<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d)
---
Of the Securities Exchange Act of 1934
For the quarter ended October 31, 1998
___ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 333-24699
COLLINS & AIKMAN FLOORCOVERINGS, INC.
(Exact name of registrant as specified in its chapter)
DELAWARE 58-2151061
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
311 SMITH INDUSTRIAL BOULEVARD, DALTON, GEORGIA 30721
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (706) 259-9711
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___.
---
The Registrant has 1,000 shares of Common Stock, par value $.01 per share,
issued and outstanding as of December 14, 1998.
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Thirteen Weeks
and Thirty-Nine Weeks ended October 31, 1998 and October 25, 1997 3
Condensed Consolidated Statements of Comprehensive Income -
Thirteen Weeks and Thirty-Nine Weeks ended October 31, 1998
and October 25, 1997 4
Condensed Consolidated Balance Sheets - As of October 31, 1998 and
January 31, 1998 5
Condensed Consolidated Statements of Cash Flows - Thirteen Weeks
and Thirty-Nine Weeks ended October 31, 1998 and October 25, 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
2
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS
ENDED OCTOBER 31, 1998 AND OCTOBER 25, 1997
(In Thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- ---------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales............................................. $ 45,055 $ 41,262 $ 139,159 $ 120,782
Cost of goods sold.................................... 27,277 24,303 81,798 73,699
Selling, general and administrative expenses.......... 11,506 10,736 35,209 34,462
------------ ------------ ------------ ------------
38,783 35,039 117,007 105,161
------------ ------------ ------------ ------------
Operating income...................................... 6,272 6,223 22,152 15,621
Net interest expense.................................. 3,712 3,761 11,089 11,297
------------ ------------ ------------ ------------
Income before income taxes............................ 2,560 2,462 11,063 4,324
Income tax expense.................................... 1,096 963 4,429 1,738
============ ============ ============ ============
Net income ........................................... $ 1,464 $ 1,499 $ 6,634 $ 2,586
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS
ENDED OCTOBER 31, 1998 AND OCTOBER 25, 1997
(In Thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------------- ---------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income............................................. 1,464 1,499 6,634 2,588
Other comprehensive income (expense) net of tax:
Foreign currency translation adjustments............. (17) (76) (14) 99
------------ ------------ ------------ ------------
Comprehensive income .................................. 1,447 1,423 6,620 2,685
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1998 AND JANUARY 31, 1998
(In Thousands)
<TABLE>
<CAPTION>
(Unaudited)
October 31, January 31,
1998 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................... $ 7,360 $ 5,699
Accounts receivable, net....................................... 26,966 20,578
Inventories.................................................... 17,729 15,849
Deferred tax assets............................................ 1,957 1,533
Prepaid expenses and other..................................... 505 222
------------- ------------
Total current assets..................................... 54,517 43,881
Property, plant and equipment, net.................................. 40,095 34,320
Goodwill and intangible assets...................................... 125,224 128,840
Deferred tax assets................................................. 329 1,368
Other assets........................................................ 7,623 8,414
============= ============
$ 227,788 $ 216,823
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt ............................. $ 162 $ --
Accounts payable............................................... 7,568 7,150
Accrued expenses............................................... 14,031 10,277
------------- ------------
Total current liabilities................................ 21,761 17,427
Long-term debt...................................................... 141,289 142,000
Other, including post-retirement benefit obligation................. 4,041 3,320
Commitments and contingencies.......................................
Stockholder's Equity:
Common stock ($.01 par value per share, 1,000
shares authorized, issued & outstanding).................... -- --
Additional paid-in capital..................................... 51,576 51,576
Retained earnings ............................................. 9,037 2,402
Accumulated other comprehensive income......................... 84 98
------------- ------------
60,697 54,076
============= ============
$ 227,788 $ 216,823
============= ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
5
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS
ENDED OCTOBER 31, 1998 AND OCTOBER 25, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------------------- ----------------------------------------
OCTOBER 31, OCTOBER 25, OCTOBER 31, OCTOBER 25,
1998 1997 1998 1997
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Cash Provided By (Used In):
OPERATIONS:
Net income for the period................. $ 1,464 $ 1,499 $ 6,634 $ 2,586
Items not affecting cash:
Depreciation of capital assets....... 1,584 1,352 4,258 3,768
Amortization of goodwill and
intangible assets................... 1,844 2,077 5,515 6,230
Amortization of deferred financing
fees................................ 329 332 987 957
Deferred income tax (benefit) expense 315 -- 614 (570)
Changes in operating assets and liabilities,
net of assets acquired:
Accounts receivable.................. 5,318 4,167 (6,003) (3,421)
Inventory............................ 2,249 686 (1,623) 538
Accounts payable..................... (3,237) (1,369) (260) 1,524
Accrued liabilities.................. 1,636 4,795 3,461 10,372
Other operating activities........... (130) (199) 483 (513)
----------------- ------------------ ------------------- ------------------
Net cash provided by operating
activities......................... 11,372 13,340 14,066 21,471
----------------- ----------------- ------------------ -----------------
INVESTING:
Acquisition of C & A Floor Coverings,
Inc...................................... -- (7) -- (197,740)
Acquisition of Advance Carpet Tiles,
Ltd., net of cash acquired............... -- -- (3,095) --
Purchase of capital assets................ (1,607) (1,020) (6,214) (2,008)
Other investing activities............... (6) -- (6) --
----------------- ----------------- ------------------ -----------------
Net cash used in investing
activities......................... (1,613) (1,027) (9,315) (199,748)
----------------- ----------------- ------------------ -----------------
FINANCING:
Net repayments of revolving credit
facility................................. (2,500) -- -- --
Proceeds from long term debt borrowings... -- -- -- 155,000
Repayments of long term debt.............. (52) (8,000) (3,090) (9,000)
Capital contribution from CAF Holdings,
Inc...................................... -- -- -- 51,576
Financing costs........................... -- (324) -- (9,366)
Net cash provided by (used in)
----------------- ----------------- ------------------ -----------------
financing activities............... (2,552) (8,324) (3,090) 188,210
----------------- ----------------- ------------------ -----------------
INCREASE IN CASH DURING THE PERIOD........ 7,207 3,989 1,661 9,933
CASH-BEGINNING OF PERIOD................. 153 6,088 5,699 144
----------------- ----------------- ------------------ -----------------
Cash-end of period....................... $ 7,360 $10,077 $ 7,360 $ 10,077
================= ================= ================== =================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Collins & Aikman Floorcoverings, Inc. (a Delaware corporation) is a leading
manufacturer of vinyl-backed floorcoverings for the specified commercial sector
of the floorcoverings market. The Company is a wholly owned subsidiary of CAF
Holdings, Inc. ("Holdings").
These condensed consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying condensed consolidated financial statements reflect all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the Company's financial position and results of operations.
These condensed consolidated financial statements should be read in conjunction
with the January 31, 1998 consolidated financial statements of the Company
included in the Company's 1997 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. Results of operations for interim periods
are not necessarily indicative of results for the full year.
2. ACQUISITION OF COLLINS & AIKMAN FLOOR COVERINGS, INC.
Prior to February 6, 1997, the Company was a wholly owned subsidiary of
Collins & Aikman Floor Coverings Group, Inc. ("C&A Group"). C&A Group was a
wholly owned subsidiary of Collins & Aikman Products Co. ("C&A Products"), which
was a wholly owned subsidiary of Collins & Aikman Corporation ("C&A
Corporation").
On February 6, 1997 (January 26, 1997 for accounting purposes), pursuant to
an agreement dated December 9, 1996, CAF Acquisition Corporation ("CAF"), a
wholly owned subsidiary of Holdings, acquired from C&A Group, all the
outstanding capital stock of the Company (the "Floorcoverings Acquisition") for
$195.6 million, plus transaction costs. Simultaneous with the consummation of
the Floorcoverings Acquisition, CAF was merged with and into the Company.
Financing for the Floorcoverings Acquisition was provided by (i) borrowings
of $57.0 million under an $85.0 million Senior Secured Credit Facility (the
"Credit Facility"), (ii) proceeds from an offering by the Company of $100.0
million aggregate principal of 10% Senior Subordinated Notes due in 2007, and
(iii) capital investments of $51.0 million by affiliates of Quad-C, Inc.,
Paribas Principal Partners, management of the Company and certain other
investors in Holdings.
The Floorcoverings Acquisition was accounted for by the purchase method of
accounting; therefore, the purchase price, which includes $27.0 million in
consideration for a trade name license agreement, was allocated among the
acquired assets and liabilities in accordance with estimates of fair market
value on the date of acquisition. The excess of the purchase price over the
estimated fair value of net assets acquired amounted to approximately $71.3
million, which is being accounted for as goodwill and amortized over 40 years
using the straight line method.
7
<PAGE>
3. INVENTORIES
Net inventory balances are summarized below (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
OCTOBER 31, JANUARY 31,
1998 1998
--------------------- ---------------------
<S> <C> <C>
Raw materials................................................ $ 9,684 $ 7,596
Work in process.............................................. 2,446 2,986
Finished goods............................................... 5,599 5,267
--------------------- ---------------------
$ 17,729 $ 15,849
===================== =====================
</TABLE>
4. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income". This statement requires companies to disclose
comprehensive income, defined as all non-owner changes in equity, resulting from
recognized transactions and other economic events in a fiscal period.
Accordingly, a statement of comprehensive income has been prepared for all
periods presented.
5. ACQUISITION AND INVESTMENT IN JOINT VENTURE
In June 1998, Collins & Aikman Floorcoverings UK Limited acquired all
outstanding capital stock of Advanced Carpet Tiles, Ltd. ("ACT") from Headlam
Group PLC ("Headlam") for $5.8 million, including assumed debt of $0.6 million.
Financing for the acquisition was provided under the existing Credit Facility
and an agreement to pay $1.9 million to Headlam, at an effective interest rate
of 8.5%, in September 2000. The ACT acquisition was accounted for using the
purchase method of accounting. The excess of the purchase price over the
estimated fair value of net assets acquired amounted to approximately $1.9
million and is being amortized over 40 years using the straight line method.
This allocation was based on preliminary estimates and may be revised at a later
date.
In August 1998, the Company entered into a joint venture with a group of
individuals to form Collins & Aikman Floorcoverings Asia Pte. Ltd. Based in
Singapore, the newly formed company will market and distribute the Company's
products throughout the Asia Pacific region. The Company obtained a 51%
ownership in the new company.
6. LONG TERM DEBT
In October 1998, the Company amended the Credit Facility to allow the
Company to purchase up to $5.0 million of the Company's Senior Subordinated
Notes on open markets.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). Since the Company does not hold any
derivative instruments, SFAS 133 does not have any impact on the Company's
results from operations or financial position.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
- -------
Collins & Aikman Floorcoverings, Inc. (a Delaware corporation), 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. This niche market is highly competitive and is impacted by fluctuations
in the commercial new construction market and, to a lesser degree, the
commercial renovation market. The Company believes the impact of economic
downturns is softened because its sales are to five diverse end markets and a
higher percentage of the Company's sales are derived from commercial renovation
projects.
Prior to February 6, 1997, the Company was a wholly owned subsidiary of
Collins & Aikman Floor Coverings Group, Inc. ("C&A Group"), a wholly owned
subsidiary of Collins & Aikman Products Co. ("C&A Products"), a wholly owned
subsidiary of Collins & Aikman Corporation. On February 6, 1997, CAF
Acquisition Corporation ("CAF") purchased all of the issued and outstanding
capital stock of Collins & Aikman Floor Coverings, Inc. from C&A Group for
$195.6 million (including $27.0 million in consideration of the Tradename
License Agreement) (the "Floorcoverings Acquisition"). Financing for the
Floorcoverings Acquisition was provided by (i) $57.0 million of borrowings under
an $85.0 million Senior Secured Credit Facility (the "Credit Facility"), (ii)
$100.0 million of proceeds from an offering by the Company of its 10% Senior
Subordinated Notes due in 2007, and (iii) $51.0 million in contributed capital.
Simultaneous with the consummation of the Floorcoverings Acquisition, CAF was
merged with and into the Company.
In June 1998, Collins & Aikman Floorcoverings UK Limited acquired all of
the outstanding capital stock of Advanced Carpet Tiles, Ltd. ("ACT") from
Headlam Group PLC ("Headlam") for $5.8 million, (the "ACT Acquisition")
including assumed debt of $0.6 million. Financing for the ACT Acquisition was
provided under the existing credit facility and an agreement to pay $1.9 million
to Headlam in September 2000 at an effective interest rate of 8.5%. The ACT
Acquisition was accounted for using the purchase method of accounting. The
excess of the purchase price over the estimated fair value of net assets
acquired amounted to approximately $1.9 million and is being amortized over 40
years using the straight line method. This allocation was based on preliminary
estimates and may be revised at a later date.
In August 1998, the Company entered into a joint venture with a group of
individuals to form Collins & Aikman Floorcoverings Asia Pte, Ltd. Based in
Singapore, the newly formed company will market and distribute the Company's
products throughout the Asia Pacific region. The Company obtained a 51%
ownership in the new company.
RESULTS OF OPERATIONS
- ---------------------
THIRTEEN WEEKS ENDED OCTOBER 31, 1998 ("THIRD QUARTER 1998") AS COMPARED WITH
- -----------------------------------------------------------------------------
THIRTEEN WEEKS ENDED OCTOBER 25, 1997 ("THIRD QUARTER 1997")
- ------------------------------------------------------------
NET SALES. Net sales, including product and sundry sales, for the Third
Quarter 1998 were $45.1 million, an increase of 9.2% from the $41.3 million for
the Third Quarter 1997. This sales increase was attributable to sales growth in
the government, healthcare and education end use markets. Product volume
increased approximately 9.1%. Overall average selling prices decreased by less
than 2.5%.
COST OF GOODS SOLD. Cost of goods sold increased to $27.3 million for the
Third Quarter 1998 from $24.3 million in the Third Quarter 1997, an increase of
12.2%. As a percentage of sales, these costs were 60.5% and 58.9%,
respectively. This cost increase was due to increased sales volume partially
offset by improved manufacturing efficiencies on the higher volume. The
increase in cost of goods sold as a percentage of sales was due to the higher
volume sold at lower average selling prices.
9
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including goodwill and intangible assets amortization
of $1.8 million, for the Third Quarter 1998 increased to $11.5 million, an
increase of 7.1% from $10.7 million in the Third Quarter 1997 which included
goodwill and intangible assets amortization of $2.1 million. As a percentage of
sales, these expenses decreased to 25.5% from 26.0%. These higher costs related
to (i) continued investment in the Company's administrative infrastructure, (ii)
continued investment in the Company's segmentation marketing strategy and (iii)
higher sales commissions related to the higher sales volume, partially offset by
reduced amortization of intangible assets.
INTEREST EXPENSE. Net interest expense for the Third Quarter 1998
decreased to $3.7 million from $3.8 million in the Third Quarter 1997. This
slight decrease was due to lower total indebtedness during the period partially
offset by higher interest rates from outstanding revolver borrowings.
NET INCOME. Net income for the Third Quarter 1998 of $1.5 million was
unchanged from Third Quarter 1997. This was due to the combined result of the
factors described above.
EBITDA. EBITDA is defined as operating income plus depreciation and
amortization. EBITDA for the Third Quarter 1998 and the Third Quarter 1997 was
$9.7 million. As a percentage of sales, EBITDA decreased to 21.5% in the Third
Quarter 1998 from 23.4% in the Third Quarter 1997. The changed in EBITDA and
EBITDA margin are the combined result of the factors described above. EBITDA
is provided as certain investors commonly use it as a measure of a company's
ability to service its indebtedness. EBITDA is not a measure of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to cash
flow as a measure of liquidity.
RESULTS OF OPERATIONS
- ---------------------
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 ("NINE MONTHS 1998") AS COMPARED WITH
- ------------------------------------------------------------------------------
THIRTY-NINE WEEKS ENDED OCTOBER 25, 1997 ("NINE MONTHS 1997")
- -------------------------------------------------------------
NET SALES. Net sales, including product and sundry sales, for the Nine
Months 1998 were $139.2 million, an increase of 15.2% from the $120.8 million
for the Nine Months 1997. This sales increase was attributable to continued
strength in the education, healthcare and government end use markets. Product
volume increased approximately 15.6% while average selling prices decreased by
less than 2.0%.
COST OF GOODS SOLD. Cost of goods sold increased to $81.8 million for the
Nine Months 1998 from $73.7 million in the Nine Months 1997, an increase of
11.0%. As a percentage of sales, these costs were 58.8% and 61.0%,
respectively. This cost increase was due to increased sales volume offset by
the improved manufacturing efficiencies on the higher volume and, during the
Nine Months 1997, the effect of a $2.6 million inventory charge. This inventory
charge was a result of writing-up inventory to fair market value for the
Floorcoverings Acquisition, and expensing the write-up amount during the Nine
Months 1997 as the inventory completely turned. Excluding the $2.6 million
inventory effect, cost of goods sold for Nine Months 1997 was $71.1 million
resulting in a 15.0% increase when comparing Nine Months 1998 to Nine Months
1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, including goodwill and intangible assets amortization
of $5.5 million, for the Nine Months 1998 increased to $35.2 million, an
increase of 11.9% from $31.5 million in the Nine Months 1997 which included
goodwill and intangible assets amortization of $6.2 million. As a percentage of
sales, these expenses decreased to 25.3% from 26.1%. This cost increase is
primarily due to increased costs related to (i) investment in the Company's
administrative infrastructure, (ii) continued investment in the Company's
segmentation marketing strategy and (iii) higher sales commissions related to
the higher sales volume, partially offset by reduced amortization of intangible
assets.
10
<PAGE>
INTEREST EXPENSE. Net interest expense for the Nine Months 1998 decreased
to $11.1 million, from $11.3 million in the Nine Months 1997. This slight
decrease was due to lower total indebtedness during the period partially offset
by higher interest rates due to outstanding revolver borrowings and 13
additional days of outstanding indebtedness during the Nine Months 1998 due to
the timing of the Floorcoverings Acquisition in the First Quarter 1997.
NET INCOME. Net income for the Nine Months 1998 increased to $6.6
million from the net income of $2.6 million in Nine Months 1997. This increase
of $4.0 million was due to the combined result of the factors described above.
EBITDA. EBITDA is defined as operating income plus depreciation,
amortization and, for the Nine Months 1997, the effect of the write-up of
inventory to fair market value. EBITDA of $31.9 million in the Nine Months 1998
was $3.7 million or 13.2% higher than the $28.2 million for the Nine Months
1997. As a percentage of sales, EBITDA decreased to 22.9% in the Nine Months
1998 from 23.4% in the Nine Months 1997. The change in EBITDA and EBITDA margin
was the combined result of the factors described above. EBITDA is provided as
certain investors commonly use it as a measure of a company's ability to service
its indebtedness. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered an
alternative to net income as a measure of performance or to cash flow as a
measure of liquidity.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary cash needs have historically been for operating
expenses, working capital and capital expenditures. Beginning with the 1997
fiscal year, in addition to the primary cash needs mentioned above, debt service
as a result of the Floorcoverings Acquisition became an additional primary cash
need. The Company has historically financed its cash requirements primarily
through internally generated cash flows.
Net cash provided by operating activities in the Third Quarter 1998 was
$11.4 million compared to $13.3 million in the Third Quarter 1997. The change
is primarily due to net working capital decreases of $5.8 million and $8.1
million in Third Quarter 1998 and 1997, respectively. Net cash provided by
operating activities in the Nine Months 1998 was $14.1 million compared to $21.5
million in the Nine Months 1997, a decrease of $7.4 million primarily due to a
negative net working capital change of $12.4 million partially offset by an
increase in net income of $4.0 million.
Capital expenditures totaled $1.6 million during the Third Quarter 1998
compared to $1.0 million during the Third Quarter 1997. For the Nine Months
1998, capital expenditures totaled $6.2 million compared to $2.0 million for the
Nine Months 1997. The $0.6 million increase in the Third Quarter 1998 and $4.2
million increase in the Nine Months 1998 were primarily due to expansions in the
Company's tufting and finishing plants. Additional capital expenditures are
focused on cost reduction/maintenance measures, efficiency improvements and
other capacity enhancements. The Company expects to incur capital expenditures
of approximately $7.0 million during the fiscal year 1998.
Concurrent with the consummation of the Floorcoverings Acquisition, the
Company incurred significant indebtedness, which consisted of $100.0 million of
10% Senior Subordinated Notes due 2007, $55.0 million in term loan borrowings
and $2.0 million in revolving credit borrowings under the Credit Facility.
During fiscal 1997, $2.0 million of the revolving credit borrowings and $3.0
million of the term loan borrowings were repaid, and $10.0 million of the term
loan borrowings was voluntarily prepaid. On February 6, 1998, the Company
prepaid an additional $3.0 million of the term loan borrowings. The term loan
portion of the Credit Facility will mature on June 30, 2002 and, as of October
31, 1998, will require annual principal payments (payable in quarterly
installments) totaling $1.0 million in the fourth quarter of 1999, $15.0 million
in each of 2000 and 2001 and $8.0 million in 2002. The revolving credit portion
of the Credit Facility will mature on June 30, 2002 and may be repaid and
reborrowed from time to time. As of October 31, 1998, there was $26.3 million
(net of $3.7 million in letters of credit outstanding) available under the
revolving credit portion of the Credit Facility.
11
<PAGE>
The Company has made three amendments to the Credit Facility. In April
1998, the first amendment related to certain restrictive covenants of the Credit
Facility allowing increased flexibility for foreign acquisitions and increased
annual limits for capital expenditures over the next four years. In May 1998,
the second amendment provided better interest rates based on the Company's
leverage ratio for the immediately preceding twelve months. In October 1998, the
third amendment provided for the ability to purchase up to $5.0 million of the
Company's Senior Subordinated Notes on open markets.
Concurrent with the consummation of the ACT Acquisition, the Company agreed
to pay to Headlam $1.9 million in September 2000 at an effective interest rate
of 8.5%. In addition, the Company assumed $0.6 in capital lease obligations and
other vendor financing related to equipment purchases which are payable monthly.
The Company's ability to make scheduled payments of principal, interest, or
to refinance its indebtedness (including the Senior Subordinated 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 Facility, will be adequate
to meet the Company's anticipated future requirements for capital expenditures
and debt service. However, 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 or to make necessary capital expenditures.
IMPACT OF INFLATION
- -------------------
The impact of inflation on the Company's operations has not been
significant in recent years. Historically, when the Company has received
inflationary price increases in its primary raw material, nylon fiber, it has
been generally been passed on to the Company's customers. 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 and third quarters of the fiscal year. This is
primarily due to higher education market sales during the summer months while
schools generally are closed and floorcovering can be installed.
YEAR 2000
- ---------
The Company has evaluated its Year 2000 risk in three separate categories,
information technology systems ("IT"), non-IT systems ("Non-IT") and material
third party relationships ("Third Party Risk"). The Company has developed a
plan in which the risks in each of these categories are being addressed and
reviewed by the appropriate level of management as follows:
The Company's review of its IT systems was substantially completed in
conjunction with the systems review for the Floorcoverings Acquisition. Due to
conversions already completed to address the separation from its former parent
and two conversions presently in progress, the Company considers its IT systems
risk to be minimal. Costs associated with these conversions were planned outside
of the company's Year 2000 review. Management expects the review of its IT
systems to be completed by March 1999 and, accordingly, will review contingency
plans for IT risks as required.
12
<PAGE>
The Company's review of Non-IT systems is ongoing with expected completion
by April 1999. Non-IT systems involve embedded technologies such as
microcontrollers or microprocessors. Examples of Non-IT systems include
telephones, security systems and computer controlled manufacturing equipment.
Any costs of addressing Non-IT risks are included in normal upgrade and
replacement expenditures which were planned outside of the Company's Year 2000
review. Management believes its Non-IT risks are minimal and will review
contingency plans as necessary.
The Company's review of its Third Party Risk includes detailed reviews of
critical relationships with suppliers and business partners, such as banking
institutions, with broader reviews of less critical relationships. The Third
Party Risk review is ongoing and is expected to be completed by April 1999.
Contingency plans for critical relationships are being developed and are
expected to be in place by April 1999. The Company presently does not expect
the risk associated with or costs of addressing the Company's Third Party Risk
to be material.
The Company's most likely Year 2000 worst case scenario would be a critical
third party's system malfunction where the Company would suffer business
interruption until the supplier corrected the problem or an alternative supply
was found. At this point in the Company's review, it is not aware of any
potential situations which may cause this scenario to occur, but will formulate
a contingency plan should its review indicate it is necessary to do so.
There can be no assurance that these conclusions will be achieved and
actual results could differ from those anticipated. Specific factors that might
cause differences include, but are not limited to, the ability of the third
parties with which the Company has material relationships to modify or convert
their systems to be Year 2000 compliant, the ability of the Company to complete
its conversions on schedule, and similar uncertainties.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT
Number DESCRIPTION
- ------ -----------
10.1(c) -- Third Amendment to the Credit Agreement among CAF Holdings, Inc.,
Collins & Aikman Floorcoverings, Inc., various lending institutions
and Bankers Trust Company as Agent.
27.1 -- Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: December 14, 1998
COLLINS & AIKMAN FLOORCOVERINGS, INC.
(Registrant)
By: /s/ Darrel V. McCay
----------------------
Darrel V. McCay
Vice-President and Chief Financial Officer
(Duly authorized Officer and Principal
Financial and Accounting Officer)
15
<PAGE>
THIRD AMENDMENT
---------------
THIRD AMENDMENT (this "Amendment"), dated as of October 9, 1998, among
CAF HOLDINGS, INC. ("Holdings"), COLLINS & AIKMAN FLOORCOVERINGS, INC. (the
"Borrower"), the financial institutions party to the Credit Agreement referred
to below (each, a "Bank" and, collectively, the "Banks"), and BANKERS TRUST
COMPANY, as Agent for the Banks (in such capacity, the "Agent"). All capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings provided such terms in the Credit Agreement.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Holdings, the Borrower, the Banks and the Agent are parties
to a Credit Agreement, dated as of February 6, 1997 (as amended, modified or
supplemented to the date hereof, the "Credit Agreement");
WHEREAS, the Borrower has requested a certain amendment to the Credit
Agreement as described below; and
WHEREAS, subject to the terms and conditions of this Amendment, the
parties hereto wish to amend the Credit Agreement as herein provided;
NOW, THEREFORE, it is agreed:
I. Amendment to Credit Agreement.
-----------------------------
1. Section 8.13 of the Credit Agreement is hereby amended by (i)
inserting the text "(x)" immediately after the text "provided, that" appearing
--------
in clause (i) of said Section and (ii) inserting the following text at the end
of clause (i) of said Section:
"and (y) the Borrower may repurchase Senior Subordinated Notes on the open-
market in an aggregate principal amount for all purchases made after the
Third Amendment Effective Date pursuant to this clause (y) not to exceed
$5,000,000, so long as (I) no Default or Event of Default then exists or
would result therefrom and (II) the purchase price for such Senior
Subordinated Notes does not exceed $1,050 per $1,000 principal amount
thereof".
II. Miscellaneous Provisions.
------------------------
1. In order to induce the Banks to enter into this Amendment, each
of Holdings and the Borrower hereby represents and warrants that:
(a) no Default or Event of Default exists as of the Third Amendment
Effective Date, both before and after giving effect to this Amendment, and
(b) all of the representations and warranties contained in the Credit
Agreement or the other Credit Documents are true and correct in all material
respects on the Third Amendment Effective Date both before and after giving
effect to this Amendment, with the same effect as though such representations
and warranties had been made on and as of the Third Amendment Effective Date (it
being understood that any representation or warranty made as of a specific date
shall be true and correct in all material respects as of such specific date).
<PAGE>
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and
by the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the "Third
Amendment Effective Date") when Holdings, the Borrower and the Required Banks
shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Agent at its Notice Office.
6. From and after the Third Amendment Effective Date, all references
in the Credit Agreement and each of the other Credit Documents to the Credit
Agreement shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute and deliver this Amendment as of the date first above
written.
CAF HOLDINGS, INC.
BY: /s/ Stephen M. Burns
---------------------------------
Stephen M. Burns
Title: Director
COLLINS & AIKMAN FLOORCOVERINGS INC.
BY: /s/ Darrel V. McCay
---------------------------------
Darrel V. McCay
Title: Vice President and
Chief Financial Officer
BANKERS TRUST COMPANY
Individually and as Agent
BY: /s/ Mary Kay Coyle
---------------------------------
Mary Kay Coyle
Title: Managing Director
FIRST SOURCE FINANCIAL LLP By:
FIRST SOURCE FINANCIAL, INC. ITS AGENT MANAGER
BY: /s/ Robert M. Cosco
---------------------------------
Robert M. Cosco
Title: Senior Vice President
HELLER FINANCIAL, INC.
BY: /s/ Tamara L. Rulhm
---------------------------------
Tamara L. Rulhm
Title: Assistant Vice President
LASALLE NATIONAL BANK
BY: /s/ Richard G. Maier
---------------------------------
Richard G. Maier
Title: Vice President
<PAGE>
BANK OF BOSTON, N.A.
BY: /s/ Peter Van Der Horst
---------------------------------
Peter Van Der Horst
Title: Vice President
First Union National Bank
BY: /s/ Joan Anderson
---------------------------------
Joan Anderson
Title: Vice President
LTCB TRUST COMPANY
BY: /s/ Rebecca J. S. Silleit
---------------------------------
Rebecca J. S. Silleit
Title: Sr. Vice President
SANWA BUSINES CREDIT CORPORATION
BY: /s/ Stanley Kamiski
---------------------------------
Stanley Kamiski
Title: Vice President
SENIOR DEBT PORTFOLIO
BY: /s/ Barbara Campbell
---------------------------------
Barbara Campbell
Title: Vice President
WACHOVIA BANK OF GEORGIA, N.A.
BY: /s/ Richard E. S. Bowen
---------------------------------
Richard E. S. Bowen
Title: Assistant Vice President
Each of the undersigned, each being a Guarantor under, and as defined in, the
Credit Agreement referenced in the foregoing Third Amendment, hereby consents to
the entering into of the Third Amendment and agrees to the provisions thereof
(including, without limitation, Sections 7 and 8 of Part II thereof).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED OCTOBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-START> AUG-02-1998 FEB-01-1998
<PERIOD-END> OCT-31-1998 OCT-31-1998
<CASH> 7,360 7,360
<SECURITIES> 0 0
<RECEIVABLES> 27,317 27,317
<ALLOWANCES> 351 351
<INVENTORY> 17,729 17,729
<CURRENT-ASSETS> 54,517 54,517
<PP&E> 49,057 49,057
<DEPRECIATION> 8,962 8,962
<TOTAL-ASSETS> 227,788 227,788
<CURRENT-LIABILITIES> 21,761 21,761
<BONDS> 141,289 141,289
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 60,697 60,697
<TOTAL-LIABILITY-AND-EQUITY> 227,788 227,788
<SALES> 45,055 139,159
<TOTAL-REVENUES> 45,055 139,159
<CGS> 27,277 81,798
<TOTAL-COSTS> 27,277 81,798
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 8 16
<INTEREST-EXPENSE> 3,712 11,089
<INCOME-PRETAX> 2,560 11,063
<INCOME-TAX> 1,096 4,429
<INCOME-CONTINUING> 1,464 6,634
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,464 6,634
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
