continue to be so determined thereafter
shall be deemed to have accrued at a fixed rate per annum equal to the rate of
interest on such Indebtedness in effect on the Transaction Date and (2)
notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements
relating to Interest Swap Obligations, shall be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense
(excluding amortization or write-off of deferred financing costs), plus (ii)
the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid or accrued during such period times (y) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
effective consolidated federal, state and local tax rate of such Person,
expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including, without
limitation, (a) any amortization of debt discount and amortization or write-
off of deferred financing costs, (b) the net costs under Interest Swap
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Obligations, (c) all capitalized interest and (d) the interest portion of any
deferred payment obligation; and (ii) the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such
Person and its Restricted Subsidiaries during such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales (without regard to the $500,000 limitation set
forth in the definition thereof) or abandonments or reserves relating thereto,
(b) after-tax items classified as extraordinary or nonrecurring gains, (c) the
net income of any Person acquired in a "pooling of interests" transaction
accrued prior to the date it becomes a Restricted Subsidiary of the referent
Person or is merged or consolidated with the referent Person or any Restricted
Subsidiary of the referent Person, (d) the net income (but not loss) of any
Restricted Subsidiary of the referent Person to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is restricted by a contract, operation of law or
otherwise, (e) the net income of any Person, other than a Wholly Owned
Restricted Subsidiary of the referent Person, except to the extent of cash
dividends or distributions paid to the referent Person or to a Wholly Owned
Restricted Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets,
any earnings of the successor corporation prior to such consolidation, merger
or transfer of assets. Notwithstanding the foregoing, "Consolidated Net
Income" shall be calculated without giving effect to (i) the amortization of
any premiums, fees or expenses incurred in connection with the Acquisition and
related financings and (ii) the amortization or depreciation of any amounts
required or permitted by Accounting Principles Board Opinion Nos. 16
(including non-cash write-ups and non-cash charges relating to inventory and
fixed assets, in each case arising in connection with the Acquisition) and 17
(including non-cash charges relating to intangibles and goodwill arising in
connection with the Acquisition).
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charge which requires an accrual of or a reserve for cash charges for any
future period).
"Credit Agreement" means the Credit Agreement dated as of the Issue Date,
among Holdings, the Company, the lenders party thereto in their capacities as
lenders thereunder and Bankers Trust Company, as agent, together with the
related documents thereto (including, without limitation, any guarantee
agreements and security documents), in each case as such agreements may be
amended (including any amendment and restatement thereof), supplemented or
otherwise modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring (including,
without limitation, increasing the amount of available borrowings thereunder
(provided that such increase in borrowings is permitted by the "Limitation on
Incurrence of Additional Indebtedness" covenant above) or adding Restricted
Subsidiaries of the Company as additional borrowers or guarantors thereunder)
all or any portion of the Indebtedness under such agreement or any successor
or replacement agreement and whether by the same or any other agent, lender or
group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
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"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt
which, at the time of determination, has an aggregate principal amount of at
least $25 million and is specifically designated in the instrument evidencing
such Senior Debt as "Designated Senior Debt" by the Company.
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or is redeemable at the sole option of the holder thereof on or prior to the
final maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom
is under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting
reasonably and in good faith and shall be evidenced by a Board Resolution of
the Board of Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Indebtedness" means with respect to any Person, without duplication, (i)
all obligations of such Person for borrowed money, (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all
obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations and all Obligations under any title
retention agreement (but excluding trade accounts payable and other accrued
liabilities arising in the ordinary course of business that are not overdue by
90 days or more or are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted), (v) all obligations
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction, (vi) guarantees and other contingent
obligations in respect of Indebtedness referred to in clauses (i) through (v)
above and clause (viii) below, (vii) all obligations of any other Person of
the type referred to in clauses (i) through (vi) which are secured by any lien
on any property or asset of such Person, the amount of such obligation being
deemed to be the lesser of the fair market value of such property or asset or
the amount of the obligation so secured, (viii) all obligations under currency
agreements and interest swap agreements of such Person and (ix) all
Disqualified Capital Stock issued by such Person with the amount of
Indebtedness represented by such Disqualified Capital Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its maximum
fixed repurchase price, but excluding accrued dividends, if any. For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if such Disqualified
Capital Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the fair market value of such Disqualified Capital
Stock, such fair market value shall be determined reasonably and in good faith
by the Board of Directors of the issuer of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the
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judgment of the Board of Directors of the Company, is otherwise independent
and qualified to perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit
by the Company and its Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of the Company or such
Restricted Subsidiary, as the case may be. For the purposes of the "Limitation
on Restricted Payments" covenant, (i) "Investment" shall include and be valued
at the fair market value of the net assets of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an Unrestricted Subsidiary
and shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments
by the Company or any of its Restricted Subsidiaries, without any adjustments
for increases or decreases in value, or write-ups, write-downs or write-offs
with respect to such Investment, reduced by the payment of dividends or
distributions in connection with such Investment or any other amounts received
in respect of such Investment; provided that no such payment of dividends or
distributions or receipt of any such other amounts shall reduce the amount of
any Investment if such payment of dividends or distributions or receipt of any
such amounts would be included in Consolidated Net Income. If the Company or
any Restricted Subsidiary of the Company sells or otherwise disposes of any
Common Stock of any direct or indirect Restricted Subsidiary of the Company
such that, after giving effect to any such sale or disposition, the Company no
longer owns, directly or indirectly, 100% of the outstanding Common Stock of
such Restricted Subsidiary, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair
market value of the Common Stock of such Restricted Subsidiary not sold or
disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement
to give any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred payment constituting interest)
received by the Company or any of its Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking
into account any reduction in consolidated tax liability due to available tax
credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale.
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"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Paribas Related Party" means Paribas Principal Inc. and any of its
Affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes and the Indenture;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed $85
million (A) less the amount of all mandatory principal payments actually
made by the Company in respect of term loans thereunder (excluding any such
payments to the extent refinanced at the time of payment under a replaced
Credit Agreement) and (B) in the case of a revolving credit facility,
reduced by any required permanent repayments (which are accompanied by a
corresponding permanent commitment reduction) thereunder;
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date reduced by the amount of any scheduled
amortization payments or mandatory prepayments when actually paid or
permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; provided, however, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(v) Indebtedness under Currency Agreements; provided that in the case of
Currency Agreements which relate to Indebtedness, such Currency Agreements
do not increase the Indebtedness of the Company and its Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(vi) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company
to the Company or to a Wholly Owned Restricted Subsidiary of the Company
for so long as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien held
by a Person other than the Company or a Wholly Owned Restricted Subsidiary
of the Company; provided that if as of any date any Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company owns or
holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vii) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien;
provided that (a) any Indebtedness of the Company to any Wholly Owned
Restricted Subsidiary of the Company is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (b) if as of any date any Person other than a
Wholly Owned Restricted Subsidiary of the Company owns or holds any such
Indebtedness or any Person holds a Lien in respect of such Indebtedness,
such date shall be deemed the incurrence of Indebtedness not constituting
Permitted Indebtedness by the Company;
(viii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within five business days of incurrence;
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(ix) Indebtedness of the Company or any of its Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance, performance bonds, surety bonds or similar requirements in the
ordinary course of business;
(x) Capitalized Lease Obligations and Purchase Money Indebtedness of the
Company and its Restricted Subsidiaries incurred in the ordinary course of
business not to exceed $5.0 million at any one time outstanding;
(xi) Indebtedness of foreign Restricted Subsidiaries of the Company not
to exceed $10.0 million at any one time outstanding; provided that at the
time of any incurrence of such Indebtedness by any such foreign Restricted
Subsidiary of the Company, the Company could have incurred such
Indebtedness in accordance with the Consolidated Fixed Charge Coverage
Ratio test of the "Limitation on Incurrence of Additional Indebtedness"
covenant;
(xii) Refinancing Indebtedness;
(xiii) guarantees by the Company and its Wholly Owned Restricted
Subsidiaries of each other's Indebtedness: provided that such Indebtedness
is permitted to be incurred under the Indenture, including, with respect to
guarantees by Wholly Owned Restricted Subsidiaries of the Company, the
"Limitation of Guarantees by Restricted Subsidiaries" covenant; and
(xiv) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $15.0 million
at any one time outstanding (which amount may, but need not, be incurred in
whole or in part under the Credit Agreement).
"Permitted Investments" means: (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted Subsidiary of the Company, provided that such Wholly Owned
Restricted Subsidiary is not restricted from making dividends or similar
distributions by contract, operation of law or otherwise; (ii) Investments in
the Company by any Restricted Subsidiary of the Company; provided that any
Indebtedness evidencing such Investment is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the Notes
and the Indenture; (iii) Investments in cash and Cash Equivalents; (iv) loans
and advances to employees and officers of the Company and its Restricted
Subsidiaries in the ordinary course of business for bona fide business
purposes not in excess of $1.0 million at any one time outstanding; (v)
Currency Agreements and Interest Swap Obligations entered into in the ordinary
course of the Company's or its Restricted Subsidiaries' businesses and
otherwise in compliance with the Indenture; (vi) additional Investments not to
exceed $5.0 million at any one time outstanding; (vii) Investments in
securities of trade creditors or customers received pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of
such trade creditors or customers; (viii) Investments made by the Company or
its Restricted Subsidiaries as a result of consideration received in
connection with an Asset Sale made in compliance with the "Limitation on Asset
Sales" covenant; and (ix) guarantees permitted by the "Limitation of
Guarantees by Restricted Subsidiaries" covenant.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
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(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) Liens securing Capitalized Lease Obligations and Purchase Money
Indebtedness permitted under clause (x) of the definition of "Permitted
Indebtedness"; provided, however, that in the case of Purchase Money
Indebtedness (A) the Indebtedness shall not exceed the cost of such
property or assets being acquired or constructed and shall not be secured
by any property or assets of the Company or any Restricted Subsidiary of
the Company other than the property and assets being acquired or
constructed and (B) the Lien securing such Indebtedness shall be created
within 90 days of such acquisition or construction;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements; and
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
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"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Principals" means Quad-C, Inc. and Paribas Principal Inc.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property.
"Quad-C Related Party" means Quad-C, Inc. and any of its Affiliates.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant (other
than pursuant to clauses (ii), (iv), (v), (vi), (vii), (viii), (ix), (x),
(xi), (xiii) or (xiv) of the definition of Permitted Indebtedness), in each
case that does not (1) result in an increase in the aggregate principal amount
of Indebtedness of such Person as of the date of such proposed Refinancing
(plus the amount of any premium required to be paid under the terms of the
instrument governing such Indebtedness and plus the amount of reasonable
expenses incurred by the Company in connection with such Refinancing) or (2)
create Indebtedness with (A) a Weighted Average Life to Maturity that is less
than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced or (B) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; provided that (x) if such Indebtedness being
Refinanced is Indebtedness of the Company, then such Refinancing Indebtedness
shall be Indebtedness solely of the Company and (y) if such Indebtedness being
Refinanced is subordinate or junior to the Notes, then such Refinancing
Indebtedness shall be subordinate to the Notes at least to the same extent and
in the same manner as the Indebtedness being Refinanced.
"Related Party" means, with respect to Quad-C, Inc., any Quad-C Related
Party, and with respect to Paribas Principal Inc., any Paribas Related Party.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then
the Representative for such Designated Senior Debt shall at all times
constitute the holders of a majority in outstanding principal amount of such
Designated Senior Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom
funds have been or are to be advanced by such Person on the security of such
Property.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case
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of any particular Indebtedness, the instrument creating or evidencing the same
or pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes. Without
limiting the generality of the foregoing, "Senior Debt" shall also include the
principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for
in the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on, and all other amounts owing in respect
of, (x) all monetary obligations (including guarantees thereof) of every
nature of the Company under the Credit Agreement, including, without
limitation, obligations to pay principal and interest, reimbursement
obligations under letters of credit, fees, expenses and indemnities, (y) all
Interest Swap Obligations (including guarantees thereof) and (z) all
obligations (including guarantees thereof) under Currency Agreements, in each
case whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Senior Debt" shall not include (i) any
Indebtedness of the Company to a Subsidiary of the Company, (ii) Indebtedness
to, or guaranteed on behalf of, any shareholder, director, officer or employee
of the Company or any Subsidiary of the Company (including, without
limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed or
owing by the Company, (vi) that portion of any Indebtedness incurred in
violation of the Indenture provisions set forth under "Limitation on
Incurrence of Additional Indebtedness" (but, as to any such obligation, no
such violation shall be deemed to exist for purposes of this clause (vi) if
the holder(s) of such obligation or their representative and the Trustee shall
have received an officers' certificate of the Company to the effect that the
incurrence of such Indebtedness does not (or, in the case of revolving credit
indebtedness, that the incurrence of the entire committed amount thereof at
the date on which the initial borrowing thereunder is made would not) violate
such provisions of the Indenture) and (vii) any Indebtedness which is, by its
express terms, subordinated in right of payment to any other Indebtedness of
the Company.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of
Regulation S-X under the Securities Act.
"Subsidiary," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Tax Allocation Agreement" means the tax allocation agreement between the
Company and Holdings as in effect on the Issue Date.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, the Company or any other Subsidiary of the
Company that is not a Subsidiary of the Subsidiary to be so designated;
provided that (x) the Company certifies to the Trustee that such designation
complies with the "Limitation on Restricted Payments" covenant and (y) each
Subsidiary to be so designated and each of its Subsidiaries has not at the
time of designation, and does not thereafter, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable with respect to
any Indebtedness pursuant to which the lender has recourse to any of the
assets of the Company or any of its Restricted Subsidiaries. The Board of
Directors of the Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary only if (x) immediately after giving effect to such
designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors of the Company shall be evidenced to the
Trustee by promptly filing with the Trustee a copy
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of the Board Resolution giving effect to such designation and an officers'
certificate certifying that such designation complied with the foregoing
provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities
(other than in the case of a foreign Restricted Subsidiary, directors'
qualifying shares or an immaterial amount of shares required to be owned by
other Persons pursuant to applicable law) are owned by such Person or any
Wholly Owned Restricted Subsidiary of such Person.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Exchange Notes initially will be issued in
one or more global certificates in definitive, fully registered form (each a
"Global Note"). Upon issuance, each Global Note will be deposited with, or on
behalf of, The Depository Trust Company, New York, New York ("DTC") and
registered in the name of a nominee of DTC.
If a holder tendering Initial Notes so requests, such holder's Exchange
Notes will be issued as described below under "Certificated Securities" in
registered form without coupons (each a "Certificated Security").
Global Notes. The Company expects that pursuant to procedures established by
DTC (i) upon the issuance of a Global Note, DTC or its custodian will credit,
on its internal system, the principal amount of Exchange Notes of the
individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). Ownership of beneficial interests in the Global Note will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture. No beneficial owner of an interest in the
Global Note will be able to transfer that interest except in accordance with
DTC's procedures, in addition to those provided for under the Indenture with
respect to the Notes.
Payments of the principal of, premium (if any), and interest (including
Additional Interest) on any Exchange Note represented by a Global Note will be
made to DTC or its nominee, as the case may be, as the registered owner
thereof. None of the Company, the Trustee or any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest (including Additional Interest) on
any Exchange Note represented by a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of the Global Note as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
to owners of beneficial interests in the Global Note held through such
participants will be governed by standing instructions and customary practice,
as is now the case with securities held for the
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accounts of customers registered in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same-day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Note.
Neither the Company nor the Trustee shall be liable for any delay by DTC or
any participant or indirect participant in identifying the beneficial owners
of the related Exchange Notes and each such person may conclusively rely on,
and shall be protected in relying on, instructions from DTC for all purposes
(including with respect to registration and delivery, and the respective
principal amounts, of the Exchange Notes to be issued).
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INITIAL NOTES REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company has agreed that
it will (i) at its cost, for the benefit of the Holders of the Initial Notes,
within 60 days after the Issue Date, file a registration statement on an
appropriate registration form (the "Exchange Offer Registration Statement")
with respect to a registered offer (the "Exchange Offer") to exchange the
Initial Notes for the Exchange Notes and (ii) use its best efforts to cause
the Exchange Offer Registration Statement to be declared effective under the
Securities Act within 120 days after the Issue Date. The Company will keep the
Exchange Offer open for not less than 20 business days (or longer if required
by applicable law) after the date notice of the Exchange Offer is mailed to
the Holders of the Initial Notes.
Under existing interpretations of the Commission contained in several no-
action letters to third parties, the Exchange Notes will be freely
transferable by holders thereof (other than affiliates of the Company) after
the Exchange Offer without further registration under the Securities Act;
provided, that each Holder that wishes to exchange its Initial Notes for
Exchange Notes will be required to represent (i) that any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii)
that at the time of the commencement of the Exchange Offer it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of Securities Act) of the Exchange Notes in
violation of the Securities Act, (iii) that it is not an "affiliate" (as
defined in Rule 405 promulgated under the Securities Act) of the Company, (iv)
if such Holder is not a broker-dealer, that it is not engaged in, and does not
intend to engage in, the distribution of Exchange Notes and (v) if such Holder
is a broker-dealer (a "Participating Broker-Dealer") that will receive
Exchange Notes for its own account in exchange for Notes that were acquired as
a result of market-making or other trading activities, that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The
Commission has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of
the Notes) with the prospectus contained in the Exchange Offer Registration
Statement. The Company will agree to make available, for a period of 180 days
after consummation of the Exchange Offer, a prospectus meeting the
requirements of the Securities Act for use by Participating Broker-Dealers and
other persons, if any, with similar prospectus delivery requirements for use
in connection with any resale of Exchange Notes.
If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company is not permitted
to effect an Exchange Offer, (ii) the Exchange Offer is not consummated within
180 days of the Issue Date, (iii) in certain circumstances, certain holders of
unregistered Exchange Notes so request, or (iv) in the case of any Holder that
participates in the Exchange Offer, such Holder does not receive Exchange
Notes on the date of the exchange that may be sold without restriction under
state and federal securities laws (other than due solely to the status of such
Holder as an affiliate of the Company within the meaning of the Securities
Act), then in each case, the Company will (x) promptly deliver to the Holders
and the Trustee written notice thereof and (y) at its sole expense, (a) as
promptly as practicable, file a shelf registration statement covering resales
of the Notes (the "Shelf Registration Statement"), (b) use its best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective the Shelf
Registration Statement until the earlier of three years after the Issue Date
or such time as all of the applicable Notes have been sold thereunder. The
Company will, in the event that a Shelf Registration Statement is filed,
provide to each Holder copies of the prospectus that is a part of the Shelf
Registration Statement, notify each such Holder when the Shelf Registration
Statement for the Notes has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes. A Holder that sells
Notes pursuant to the Shelf Registration Statement will be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement that are
applicable to such a Holder (including certain indemnification rights and
obligations).
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If (a) the Company fails to file any of the registration statements required
by the Registration Rights Agreement on or before the date specified for such
filing, (b) any of such registration statements are not declared effective by
the Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company fails to consummate the Exchange
Offer within 20 business days of the Effectiveness Target Date with respect to
the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective
but thereafter, subject to certain exceptions, ceases to be effective or
usable in connection with the Exchange Offer or resales of Transfer Restricted
Notes, as the case may be, during the periods specified in the Registration
Rights Agreement (each such event referred to in clauses (a) through (d)
above, a "Registration Default"), then the interest rate on Transfer
Restricted Notes will increase ("Additional Interest"), with respect to the
first 90-day period immediately following the occurrence of such Registration
Default by 0.5% per annum and will increase by an additional 0.5% per annum
with respect to each subsequent 90-day period until such Registration Default
has been cured, up to a maximum amount of 1.0% per annum. Following the cure
of all Registration Defaults, the accrual of Additional Interest will cease
and the interest rate will revert to the original rate.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The Company believes, based upon the opinion of McGuire, Woods, Battle &
Boothe, L.L.P. ("Counsel"), that the following summary fairly describes the
material United States federal income tax consequences expected to apply to
the exchange of Initial Notes for Exchange Notes and the ownership and
disposition of Exchange Notes under currently applicable federal income tax
law. The following summary of the material anticipated federal income tax
consequences of the issuance of Exchange Notes and the Exchange Offer is based
upon the provisions of the Internal Revenue Code of 1986, as amended, the
final, temporary and proposed regulations promulgated thereunder, and
administrative rulings and judicial decisions now in effect, all of which are
subject to change (possibly with retroactive effect) or different
interpretations. The following summary is not binding on the Internal Revenue
Service ("IRS") and there can be no assurance that the IRS will take a similar
view with respect to the tax consequences described below. No ruling has been
or will be requested by the Company from the IRS on any tax matters relating
to the Exchange Notes or the Exchange Offer. This discussion is for general
information only and does not purport to address all of the possible federal
income tax consequences or any state, local or foreign tax consequences of the
acquisition, ownership and disposition of the Initial Notes, the Exchange
Notes or the Exchange Offer. It is limited to investors who will hold the
Initial Notes and the Exchange Notes as capital assets and does not address
the federal income tax consequences that may be relevant to particular
investors in light of their unique circumstances or to certain types of
investors (such as dealers in securities, insurance companies, financial
institutions, foreign corporations, partnerships, trusts, nonresident
individuals, and tax-exempt entities) who may be subject to special treatment
under federal income tax laws. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR
DISPOSITION OF EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE U.S. FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR
SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR INTERNATIONAL TAXING JURISDICTION.
INDEBTEDNESS
The Initial Notes and the Exchange Notes should be treated as indebtedness
of the Company. In the unlikely event the Initial Notes or the Exchange Notes
were treated as equity, the amount treated as a distribution on any such
Initial Note or Exchange Note would first be taxable to the holder as dividend
income to the extent of the Company's current and accumulated earnings and
profits, and would next be treated as a return of capital to the extent of the
holder's tax basis in the Initial Notes or Exchange Notes, with any remaining
amount treated as a gain from the sale of an Initial Note or an Exchange Note.
In addition, in the event of equity treatment, amounts received in retirement
of an Initial Note or an Exchange Note might in certain circumstances be
treated as a dividend, and the Company could not deduct amounts paid as
interest on such Initial Notes or Exchange Notes. The remainder of this
discussion assumes that the Initial Notes and the Exchange Notes will
constitute indebtedness.
EXCHANGE OFFER
The exchange of the Initial Notes for Exchange Notes pursuant to the
Exchange Offer should not be treated as an "exchange" because the Exchange
Notes should not be considered to differ materially in kind or extent from the
Initial Notes. Rather, the Exchange Notes received by a holder of the Initial
Notes should be treated as a continuation of the Initial Notes in the hands of
such holder. Accordingly, Counsel has given to the Company its opinion that
there should be no federal income tax consequences to holders exchanging the
Initial Notes for the Exchange Notes pursuant to the Exchange Offer. The
holding period of Exchange Notes in the hands of a holder should include the
holding period of the Initial Notes exchanged for such Exchange Notes.
INTEREST
A holder of an Initial Note or an Exchange Note will be required to report
stated interest on the Initial Note and the Exchange Note as interest income
in accordance with the holder's method of accounting for tax purposes. Because
the Initial Notes were issued at par there is no original issue discount
pursuant to the de minimis exception to the "original issue discount" rules.
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TAX BASIS IN INITIAL NOTES AND EXCHANGE NOTES
A holder's tax basis in an Initial Note will generally be the holder's
purchase price for the Initial Note. If a holder of an Initial Note exchanges
the Initial Note for an Exchange Note pursuant to the Exchange Offer, the tax
basis of the Exchange Note immediately after such exchange should equal the
holder's tax basis in the Initial Note immediately prior to the exchange.
DISPOSITION OF INITIAL NOTES OR EXCHANGE NOTES
The sale, exchange, redemption or other disposition of an Initial Note or an
Exchange Note, except in the case of an exchange pursuant to the Exchange
Offer (see the above discussion), generally will be a taxable event. A holder
generally will recognize gain or loss equal to the difference between (i) the
amount of cash plus the fair market value of any property received upon such
sale, exchange, redemption or other taxable disposition of the Initial Note or
the Exchange Note (except to the extent attributable to accrued interest) and
(ii) the holder's adjusted tax basis in such debt instrument. Such gain or
loss will be capital gain or loss, and will be long term if the Initial Notes
or the Exchange Notes have been held for more than one year at the time of the
sale or other disposition.
PURCHASERS OF INITIAL NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules which may affect the treatment
of purchasers that acquired Initial Notes other than at par, including those
provisions of the Internal Revenue Code relating to the treatment of "market
discount," and "amortizable bond premium." Any such purchaser should consult
its tax advisor as to the consequences to it of the acquisition, ownership and
disposition of Initial Notes.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification number
(employer identification number or social security number) to the Company and
certifies that such number is correct, generally under the federal income tax
backup withholding rules, 31% of (1) the interest paid on the Initial Notes
and the Exchange Notes, and (2) proceeds of sale of the Initial Notes and the
Exchange Notes, must be withheld and remitted to the United States Treasury.
Therefore, each holder should complete and sign the Substitute Form W-9
included with the Letter of Transmittal so as to provide the information and
certification necessary to avoid backup withholding. However, certain holders
(including, among others, certain foreign individuals) are not subject to
these backup withholding and reporting requirements. For a foreign individual
holder to qualify as an exempt foreign recipient, that holder must submit a
statement, signed under penalties of perjury, attesting to that individual's
exempt foreign status. Such statements can be obtained from the Company. For
further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the
Substitute Form W-9 if the Initial Notes are held in more than one name),
contact the Company's Secretary, 311 Smith Industrial Boulevard, Dalton,
Georgia 30722 or telephone number (706) 259-9711.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to backup withholding will be
reduced by the amount of tax withheld. If backup withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
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PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission (the "Staff") set
forth in no-action letters issued to third parties, the Company believes that
Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Initial Notes may be offered for resale, resold and otherwise transferred by
holders thereof (other than any holder which is (i) an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act, (ii) a
broker-dealer who acquired Notes directly from the Company or (iii) broker-
dealers who acquired Notes as a result of market-making or other trading
activities) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such Exchange Notes are
acquired in the ordinary course of such holders' business, and such holders
are not engaged in, and do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of such
Exchange Notes; provided that broker-dealers ("Participating Broker-Dealers")
receiving Exchange Notes in the Exchange Offer will be subject to a prospectus
delivery requirement with respect to resales of such Exchange Notes. To date,
the Staff has taken the position that Participating Broker-Dealers may fulfill
their prospectus delivery requirements with respect to transactions involving
an exchange of securities such as the exchange pursuant to the Exchange Offer
(other than a resale of an unsold allotment from the sale of the Initial Notes
to the Initial Purchaser) with the Prospectus, contained in the Exchange Offer
Registration Statement. Pursuant to the Registration Rights Agreement, the
Company has agreed to permit Participating Broker-Dealers and other persons,
if any, subject to similar prospectus delivery requirements to use this
Prospectus in connection with the resale of such Exchange Notes. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus, and any amendment or supplement to this Prospectus,
available to any broker-dealer that requests such documents in the Letter of
Transmittal.
Each holder of the Initial Notes who wishes to exchange its Initial Notes
for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company as set forth in "The Exchange Offer--Purpose
and Effect of the Exchange Offer." In addition, each holder who is a broker-
dealer and who receives Exchange Notes for its own account in exchange for
Initial Notes that were acquired by it as a result of market-making activities
or other trading activities, will be required to acknowledge that it will
deliver a prospectus in connection with any resale by it of such Exchange
Notes.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver a prospectus, and by delivering a prospectus a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Company has agreed to pay all expenses incidental to the Exchange Offer
other than commissions and concessions of any brokers or dealers and will
indemnify holders of the Initial Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act, as set
forth in the Registration Rights Agreement.
93
<PAGE>
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by McGuire, Woods, Battle & Boothe, L.L.P., Richmond, Virginia. Members of
McGuire, Woods, Battle & Boothe, L.L.P. beneficially own approximately 13,812
Common Shares and 1,243 Preferred Shares of Holdings.
EXPERTS
The consolidated financial statements of the Company as of January 27, 1996
and January 25, 1997 and for each of the three years in the period ended
January 25, 1997, and the financial statements of CAF Acquisition Corporation
as of January 25, 1997, included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
As of January 27, 1996 and January 25, 1997, and for each of the three years
in the period ended January 25, 1997:
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Statements of Operations.................................... F-3
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Cash Flows.................................... F-5
Consolidated Statements of Stockholder's Deficit......................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
CAF ACQUISITION CORPORATION
As of January 25, 1997, and for the period then ended:
<TABLE>
<S> <C>
Report of Independent Public Accountants................................ F-18
Balance Sheet........................................................... F-19
Statement of Stockholder's Equity....................................... F-20
Notes to Financial Statements........................................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Collins & Aikman Floor Coverings, Inc.:
We have audited the accompanying consolidated balance sheets of COLLINS &
AIKMAN FLOOR COVERINGS, INC. (a Delaware corporation) AND SUBSIDIARY as of
January 27, 1996 and January 25, 1997 and the related consolidated statements
of operations, stockholder's deficit, and cash flows for each of the three
years in the period ended January 25, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Collins & Aikman Floor
Coverings, Inc. and subsidiary as of January 27, 1996 and January 25, 1997 and
the results of their operations and their cash flows for each of the three
years in the period ended January 25, 1997 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
March 14, 1997
F-2
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 28, 1995,
JANUARY 27, 1996, AND JANUARY 25, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales................................. $108,039 $122,169 $136,124
-------- -------- --------
Cost of goods sold........................ 62,527 73,615 81,715
Selling, general and administrative
expenses................................. 23,733 27,364 28,971
Corporate general and administrative
allocated costs.......................... 1,069 1,591 1,531
-------- -------- --------
87,329 102,570 112,217
-------- -------- --------
Operating income.......................... 20,710 19,599 23,907
Interest expense allocated from Collins &
Aikman Products Co....................... 2,454 3,098 2,854
Loss on sale of accounts receivable....... 1,261 3,269 3,489
-------- -------- --------
Income before income taxes................ 16,995 13,232 17,564
Income tax expense........................ 6,645 5,127 6,729
-------- -------- --------
Net income................................ $ 10,350 $ 8,105 $ 10,835
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JANUARY 27, 1996 AND JANUARY 25, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash................................................. $ 133 $ 144
Accounts receivable, net of allowance of $88 and $15
in fiscal 1995 and fiscal 1996, respectively........ 2,247 1,577
Inventories.......................................... 12,265 16,172
Deferred tax assets.................................. 1,864 1,433
Prepaid expenses and other........................... 199 488
------- -------
Total current assets............................... 16,708 19,814
Property, plant, and equipment, net.................... 14,131 19,521
Deferred tax assets.................................... 379 259
Other assets........................................... 13 20
------- -------
$31,231 $39,614
======= =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities:
Accounts payable..................................... $ 6,956 $ 8,659
Accrued expenses..................................... 5,947 4,670
------- -------
Total current liabilities.......................... 12,903 13,329
------- -------
Other liabilities, including postretirement benefit
obligation............................................ 4,673 4,665
------- -------
Allocated debt of C&A Products......................... 43,300 25,400
------- -------
Commitments and contingencies
Stockholder's Deficit:
Common stock ($.01 par value per share, 1,000 shares
authorized, issued and outstanding in fiscal 1995
and fiscal 1996).................................... -- --
Paid-in capital...................................... 7,821 7,821
Retained earnings.................................... 8,105 18,940
Investment and advances to Collins & Aikman Products
Co. ................................................ (45,456) (30,386)
Foreign currency translation adjustment.............. 182 222
Pension equity adjustment............................ (297) (377)
------- -------
(29,645) (3,780)
------- -------
$31,231 $39,614
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 28, 1995,
JANUARY 27, 1996, AND JANUARY 25, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................ $ 10,350 $8,105 $10,835
-------- ------ -------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and leasehold
amortization........................... 2,237 2,154 2,201
Decrease (increase) in accounts
receivable............................. 11,770 (414) 670
Decrease (increase) in inventories...... 71 (1,857) (3,907)
(Decrease) increase in accounts
payable................................ (23) 2,196 1,703
Other, net.............................. 507 1,560 873
-------- ------ -------
Total adjustments....................... 14,562 3,639 1,540
-------- ------ -------
Net cash provided by operating
activities........................... 24,912 11,744 12,375
-------- ------ -------
INVESTING ACTIVITIES:
Additions to property, plant and
equipment................................ (1,823) (4,290) (7,897)
Proceeds from sale leaseback arrangement.. 866 -- --
Other, net................................ (15) 20 41
-------- ------ -------
Net cash used in investing
activities........................... (972) (4,270) (7,856)
-------- ------ -------
FINANCING ACTIVITIES:
Net cash transactions with Collins &
Aikman Products Co. ..................... (23,959) (7,347) (4,508)
-------- ------ -------
NET CHANGE IN CASH........................ (19) 127 11
CASH, beginning of year................... 25 6 133
-------- ------ -------
CASH, end of year......................... $ 6 $ 133 $ 144
======== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED JANUARY 28, 1995,
JANUARY 27, 1996, AND JANUARY 25, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
INVESTMENTS AND FOREIGN
ADVANCES FROM (TO) CURRENCY PENSION
COMMON PAID-IN RETAINED COLLINS & AIKMAN TRANSLATION EQUITY
STOCK CAPITAL EARNINGS PRODUCTS CO. ADJUSTMENTS ADJUSTMENT TOTAL
------ ------- -------- ------------------ ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 29,
1994................... $ -- $ -- $ -- $ 15,162 $ 9 $(259) $ 14,912
Net income.............. -- -- -- 10,350 -- -- 10,350
Foreign currency
translation
adjustment............. -- -- -- -- 1 -- 1
Pension equity
adjustment............. -- -- -- -- -- (52) (52)
Net transactions with
Collins & Aikman
Products Co. .......... -- -- -- (58,210) -- -- (58,210)
------ ------ ------- -------- ---- ----- --------
BALANCE, JANUARY 28,
1995................... -- -- -- (32,698) 10 (311) (32,999)
Reclassification of
capital related to the
incorporation of the
Company................ -- 7,821 -- (7,821) -- -- --
Net income.............. -- -- 8,105 -- -- -- 8,105
Foreign currency
translation
adjustment............. -- -- -- -- 172 -- 172
Pension equity
adjustment............. -- -- -- -- -- 14 14
Net transactions with
Collins & Aikman
Products Co. .......... -- -- -- (4,937) -- -- (4,937)
------ ------ ------- -------- ---- ----- --------
BALANCE, JANUARY 27,
1996................... -- 7,821 8,105 (45,456) 182 (297) (29,645)
Net income.............. -- -- 10,835 -- -- -- 10,835
Foreign currency
translation
adjustment............. -- -- -- -- 40 -- 40
Pension equity
adjustment............. -- -- -- -- -- (80) (80)
Net transactions with
Collins & Aikman
Products Co. .......... -- -- -- 15,070 -- -- 15,070
------ ------ ------- -------- ---- ----- --------
BALANCE, JANUARY 25,
1997................... $ -- $7,821 $18,940 $(30,386) $222 $(377) $ (3,780)
====== ====== ======= ======== ==== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Collins & Aikman Floor Coverings, Inc. (a Delaware corporation incorporated
on January 29, 1995), together with its subsidiary Collins & Aikman United
Kingdom Limited (collectively referred to as the "Company"), is a leading
manufacturer of floorcoverings for the specified commercial sectors of the
floorcoverings market. Prior to its incorporation on January 29, 1995, the
business of the Company was conducted principally as a division of Collins &
Aikman Products Co. ("C&A Products"), a wholly-owned subsidiary of Collins &
Aikman Corporation ("C&A Corporation"). At January 25, 1997, the Company was
an indirect subsidiary of C&A Products.
Effective December 9, 1996, C&A Products entered into a definitive agreement
to sell the Company to an entity sponsored by Quad-C, Inc. ("Quad-C"), a
Virginia merchant banking firm, and Paribas Principal Partners ("Paribas"),
the U.S. private equity group of Groupe Paribas. The purchase price of $197
million, including $27 million in consideration for a trade name license
agreement, is subject to adjustment based on the Company's level of net
working capital on the closing date of the sale (see Note 13).
2. BASIS OF PRESENTATION
At January 27, 1996, Collins & Aikman Floor Coverings, Inc. and Collins &
Aikman United Kingdom Limited were separate indirect subsidiaries of C&A
Products. As a result of C&A Corporation's international tax structuring,
Collins & Aikman United Kingdom Limited owned 100% of the outstanding shares
of Imperial Wallcoverings Limited, a company operating as part of another C&A
Corporation business segment and entirely independent of the Company. In
preparation for the sale of the Company, on August 3, 1996, C&A Products
contributed its ownership in Collins & Aikman United Kingdom Limited to
Collins & Aikman Floor Coverings, Inc., making Collins & Aikman United Kingdom
Limited a wholly owned subsidiary. In addition, effective December 5, 1996,
another C&A Products subsidiary purchased Imperial Wallcoverings Limited from
Collins & Aikman United Kingdom Limited at its net book value. For financial
reporting purposes, these transfers between related entities have been treated
in a manner similar to a pooling of interests. Accordingly, the results of
Collins & Aikman Floor Coverings, Inc. and its subsidiary have been
consolidated and treated as a single reporting entity for all periods
presented, and the results of Imperial Wallcoverings Limited have been
excluded for all periods presented.
As discussed in Note 1, prior to January 29, 1995, the business of the
Company was conducted principally as a division of C&A Products. At the date
of incorporation, $10 of the $32.7 million in investments and advances to C&A
Products was allocated to common stock and $7.8 million was allocated to other
paid-in capital. Subsequent to the incorporation of the Company, transfers of
operating funds between C&A Products and the Company have continued on a
noninterest-bearing basis, with the net amounts of these transfers reflected
in investments and advances from (to) C&A Products in the accompanying
consolidated financial statements. The net balance in investments and advances
to C&A Products at January 25, 1997 of $30.4 million is classified as a
component of stockholder's deficit in the accompanying consolidated balance
sheet due to the intent to forgive any net balance in investments and advances
to or from C&A Products upon the sale of the Company by C&A Products.
As indicated above, the accompanying consolidated financial statements
present the financial position, results of operations, and cash flows of the
Company as if it were a separate entity for all periods presented. In
accordance with Staff Accounting Bulletin No. 54 of the Securities and
Exchange Commission, C&A Products' investment in the Company is reflected in
the consolidated financial statements of the Company. The accompanying
consolidated financial statements reflect the allocation of the purchase price
in excess of the net assets acquired on the same basis as in consolidation
with C&A Corporation. In accordance with the provisions of Staff Accounting
Bulletin 73, a portion of the debt and the related interest expense of C&A
Products has been allocated to the Company as a result of its guarantee of
certain C&A Products debt. The allocations have been made based upon the ratio
of the Company's net assets to the consolidated invested capital of C&A
Products, which approximates the Company's guaranteed share of the related C&A
Products debt. These allocations, which have been made to conform to the
presentation requirements of the Securities and Exchange Commission, result in
a financial statement presentation that differs from the Company's previous
financial statements that excluded
F-7
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
these allocated amounts. The average interest rates in effect for fiscal 1994,
fiscal 1995, and fiscal 1996 were 8.8%, 8.1%, and 7.9%, respectively. In
connection with the sale of the Company, the Company was released from its
guarantee of all C&A Products debt and, accordingly, the Company was not
required to repay any of the allocated debt reflected in the accompanying
consolidated balance sheets. Interest has not been computed on the remaining
intercompany balances.
C&A Products performs certain services and incurs certain costs for the
Company. Services provided include tax, treasury, risk management, employee
benefits, legal, data processing, application of cash receipts, and other
general corporate services. The costs of these services provided by C&A
Products have been allocated to the Company based on a combination of
estimated use and the relative sales of the Company's business to the total
consolidated operations of C&A Products. Corporate costs of C&A Products
totaling $1.1 million, $1.6 million and $1.6 million have been allocated to
the Company for fiscal 1994, fiscal 1995, and fiscal 1996, respectively. In
the opinion of management, the method of allocating these costs is reasonable.
However, the costs of services charged to the Company are not necessarily
indicative of the costs that would have been incurred if the Company had
performed these functions. Subsequent to the sale, the Company will perform
these functions using its own resources or purchased services, including
services purchased from C&A Products during a transition period.
C&A Products administers its self-insurance programs on a corporatewide
basis and charges its individual participating subsidiaries and divisions
based on estimated claims and loss experience. Costs charged by C&A Products
to the Company for product, automotive and general liability, workers'
compensation, employee group health claims, and insurance amounted to
approximately $1.8 million, $1.7 million, and $1.7 million in fiscal 1994,
fiscal 1995, and fiscal 1996, respectively. The accompanying consolidated
balance sheets include accruals for product, automotive, general liability,
workers' compensation, and employee group health claims.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of Collins & Aikman Floor Coverings, Inc. and Collins & Aikman
United Kingdom Limited. All significant intercompany items have been
eliminated in consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year--The fiscal year of the Company ends on the last Saturday of
January. Fiscal 1994, fiscal 1995, and fiscal 1996 were 52-week years which
ended on January 28, 1995, January 27, 1996, and January 25, 1997,
respectively.
Foreign Currency--Foreign currency activity is reported in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." SFAS No. 52 generally provides that the assets and liabilities
of foreign operations be translated at the current exchange rates as of the
end of the accounting period and that revenues and expenses be translated
using average exchange rates. The resulting translation adjustments arising
from foreign currency translations are accumulated as a separate component of
stockholder's equity. Translation adjustments resulted in increases in equity
of approximately $1,000 in fiscal 1994, $172,000 in fiscal 1995, and $40,000
in fiscal 1996.
Gains and losses resulting from foreign currency transactions are recognized
in income. Recorded balances that are denominated in a currency other than the
Company's functional currency are adjusted to reflect the exchange rate at the
balance sheet date.
Revenue Recognition--Revenue is recognized when goods are shipped.
Financial Instruments--Financial instruments which potentially subject the
Company to concentrations of credit risk consist primarily of trade accounts
receivable. Because of the short maturity of these instruments, carrying value
approximates fair value.
F-8
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reliance on Principal Supplier--One supplier currently supplies all of the
Company's requirements for nylon yarn, the principal raw material used in the
Company's floorcovering products. While the Company believes that there are
adequate alternative sources of supply from which it could fulfill its nylon
yarn requirements, the unanticipated termination of the current supply
arrangement or a prolonged interruption in shipments could have a material
adverse effect on the Company.
Cash and Cash Equivalents--Cash and cash equivalents include all cash
balances and highly liquid investments with an original maturity of three
months or less.
Inventories--Inventories are valued at the lower of cost or market, but not
in excess of net realizable value. Cost is determined primarily on the first-
in, first-out basis.
Property, Plant, and Equipment--Property, plant, and equipment are stated at
cost. Provisions for depreciation are primarily computed on a straight-line
basis over the estimated useful lives of the assets, presently ranging from 3
to 40 years. Leasehold improvements are amortized over the lesser of the lease
term or the estimated useful lives of the improvements.
Long-Lived Assets--In the fourth quarter of fiscal 1995, the Company adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of. The
adoption of SFAS No. 121 did not have a material impact on the Company's
consolidated results or operations.
Advertising Costs--The Company expenses all advertising costs as they are
incurred.
Income Taxes--Although the Company is included in the consolidated federal
income tax return of C&A Corporation, federal, state, and foreign income taxes
are provided on a separate return basis.
4. INVENTORIES
Net inventory balances are summarized below (in thousands):
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
Raw materials........................................ $ 5,298 $ 7,376
Work in process...................................... 2,804 2,843
Finished goods....................................... 4,163 5,953
------- -------
$12,265 $16,172
======= =======
</TABLE>
5. PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment, net, are summarized below (in thousands):
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
Land and improvements............................... $ 893 $ 902
Buildings........................................... 7,629 7,672
Machinery and equipment............................. 33,915 32,606
Leasehold improvements.............................. 853 853
Construction in progress............................ 1,397 5,710
-------- --------
44,687 47,743
Less accumulated depreciation and amortization...... (30,556) (28,222)
-------- --------
$ 14,131 $ 19,521
======== ========
</TABLE>
F-9
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and leasehold amortization of property, plant, and equipment
was $2.2 million for fiscal 1994, fiscal 1995, and fiscal 1996.
6. ACCRUED EXPENSES:
Accrued expenses are summarized below (in thousands):
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
Payroll and employee benefits........................ $3,589 $3,648
Accrued legal expenses............................... 1,400 210
Customer claims and repairs.......................... 550 550
Other................................................ 408 262
------ ------
$5,947 $4,670
====== ======
</TABLE>
7. RECEIVABLES FACILITY
Effective July 13, 1994, C&A Products and certain other subsidiaries,
including Collins & Aikman Floor Coverings, Inc. (each of the foregoing, a
"Seller"), entered into a Receivables Sale Agreement with Carcorp, Inc.
("Carcorp"), a wholly owned, bankruptcy remote subsidiary of C&A Products (as
amended and restated as of March 30, 1995, the "Receivables Sale Agreement").
Under the terms of the Receivables Sale Agreement, Carcorp purchases on a
revolving basis, without recourse, virtually all trade receivables generated
by the Sellers. Carcorp has sold certain interests in the purchased
receivables to outside parties.
As of January 27, 1996 and January 25, 1997, the face value of the open
accounts receivable of the Company that had been purchased by Carcorp
aggregated to $16.9 million and $17.8 million, respectively.
The receivables are purchased by Carcorp at the face amount of the
receivables less a defined discount. The discount percentage includes a yield
factor, factors for Carcorp's servicing and processing expenses, as well as
other factors, which are subject to variation, based upon the collectibility
and aging of the receivables purchased. In connection with the sale of the
receivables to Carcorp, the Company recorded losses of $1.3 million, $3.3
million and $3.5 million in fiscal 1994, fiscal 1995, and fiscal 1996,
respectively.
C&A Products retains the responsibility of servicing trade receivables,
including the trade receivables of the Company, sold to Carcorp, and it is
compensated by Carcorp for its servicing activities.
In connection with the sale of the Company, the Company was terminated as a
Seller under the Receivables Sale Agreement. Receivables sold by the Company
to Carcorp prior to the termination of the Company as a Seller remained with
Carcorp (see Note 13).
8. LEASE COMMITMENTS
On September 30, 1994, C&A Products entered into a master equipment lease
agreement. Pursuant to the agreement, certain equipment of the Company was
sold and leased back on January 24, 1995. The aggregate net book values of the
equipment totaling $866,000 were removed from the balance sheet. The ten-year
lease term has annual lease payments of approximately $120,000. The lease
covering the Company's equipment has been assigned to the Company by C&A
Products. The Company has a purchase option on the equipment at the end of the
lease term based on the fair market value of the equipment. The Company has
classified this lease as an operating lease.
F-10
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At January 25, 1997, future minimum lease payments under operating leases
are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING:
-------------------
<S> <C>
January 1998......................................................... $ 231
January 1999......................................................... 231
January 2000......................................................... 220
January 2001......................................................... 201
January 2002......................................................... 163
Thereafter........................................................... 406
------
$1,452
======
</TABLE>
Rental expense under operating leases was approximately $490,000, $665,000
and $816,000 in fiscal 1994, fiscal 1995, and fiscal 1996, respectively.
9. EMPLOYEE BENEFIT PLANS
Defined Benefit Plan
Substantially all domestic employees of the Company who meet eligibility
requirements, along with eligible employees from certain other affiliated
companies, participate in a defined benefit plan administered by C&A Products.
Plan benefits are generally based on years of service and employees'
compensation during their years of employment. Funding of retirement costs for
this plan complies with the minimum funding requirements specified by the
Employee Retirement Income Security Act of 1974. Assets of the pension plan
are held in a C&A Products master trust which invests primarily in equity and
fixed income securities. Actuarially determined calculations of plan benefits
for the Company as a stand-alone entity are included in the accompanying
consolidated financial statements.
The net periodic pension cost of the Company for fiscal 1994, fiscal 1995,
and fiscal 1996 includes the following components (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Service cost........................... $ 411 $ 407 $ 442
Interest cost on projected benefit
obligation and service cost........... 320 374 343
Actual gain on assets.................. (281) (303) (344)
Net amortization and deferral.......... (3) 1 (1)
----- ----- -----
Net periodic pension cost.............. $ 447 $ 479 $ 440
===== ===== =====
</TABLE>
F-11
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the Company's actuarially determined portion
of the plan's funded status and amounts recognized in the Company's
consolidated balance sheets (in thousands):
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation........................ $(4,187) $(4,316)
======= =======
Accumulated benefit obligation................... $(4,427) $(4,783)
======= =======
Projected benefit obligation..................... $(4,548) $(4,985)
Plan assets at fair value.......................... 3,723 4,149
------- -------
Projected benefit obligation in excess of plan
assets............................................ (825) (836)
Unrecognized net loss.............................. 944 1,108
Prior service not yet recognized in net periodic
pension cost...................................... (341) (294)
Adjustment required to recognize minimum
liability......................................... (482) (611)
------- -------
Pension liability recognized in the consolidated
balance sheets.................................... $ (704) $ (633)
======= =======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.5% at January 27, 1996 and January 25,
1997. The expected rate of increase in future compensation levels is 5.5% and
4.5% in fiscal 1995 and fiscal 1996, respectively, and the expected long-term
rate of return on plan assets was 9% in fiscal 1995 and fiscal 1996. The
provisions of SFAS No. 87, "Employers' Accounting for Pensions," require
companies with any plans that have an unfunded accumulated benefit obligation
to recognize an additional minimum pension liability, an offsetting intangible
pension asset, and, in certain situations, a contra-equity balance. In
accordance with the provisions of SFAS No. 87, the consolidated balance sheets
at January 27, 1996 and January 25, 1997 include an additional minimum pension
liability of $482,000 and $611,000, respectively, and a contra-equity balance,
net of the related tax effect, of $297,000 and $377,000, respectively.
As of February 6, 1997, all participant balances became fully vested and
participants could elect to maintain balances in the current plan, receive a
lump-sum distribution, or roll over balances into a new defined contribution
plan.
Defined Contribution Plans
Certain of the Company's employees who meet eligibility requirements are
included in C&A Products sponsored defined contribution plans. C&A Products'
contributions are based on specified formulas and, for one contribution plan,
are at the discretion of C&A Products, as specified in the plan documents. The
accompanying statements of operations include expenses of approximately
$450,000, $465,000, and $376,000 in fiscal 1994, fiscal 1995 and fiscal 1996,
respectively, for the Company's participation in the plans.
As of February 6, 1997, all participant balances became fully vested and
were rolled over into a new defined contribution plan.
Postretirement Benefit Plans
C&A Products provides life and health coverage for certain of the Company's
retirees under plans currently in effect. Many of the domestic employees may
be eligible for coverage if they reach retirement age while still employed by
the Company. Actuarially determined calculations of plan benefits for the
Company as a stand-alone entity are included in the accompanying consolidated
financial statements.
F-12
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net periodic postretirement benefit cost for the Company's participation
in these plans includes the following components (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Service cost........................... $ 86 $ 69 $ 86
Interest cost on accumulated
postretirement benefit obligation..... 148 148 153
Net amortization....................... (99) (111) (97)
---- ----- ----
Net periodic postretirement benefit
cost.................................. $135 $ 106 $142
==== ===== ====
</TABLE>
The following table sets forth the amount of accumulated postretirement
benefit obligation for the Company's participation in these plans (in
thousands):
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
Retirees and beneficiaries......................... $ 448 $ 621
Fully eligible active plan participants............ 873 915
Other active plan participants..................... 887 803
------ ------
Accumulated postretirement benefit obligation...... 2,208 2,339
Unrecognized prior service gain from plan
amendments........................................ 969 931
Unrecognized net loss.............................. (69) (104)
------ ------
Net postretirement benefit obligation.............. $3,108 $3,166
====== ======
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at January 27, 1996 and January 25,
1997. These plans are unfunded. For measurement purposes, a 12% and 11% annual
rate of increase in the per capita cost of covered health care benefits was
assumed for fiscal 1995 and 1996; the rate was assumed to decrease 1%
percentage point per year to 6% and remain at that level thereafter. The
health care cost trend rate assumption does not have an impact on the
obligation because of the plan amendments discussed below. Effective April 1,
1994, C&A Products amended the postretirement benefit plans which cover
substantially all of the eligible current and retired employees of the
Company. Pursuant to the amendment, obligation for future inflation of health
care costs will be limited to 6% per year through March 31, 1998. Subsequent
to March 1998, the Company's portion of coverage costs will not be adjusted
for inflation in health care costs.
10. INCOME TAXES
Although the Company is included in the consolidated federal income tax
return of C&A Corporation, federal, state, and foreign income taxes are
provided on a separate return basis. C&A Products and its subsidiaries,
including the Company, are parties to a tax sharing agreement with C&A
Corporation which provides for tax-sharing payments to or from C&A
Corporation, calculated in accordance with federal tax regulations, based on
taxable income. C&A Corporation, as appropriate, pays such amounts to the
Internal Revenue Service ("IRS") and/or distributes the amounts to the
companies included in its consolidated income tax return that generated losses
which resulted in reduced payments to the IRS. In fiscal 1995 and fiscal 1996,
the Company received, under the tax-sharing agreement, an additional benefit
of $1.3 million and $3.4 million, respectively, that has been reported as a
component of net transactions with C&A Products. The tax-sharing arrangement
resulted in an additional charge of $1.0 million in fiscal 1994 that has been
reported as a component of net transactions with C&A Products.
F-13
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Domestic and foreign components of income (loss) before income taxes are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Domestic................................. $17,159 $13,187 $17,430
Foreign.................................. (164) 45 134
------- ------- -------
$16,995 $13,232 $17,564
======= ======= =======
</TABLE>
Components of the income tax provision for fiscal 1994, fiscal 1995, and
fiscal 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal................................ $5,077 $3,866 $5,289
State.................................. 807 618 838
------ ------ ------
5,884 4,484 6,127
------ ------ ------
Deferred:
Federal................................ 658 556 521
State.................................. 103 87 81
------ ------ ------
761 643 602
------ ------ ------
Income tax expense....................... $6,645 $5,127 $6,729
====== ====== ======
</TABLE>
Collins & Aikman United Kingdom Limited had sufficient loss carryforwards to
offset taxable income in fiscal 1995 and fiscal 1996. No benefit was recorded
for the operating loss in fiscal 1994. Therefore, no foreign income tax
expense is reflected in the statements of operations.
A reconciliation between income taxes computed at the statutory federal rate
of 35% and the provisions for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Amount at statutory federal rate....... $5,948 $4,631 $6,147
State income taxes, net of federal
income tax benefit.................... 592 458 597
Foreign tax more (less) than federal
tax at statutory rate................. 57 (16) (47)
Other.................................. 48 54 32
------ ------ ------
Income tax expense..................... $6,645 $5,127 $6,729
====== ====== ======
</TABLE>
F-14
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred tax assets as of January 27, 1996 and
January 25, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 27, JANUARY 25,
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Employee benefits..................................... $ 2,770 $ 2,755
Inventory reserves.................................... 514 543
Other liabilities and reserves........................ 907 467
Foreign net operating loss carryforwards.............. 148 91
Valuation allowance................................... (148) (91)
------- -------
Total deferred tax assets........................... 4,191 3,765
------- -------
Deferred tax liabilities:
Property, plant, and equipment........................ (1,948) (2,073)
------- -------
Net deferred tax assets................................. $ 2,243 $ 1,692
======= =======
</TABLE>
The valuation allowance is provided because, in management's assessment, it
was uncertain whether the net deferred tax asset related to the foreign net
operating loss carryforwards would be realized.
11. OTHER RELATED-PARTY TRANSACTIONS
At January 25, 1997, the Company, together with other subsidiaries of C&A
Products, was guarantor of certain indebtedness of C&A Products. As a result,
certain debt and interest expense of C&A Products has been allocated to the
Company and included in the accompanying consolidated financial statements
(see Note 2). In connection with the sale of the Company, the Company was
released from this guarantee.
Due to the intent to forgive any net balance in investments and advances to
or from C&A Products upon the sale of the Company by C&A Products, the net
intercompany balance has been classified as a component of stockholder's
deficit. Significant components of the net transactions with C&A Products have
been summarized as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
JANUARY 28, JANUARY 27, JANUARY 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash transactions:
Corporate general and administrative
allocated costs......................... $ 1,069 $ 1,591 $ 1,531
Payments under tax sharing agreement with
C&A Corporation......................... 6,967 3,590 2,880
Net transfers of excess cash flow to C&A
Products................................ (31,995) (12,528) (8,919)
-------- ------- -------
(23,959) (7,347) (4,508)
Other activity:
Change in allocated debt of C&A
Products................................ (35,700) 500 17,900
Interest expense allocated from C&A
Products, net of income tax effect...... 1,449 1,910 1,678
-------- ------- -------
$(58,210) $(4,937) $15,070
======== ======= =======
</TABLE>
During fiscal 1996, the Company maintained an average intercompany
receivable balance of $3.5 million relating to its cash transactions with C&A
Products. During fiscal 1994 and fiscal 1995, the Company had an average
intercompany payable balance of $19.4 million and $7.4 million, respectively,
relating to the cash transactions.
F-15
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
C&A Products performs certain services and incurs certain costs for the
benefit of the Company. Services provided include tax services, treasury
services, risk management, employee benefit services, legal services, accounts
receivable servicing, and other general corporate services. Costs allocated to
the Company for these services totaled $1.1 million, $1.6 million, and $1.5
million for fiscal 1994, fiscal 1995, and fiscal 1996, respectively.
The Company utilizes certain facilities and services available at C&A
Products' New York office. The Company is allocated a portion of the cost for
these facilities based on the actual facilities and services utilized. Costs
for these facilities and services totaling $94,000, $103,000, and $171,000 in
fiscal 1994, fiscal 1995, and fiscal 1996, respectively, are included in the
accompanying consolidated statements of operations.
Certain of the Company's employees participate in C&A Corporation's stock
option plans, which provide for the award of options on common shares to
employees, exercisable over ten-year periods. Effective January 28, 1994, C&A
Corporation granted certain employees of the Company stock options with
exercise prices below the then-estimated fair value in recognition of their
prior service. In subsequent periods, C&A Corporation granted additional stock
options to certain employees of the Company with exercise prices equal to the
market value at the time of grant. In connection with sale of the Company, all
outstanding options held by employees of the Company automatically vested and
the employees have up to 90 days to exercise any options.
12. COMMITMENTS AND CONTINGENCIES
Environmental
The Company is subject to federal, state, and local laws and regulations
concerning the environment. When it has been possible to reasonably estimate
the Company's liability with respect to environmental matters, provisions have
been made in accordance with generally accepted accounting principles. At
January 25, 1997, management concluded that no environmental reserves were
required. In the opinion of the Company's management, based on the facts
presently known to it, the ultimate outcome of any environmental matters is
not expected to have a material adverse effect on the Company's consolidated
financial position or results of operations.
Litigation
In response to claims of an unpleasant odor from vinyl-backed carpet tiles
at certain customer sites, the Company has reached settlements or necessary
remediation has been performed to satisfy all customer claims made to date.
The Company shared the cost of a majority of the remediation costs with a
third-party vendor under a funding agreement. Provisions for the remediation
costs were recorded by the Company in fiscal 1993. In fiscal 1995, an
additional $1.4 million was provided in connection with a specific customer
site. This amount was paid in settlement of the claim in October 1996.
The Company and this vendor are currently engaged in litigation in which
each side is seeking damages. The Company's claim includes recovery of its
remediation costs and loss of business. Subsequent to the sale of the Company,
C&A Products will retain this litigation, including all costs and recoveries.
At January 25, 1997, there are no amounts relating to these claims included in
the accompanying consolidated balance sheet.
During 1996, the Company agreed to a settlement including payment of
approximately $427,500 in connection with a patent infringement claim related
to the manufacturing of a certain product. This amount is included as a
component of selling, general and administrative expenses in the accompanying
consolidated statement of operations for fiscal 1996.
F-16
<PAGE>
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1993, two companies owned by a former sales representative of the
Company's products commenced an arbitration against the Company alleging that
their distributor contracts were wrongfully terminated. This action seeks
damages in excess of $4.0 million. The Company maintains that the contracts
were not wrongfully terminated, denies liability, and has continued to contest
this matter vigorously. Subsequent to the sale of the Company, C&A Products
will retain this arbitration.
The ultimate outcome of all legal proceedings to which the Company is a
party will not, in the opinion of the Company's management, based on the facts
presently known to it, have a material adverse effect on the Company's
consolidated financial position or results of operations.
Other Commitments
In connection with certain product installation contracts, the Company
issues performance bonds. No liability for these bonds is reflected in the
accompanying consolidated balance sheets because, in management's opinion,
based on the facts presently known to it, all product installation contracts
will be fulfilled in accordance with their terms.
13. SUBSEQUENT EVENTS
As discussed in Note 1, on February 6, 1997, pursuant to the definitive
agreement entered into by C&A Products, the Company, CAF Holdings, Inc.
("Holdings"), a corporation organized on behalf of affiliates of Quad-C and
Paribas, CAF Acquisition Corporation ("CAF"), a wholly owned subsidiary of
Holdings, and Collins & Aikman Floor Coverings Group, Inc. (the "Seller"), CAF
acquired from the Seller all of the outstanding capital stock of the Company
(the "Acquisition"). Simultaneous with the consummation of the Acquisition,
CAF was merged with and into the Company.
At the date of closing, CAF paid the Seller $195.6 million, which
represented the $197.0 million purchase price less the parties' preliminary
estimate of net working capital as of the closing date. Financing for the
Acquisition was provided by (i) borrowings of $57.0 million under an $85.0
million senior secured credit facility among CAF, Holdings, certain lenders,
and Bankers Trust Company, as agent, (ii) proceeds from an offering by CAF of
$100.0 million aggregate principal amount of 10% senior subordinated notes due
in 2007, and (iii) capital investments of $51.0 million by affiliates of Quad-
C, Paribas, management, and certain other investors in Holdings. The
Acquisition will be accounted for as a purchase.
Under the terms of the Acquisition, C&A Products will remit, as collected,
the accounts receivable receipts relating to the Company's open account held
by Carcorp at the date of closing.
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CAF Acquisition Corporation:
We have audited the accompanying balance sheet of CAF ACQUISITION
CORPORATION (a Virginia corporation) as of January 25, 1997 and the related
statement of stockholder's equity for the period from inception (December 9,
1996) to January 25, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CAF Acquisition
Corporation as of January 25, 1997 for the period from inception (December 9,
1996) to January 25, 1997 in conformity with generally accepted accounting
principles.
Atlanta, Georgia
June 2, 1997
Arthur Andersen LLP
F-18
<PAGE>
CAF ACQUISITION CORPORATION
BALANCE SHEET
JANUARY 25, 1997
<TABLE>
<S> <C>
ASSETS
ORGANIZATION COSTS....................................................... $105
====
LIABILITIES AND STOCKHOLDER'S EQUITY
ACCOUNTS PAYABLE $105
----
STOCKHOLDER'S EQUITY:
Common stock, no par value; 5,000 shares authorized and 100 shares
issued and outstanding................................................ 0
Additional paid-in capital............................................. 100
Subscription receivable................................................ (100)
----
Total liabilities and stockholder's equity........................... $105
====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-19
<PAGE>
CAF ACQUISITION CORPORATION
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE PERIOD FROM INCEPTION (DECEMBER 9, 1996)
TO JANUARY 25, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN SUBSCRIPTION STOCKHOLDER'S
STOCK CAPITAL RECEIVABLE EQUITY
------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
INITIAL INVESTED CAPITAL,
December 9, 1996................ 100 $100 $ 0 $ 100
Subscription receivable........ 0 0 (100) (100)
--- ---- ----- -----
STOCKHOLDER'S EQUITY, January 25,
1997............................ 100 $100 $(100) $ 0
=== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE>
CAF ACQUISITION CORPORATION
NOTES TO FINANCIAL STATEMENTS
JANUARY 25, 1997
1. ORGANIZATION
Effective December 9, 1996, CAF Acquisition Corporation (the "Company") was
organized for the purpose of acquiring Collins & Aikman Floor Coverings, Inc.
("Floor Coverings"), a Delaware corporation incorporated on January 29, 1995.
The Company was a wholly-owned subsidiary of CAF Holdings, Inc. ("Holdings"),
a corporation organized on behalf of affiliates of Quad-C, Inc. ("Quad-C") and
Paribas Principal Partners ("Paribas").
Prior to its incorporation on January 29, 1995, Floor Coverings was
principally a division of Collins & Aikman Products Co. ("C&A Products"). C&A
Products entered into a definitive agreement to sell the stock of Floor
Coverings to the Company for a purchase price of $197 million, including $27
million in consideration for a trade name license agreement, subject to
adjustment based on the Company's level of net working capital on the closing
date of the sale.
As of January 25, 1997, the Company will receive $1 per share for the 100
shares of stock issued upon inception. This amount has been recorded as a
subscription receivable in the accompanying statement of stockholder's equity.
2. SUBSEQUENT EVENTS
On February 6, 1997, pursuant to the definitive agreement entered into by,
among others, C&A Products, the Company, Holdings and Floor Coverings, the
Company acquired from C&A Products all of the outstanding capital stock of
Floor Coverings (the "Acquisition"). Simultaneous with the consummation of the
Acquisition, the Company was merged with and into Floor Coverings.
Financing for the Acquisition was provided by (i) $57 million of borrowings
under an $85 million senior secured credit facility among the Company,
Holdings, certain lenders and Bankers Trust Company, as agent, (ii) proceeds
from an offering by the Company of $100 million aggregate principal amount of
10% senior subordinated notes due in 2007, and (iii) certain amounts of
capital invested by affiliates of Quad-C, Paribas, management and certain
other investors in Holdings. The acquisition has been accounted for as a
purchase.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CONTAINED
HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES, NOT DOES IT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER TO SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 13
The Acquisition.......................................................... 17
Use of Proceeds of the Exchange Notes.................................... 18
Pro Forma Capitalization................................................. 19
Unaudited Pro Forma Financial Data....................................... 20
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
The Exchange Offer....................................................... 34
Business................................................................. 42
Management............................................................... 54
Ownership of Capital Stock............................................... 59
Certain Transactions..................................................... 61
Description of Credit Agreement.......................................... 62
Description of the Notes................................................. 63
Initial Notes Registration Rights........................................ 89
Certain U.S. Federal Income Tax Consequences............................. 91
Plan of Distribution..................................................... 93
Legal Matters............................................................ 94
Experts.................................................................. 94
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
UNTIL SEPTEMBER 3, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING
EXCHANGE NOTES RECEIVED IN EXCHANGE FOR INITIAL NOTES HELD FOR THEIR OWN AC-
COUNT.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
--------------
PROSPECTUS
--------------
[LOGO OF COLLINS & AIKMAN FLOORCOVERINGS, INC. APPEARS HERE]
COLLINS & AIKMAN
FLOORCOVERINGS, INC.
OFFER TO EXCHANGE SERIES B 10% SENIOR SUBORDINATED
NOTES DUE 2007 ("EXCHANGE NOTES") FOR ALL OUTSTANDING 10% SENIOR SUBORDINATED
NOTES DUE 2007 ("INITIAL NOTES")
JUNE 5, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
(the "DGCL"), provides that a corporation (in its original certificate of
incorporation or an amendment thereto) may eliminate or limit the personal
liability of a director (or certain persons who, pursuant to the provisions of
the certificate of incorporation, exercise or perform duties conferred or
imposed upon directors by the DGCL) to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that
such provisions shall not eliminate or limit the liability of a director (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (providing for liability of directors for unlawful payment of
dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which the director derived an improper personal benefit.
Article EIGHTH of the Registrant's Certificate of Incorporation limits the
liability of directors thereof to the extent permitted by Section 102(b)(7) of
the DGCL.
Section 145 of the DGCL provides that a corporation may indemnify its
directors, officers, employees or agents against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought by third parties to which they may be made parties by reason of their
being or having been directors, officers, employees or agents and shall so
indemnify such persons if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. Article XI, Section 1
of the Registrant's Bylaws provides that the Registrant shall indemnify its
officers, directors, employees and agents to the full extent permitted by
Delaware law.
Article XI, Section 1 of the Registrant's Bylaws also provides that the
Registrant shall indemnify any such person seeking indemnification in
connection with a proceeding initiated by such person only if such proceeding
was authorized by the Board. Article XI, Section 2 of the Registrant's Bylaws
provides that the right to indemnification conferred by Section 1 includes the
right to be paid by the Registrant the expenses incurred in defending any such
proceeding in advance of its final disposition, except that, if the DGCL
requires, the payment of such expenses incurred by an indemnitee in such
capacity in advance of final disposition shall be made only upon delivery to
the Registrant of an undertaking, by or on behalf of such indemnitee, to repay
all amounts so advanced if it is ultimately determined that such indemnitee is
not entitled to be indemnified under Section 2 or otherwise.
Article XI, Section 3 of the Registrant's Bylaws provides that if a claim
under Section 1 or 2 is not paid in full by the Registrant within 60 days
after a written claim has been received by the Registrant, except in the case
of a claim for advancement of expenses which must be paid in 20 days, the
indemnitee may bring suit against the Registrant to recover the unpaid amount
of the claim. The Registrant may maintain insurance to protect itself and any
of its directors, officers, employees or agents against any expense, liability
or loss. By action of the board of directors, the Registrant may extend such
indemnification to employees and agents of the Registrant.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Purchase Agreement among CAF Holdings, Inc., CAF Acquisition
Corporation and BT Securities Corporation, dated as of January 29,
1997.
*2.1 Acquisition Agreement, by and among Collins & Aikman Products Co.,
Collins & Aikman Floor Coverings Group, Inc., the Registrant, CAF
Holdings, Inc. and CAF Acquisition Corporation, dated as of December
9, 1996, as amended.
*3.1 Certificate of Incorporation of the Registrant, as amended to date.
*3.2 Bylaws of the Registrant.
*4.1 Indenture, dated as of February 6, 1997, by and among CAF Acquisition
Corporation and IBJ Schroder Bank & Trust Company.
*4.2 First Supplemental Indenture, dated as of February 6, 1997, by and
among the Registrant and IBJ Schroder Bank & Trust Company.
*4.3 Form of Series B 10% Senior Subordinated Note.
*4.4 Registration Rights Agreement, dated as of February 6, 1997, by and
between CAF Acquisition Corporation and BT Securities Corporation.
*5.1 Opinion of McGuire, Woods, Battle & Boothe, L.L.P.
8.1 Opinion of McGuire, Woods, Battle & Boothe, L.L.P.
*10.1 Credit Agreement among CAF Holdings, Inc., CAF Acquisition
Corporation, various lending institutions and Bankers Trust Company,
as Agent, dated as of February 6, 1997.
*10.2 Tradename License Agreement, dated as of February 6, 1997, by and
between Collins & Aikman Floor Coverings Group, Inc., CAF Holdings,
Inc. and the Registrant.
*10.3 Consulting Services Agreement dated as of February 6, 1997 among CAF
Holdings, Inc., the Registrant and Quad-C, Inc.
*10.4 1997 Stock Option Plan and Form of Grant Letter.
*10.5 Non-Competition Agreement among CAF Holdings, Inc., the Registrant,
Collins & Aikman Corporation and Collins & Aikman Products Co., dated
as of February 6 1997.
*10.6 Tax Sharing Agreement, dated as of February 6, 1997, between CAF
Holdings, Inc. and the Registrant.
*12.1 Statements re: computation of ratios.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (contained in
Exhibit 5.1).
*25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of
IBJ Schroder Bank & Trust Company under the Trust Indenture Act of
1939.
*27.1 Financial Data Schedule (as amended).
99.1 Form of Letter of Transmittal for the 10% Senior Subordinated Notes
due 2007.
*99.2 Notice of Guaranteed Delivery.
</TABLE>
- --------
*Previously filed.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
II-2
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(c) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective.
(d) That insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
DALTON, STATE OF GEORGIA, ON JUNE 4, 1997.
COLLINS & AIKMAN FLOORCOVERINGS,
INC.
By: /s/ Edgar M. Bridger
---------------------------------
EDGAR M. BRIDGER PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THEIR CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
---- ----- ----
/s/ Edgar M. Bridger Chief Executive June 4, 1997
- ------------------------------------- Officer and
EDGAR M. BRIDGER Director
/s/ Darrel V. McCay Chief Financial June 4, 1997
- ------------------------------------- Officer (Principal
DARREL V. MCCAY Financial and
Accounting Officer)
/s/ Terrence D. Daniels* Director June 4, 1997
- -------------------------------------
TERRENCE D. DANIELS
/s/ Stephen M. Burns* Director June 4, 1997
- -------------------------------------
STEPHEN M. BURNS
/s/ Gary A. Binning* Director June 4, 1997
- -------------------------------------
GARY A. BINNING
/s/ Stephen Eisenstein* Director June 4, 1997
- -------------------------------------
STEPHEN EISENSTEIN
/s/ R. Ted Weschler* Director June 4, 1997
- -------------------------------------
R. TED WESCHLER
/s/ J. Hunter Reichert* Director June 4, 1997
- -------------------------------------
J. HUNTER REICHERT
*By /s/ Edgar M. Bridger
- -------------------------------------
EDGAR M. BRIDGER
AS ATTORNEY-IN-FACT
II-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Purchase Agreement among CAF Holdings, Inc., CAF Acquisition
Corporation and BT Securities Corporation, dated as of January 29,
1997.
*2.1 Acquisition Agreement, by and among Collins & Aikman Products Co.,
Collins & Aikman Floor Coverings Group, Inc., the Registrant, CAF
Holdings, Inc. and CAF Acquisition Corporation, dated as of December
9, 1996, as amended.
*3.1 Certificate of Incorporation of the Registrant, as amended to date.
*3.2 By-Laws of the Registrant.
*4.1 Indenture, dated as of February 6, 1997, by and among CAF Acquisition
Corporation and IBJ Schroder Bank & Trust Company.
*4.2 First Supplemental Indenture, dated as of February 6, 1997, by and
among the Registrant and IBJ Schroder Bank & Trust Company.
*4.3 Form of Series B 10% Senior Subordinated Note.
*4.4 Registration Rights Agreement, dated as of February 6, 1997, by and
between CAF Acquisition Corporation and BT Securities Corporation.
*5.1 Opinion of McGuire, Woods, Battle & Boothe, L.L.P.
*8.1 Opinion of McGuire, Woods, Battle & Boothe, L.L.P.
*10.1 Credit Agreement among CAF Holdings, Inc., CAF Acquisition
Corporation, various lending institutions and Bankers Trust Company,
as Agent, dated as of February 6, 1997.
*10.2 Tradename License Agreement, dated as of February 6, 1997, by and
between Collins & Aikman Floor Coverings Group, Inc., CAF Holdings,
Inc. and the Registrant.
*10.3 Consulting Services Agreement dated as of February 6, 1997 among CAF
Holdings, Inc., the Registrant and Quad-C, Inc.
*10.4 1997 Stock Option Plan and Form of Grant Letter.
*10.5 Non-Competition Agreement among CAF Holdings, Inc., the Registrant,
Collins & Aikman Corporation and Collins & Aikman Products Co., dated
as of February 6 1997.
*10.6 Tax Sharing Agreement, dated as of February 6, 1997, between CAF
Holdings, Inc. and the Registrant.
*12.1 Statements re: computation of ratios.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (contained in
Exhibit 5.1).
*25.1 Statement of Eligibility and Qualification of Trustee on Form T-1 of
IBJ Schroder Bank & Trust Company under the Trust Indenture Act of
1939.
*27.1 Financial Data Schedule. (as amended)
*99.1 Form of Letter of Transmittal for the 10% Senior Subordinated Notes
due 2007.
*99.2 Notice of Guaranteed Delivery.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ Arthur Andersen llp
Atlanta, Georgia
June 2, 1997
