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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
---- of the Securities Exchange Act of 1934
For the Fiscal Year Ended January 30, 1999
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 charter)
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<S> <C>
Delaware 58-2151061
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
311 Smith Industrial Boulevard, Dalton, Georgia 30721
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (706) 259-9711
Securities registered pursuant to Section 12 (b) of the Act:
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<S> <C>
Title of Each Class Name of each exchange on which registered:
10% $100,000,000 Senior Subordinated Notes Due 2007 None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 .
------ -----
Indicate by check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of April 29, 1999, 1,000 shares of the Registrant's common stock, no par
value, were outstanding and held entirely by CAF Holdings, Inc. None of the
Registrant's common stock was held by non-affiliates.
Documents incorporated by reference: None.
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PART I
Item 1. Business
GENERAL
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Collins & Aikman Floorcoverings, Inc. (the "Company"), a Delaware corporation,
is a leading manufacturer of vinyl-backed commercial floorcovering in the United
States, with the number one market position in six-foot roll carpet and a
leading producer of modular carpet tile. The Company markets its products to a
wide variety of commercial end-markets, including corporate office space, retail
stores, 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 dry bond
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) award-winning design capability and (iv) environmental
leadership, including the industry's only closed loop recycling system which
converts plant waste and reclaimed post-consumer, vinyl-backed carpeting into
backing for new tile and roll carpet products and other commercial uses, such as
industrial block flooring. In the fiscal year ended January 30, 1999, the
Company generated net sales and EBITDA of $175.7 million and $39.3 million,
respectively.
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, pursuant to an
agreement entered into among CAF Holdings, Inc. ("Holdings"), a corporation
sponsored by Quad-C, Inc. ("Quad-C"), a Virginia merchant banking firm, and
Paribas Principal Partners ("Paribas"), the U.S. private equity group of
Paribas, CAF Acquisition Corporation ("CAF"), a wholly owned subsidiary of
Holdings, the Company and C&A Products, CAF purchased all of the issued and
outstanding capital stock of Collins & Aikman Floor Coverings, Inc. from C&A
Group for $197.0 million (including $27.0 million in consideration of a
tradename license agreement) which was reduced to $195.6 million after a $1.4
million working capital adjustment (the "Floorcoverings Acquisition").
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 $3.5 billion in 1998. The specified commercial market, which
represents approximately $2.1 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 markets 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
$600.0 million of industry sales in 1998. 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 has historically been able to achieve sales growth in excess of that in
the general commercial carpet industry. The Company's net sales have grown from
$108.0 million in 1993 to $175.7 million in 1998, representing a compound annual
growth rate ("CAGR") of 12.9%.
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The Company believes that the diversity of its end-markets provides
significant stability to its revenue base. The Company's focus on end use
markets 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 60.0% of the Company's sales are related
to renovation projects and approximately 40.0% are attributable to new
construction. Due to the current favorable U.S. economy, low interest rates and
low vacancy rates in commercial real estate, management believes that new
construction and renovation demands will continue to be strong in the near term.
Competitive Strengths
The Company considers its competitive strengths to include 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.
Leading Positions in Niche Products
In 1967, the Company pioneered a vinyl-backed flooring system (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. The Company has the
number one position in the fast growing six-foot roll market of the specified
U.S. commercial carpet market and is a leading producer of modular carpet tile
which the company pioneered in North America. Management believes that the six-
foot roll market will continue to grow significantly faster than the commercial
carpet industry as a whole.
Unique Marketing Segmentation
The Company has implemented a marketing strategy which targets the Company's
specific end use markets with sales and marketing efforts tailored to the
specified needs of each end-market within a given geographic area. Management
believes that each end-market (corporate office space, retail stores, education,
health care and government facilities) has distinct product, service,
performance, aesthetics, distribution and budgetary requirements. This 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 more than doubled since the implementation of this strategy in
1993 from 45 to 98 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. In addition, the diversity of the end-
markets served provides significant stability to the Company's revenue base.
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Leading Recycling Capability
The Company has developed a proprietary technology for recycling vinyl carpet
waste from its plants as well as post-consumer waste reclaimed from installation
sites. This unique capability eliminates the need for landfill disposal or
incineration. The Company uses these waste products as raw materials to produce
backing (ER3) for its carpet products 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, professional designers and architects increasingly prefer and/or
require products with recycled content. The Company has recently standardized
on ER3 for modular tile production. ER3 is the only product of its type
available in the industry, and provides the Company lower cost raw materials and
a strategic competitive advantage in the marketplace. As a result of this
unique technology, the Company has been widely recognized through various awards
including the 1998 National Recycling Coalition's "Best of the Best" Innovative
Product. Management believes that sales of recycled-content products will
increase significantly in 1999 and future years.
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 end use markets, (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 over 21 years of experience in the floorcovering industry and an average of
over 11 years of experience with the Company. Management has promoted Company-
wide employee involvement in every phase of the manufacturing and selling
process, which has resulted in the implementation of suggestions regarding
Company operations from both hourly and salaried associates throughout the
Company. Manufacturing employees are cross-trained in several functions and
have access to ongoing internal training programs as well as external
educational programs.
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 ("OFI") was implemented in
1991 to provide a vehicle for suggestions related to product quality, employee
safety, manufacturing costs and workplace improvement. In 1997, the category of
environment was added to the OFI program. Additionally, the Company has for
over five years, utilized an additional program called CIP (Cost Improvement
Program) which tracks true cost savings to the Company. For 1998, $3.1 million
cost savings (annualized basis) were identified. These cost savings help offset
cost increases in other areas.
3
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Industry Overview
The Company's sales are in one industry segment, commercial floorcoverings.
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.
Historically, six-foot roll goods were primarily used in the education and
health care markets. These products in recent years have been accepted in other
end use markets 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.
Sales, Marketing and Distribution
Sales. In 1993, the Company implemented a highly focused sales and marketing
strategy, under which each account manager targets specific end use markets
within a particular geographic area. This strategy is designed to achieve
comprehensive market coverage of the nation's leading markets. The Company
believes that each end use market (corporate office space, retail stores,
education, health care and government facilities) has specific product, service,
performance, aesthetic, distribution and budgetary requirements and that
purchasing decisions are unique to each end use. The Company's strategy allows
the account managers to develop specific expertise in a particular end use
market, which management believes results in higher customer service levels,
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 design capabilities
for specific end use markets, (iii) the Company's dedication to responsive
customer service and (iv) the Company's environmental initiatives. The
Company's account managers take on advisory or consultant roles to the customer
as compared to a normal sales person. Management believes this end market-
oriented strategy has resulted in an improvement in service and greater sales.
The Company has ten domestic sales offices, each directed by a regional
manager. The size of the Company's sales organization has more than doubled
since the implementation of the specific end use strategy from 45 account
managers and 7 regional managers in 1993 to 98 account managers and 10 regional
managers currently. Historically, the productivity of the sales force has
increased significantly with experience. During 1998, the Company's account
managers with four or more years of experience produced substantially 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.
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Marketing. As part of the Company's strategy, each end use market 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 end use market. The Company
has an 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-
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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.
Retail Stores. Retail stores is the Company's newest end use market with a
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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.
Education. The education market has been a primary focus for the Company
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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 end use market. Customers in the education market
tend to be particularly 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. Over the last three years, the
Company has begun to focus on the college and university market.
Health Care. Powerbond RS is particularly well suited to the health care
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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 for installations, is well-suited to
serve this market.
Government. The Company sells to federal, state and local governments. The
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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 dry bond
backing system, and its recently introduced recycled content product offerings.
International Markets. The Company distributes its products throughout the
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world utilizing its own companies and distributors. In June 1998, the Company
purchased a commission carpet backing facility (Advance Carpet Tiles, Ltd.) to
provide quicker service and delivery to its customer base particularly in the
United Kingdom and Europe. This was a complimentary addition to the Company's
already established United Kingdom sales office. Additionally, in August 1998
the Company formed a joint venture company in Singapore (Collins & Aikman
Floorcoverings Asia Pte. Ltd.) where it holds a 51.0% ownership. This company
will sell products to certain countries and manage distributors of the Company's
products in the other countries of the region. Sales to international customers
constituted less than 10.0% of the Company's revenues during 1998. The Company
intends to add dedicated sales personnel to its various international companies
and distributors in other international markets.
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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. Rather than mandating
from whom the customer can buy the Company's products, the Company operates with
a flexible distribution philosophy to satisfy the needs of the customer. These
channels are outlined below:
Direct. Direct distribution allows end-users to purchase floorcovering
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directly from the Company. The Company's account managers work directly with
the customer to advise, 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
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management department provides single-source coordination and turn-key project
management service. 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
Company-certified installers throughout the nation.
Dealer. The carpet industry traditionally has sold products to customers
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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.
Backlog
The Company's backlog of unshipped orders was approximately $21.6 million
at March 27, 1999, compared to approximately $16.0 million at March 28, 1998.
All of the backlog of orders at March 27, 1999 are expected to be shipped within
three months of that date. Orders on hand are not necessarily indicative of
total future sales.
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 goods and modular carpet tiles, which
enables the Company to market an integrated system of product solutions to
address the specific requirements of end-users. These products offer
distinctive characteristics of use and application. Additionally, these
products are recyclable through the Company's industry leading environmental
program into backing for new carpet and other value added commercial products,
such as industrial block flooring.
Six-Foot Roll Goods. The Company is the leading U.S. manufacturer of six-foot
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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.
Modular Carpet Tiles. The Company was the first manufacturer in the U.S.
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to introduce vinyl-backed modular carpet tile technology in 1969 and today is an
industry leader. 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 modular carpet tile system is specifically
engineered to have a monolithic appearance on
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the floor and is marketed as the most seamless tile in the industry. The
Company's modular carpet tile products are offered in a variety of sizes to
accommodate a range of domestic and international requirements. Additionally,
in January 1999, the Company announced the standardization of ER3(RS) backing
for all of its tile products. This ER3(RS) backing is the result of the
Company's environmental recycling program.
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 continues to experience 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. 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 or modular carpet tiles
as one part 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 tiles
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 tiles 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. Unlike some larger industry participants, historically the
Company has grown organically, not through acquisitions.
Traditionally, the vast majority of the commercial carpet industry's sales
have been through independent carpet dealers. Within the last four years, 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.
Manufacturing and Facilities
The Company owns manufacturing facilities in Dalton, Georgia and Blaina,
Gwent, Wales. The Dalton facilities consist of (i) a yarn processing plant with
carpet dyeing capabilities, (ii) a carpet tufting 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
Wales facilities contain commission backing services. In addition to the owned
facilities, the Company leases ten sales and service facilities and four
warehouses in the U.S., one sales and service facility and one manufacturing
facility in Wales and one sales and service facility in Singapore. In 1998, the
Company made significant capital expenditures toward facility expansions. During
1998, the Company completed a tufting facility expansion of 40,000 square feet
and added a production line in its Dalton finishing plant. Additional
expenditures were incurred for other manufacturing equipment, both new and
enhancements to existing equipment. In the opinion of Management, the Company's
manufacturing capacity is sufficient to meet the Company's requirement for the
foreseeable future.
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The following table summarizes the Company's manufacturing, distribution
and sales facilities:
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<CAPTION>
Approximate
Location Operation Owned/Leased Square Feet
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<S> <C> <C> <C>
Dalton, Georgia........................ Yarn Processing Owned 161,500
Carpet Dyeing
Dalton, Georgia........................ Tufting Owned 154,990
Corporate Offices
Dalton, Georgia........................ Six-Foot Finishing Owned 245,800
Tile Finishing
Tile Printing
Recycling
Dalton, Georgia........................ Distribution Warehouse Owned 133,200
Sales Service Office
Finance & Administration
Dalton, Georgia........................ Warehouse Leased 46,200
Dalton, Georgia........................ Warehouse Leased 15,000
Dalton, Georgia........................ Warehouse Leased 95,350
Calhoun, Georgia....................... Warehouse Leased 33,750
Burke, Virginia........................ Sales / Showroom Leased 1,783
Chagrin Falls, Ohio.................... Sales / Showroom Leased 1,100
Chicago, Illinois...................... Sales / Showroom Leased 5,498
Dallas, Texas.......................... Sales / Showroom Leased 1,960
Denver, Colorado....................... Sales / Showroom Leased 1,318
Farmington, Massachusetts.............. Sales / Showroom Leased 120
Marietta, Georgia...................... Sales / Showroom Leased 2,129
New York, New York..................... Sales / Showroom Leased 3,800
Newport Beach, California.............. Sales / Showroom Leased 1,600
San Francisco, California.............. Sales / Showroom Leased 3,330
Blaina, Gwent, Wales................... Six Foot and Tile Finishing Leased 3,000
Blaina, Gwent, Wales................... Six Foot and Tile Finishing Owned 32,000
Blaina, Gwent, Wales................... Warehousing Owned 14,000
Blaina, Gwent, Wales................... Sales/Warehouse Leased 4,860
Singapore.............................. Sales/Showroom Leased 1,265
</TABLE>
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 a significant number 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. Other significant raw materials used by the Company in its
manufacturing process include coater materials, such as vinyl resins, and
primary backing.
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.
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Patents and Trademarks
The Company owns a number of patents in the United States including its
Powerbond RS patent, which expires in 2008 and its newly obtained patents
(process and product) for the ER3 backing produced from its environmental
program. The Company considers its know-how and technology more important to its
current business than patents and, accordingly, believes that expiration of
existing patents 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 30, 1999, the Company had a total of 839 employees of which 510
were hourly and 329 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 discussion or attempts to organize
the workforce within any of the Company's facilities.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
environmental laws and regulations that impose limitations on the discharge of,
and establish standards for the handling, generation, emission, release,
discharge, treatment, storage and disposal of, certain materials, substances and
wastes. The Company believes that its operations are in material compliance with
the terms of all applicable environmental laws and regulations as currently
interpreted. The cost of such compliance is immaterial to the financial position
and results of operations of the Company.
Item 2. Properties
For information concerning the principal physical properties of the Company,
see "Item 1. Business--Manufacturing and Facilities."
Item 3. Legal Proceedings
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.
Item 4. Submission of Matters to A Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of April 29, 1999, there was one holder of record of the Company's
common stock. There is no public trading market for the Company's common stock.
The Company has not historically paid dividends and has no intention to pay
dividends in the future.
Item 6. Selected Financial Data
The following data is qualified in its entirety by the consolidated
financial statements of the Company and other information contained elsewhere
herein. The financial data as of January 28, 1995, January 27, 1996, January
25, 1997, January 31, 1998 and for each of the years ended January 30, 1999 have
been derived from the audited financial statements of the Company. The
historical consolidated financial statements of the Company contained elsewhere
herein are presented as if the Company was 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 herein.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting generally results in
increased amortization and depreciation reported in periods subsequent to the
Floorcoverings Acquisition. In addition, pre-Floorcoverings Acquisition results
include accruals and costs allocated by C&A Products. Accordingly, pre-
Floorcoverings Acquisition results of the Company and post-Floorcoverings
Acquisition results are not comparable in all material respects. A vertical
black line on the table below distinguishes between the pre-Floorcoverings
Acquisition and post-Floorcoverings Acquisition results.
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------
January 28, January 27, January 25, January 31, January 30,
1995 1996 1997 1998(a) 1999
(Fiscal 1994) (Fiscal 1995) (Fiscal 1996) (Fiscal 1997) (Fiscal 1998)
-----------------------------------------------------------------------
(Dollars in thousands) |
<S> <C> <C> <C> | <C> <C>
Operating Data: |
Net sales.............................................. $108,039 $122,169 $136,124 | $ 160,383 $175,662
Costs of goods sold.................................... 62,527 73,615 81,715 | 97,263 103,739
-------- -------- -------- | --------- --------
Gross profit........................................... 45,512 48,554 54,409 | 63,120 71,923
Selling, general and administrative expenses (b)....... 23,733 27,364 28,971 | 34,769 38,514
Corporate general & administrative allocated |
costs (c)....................................... 1,069 1,591 1,531 | 649 --
Goodwill and other intangibles amortization (d)........ -- -- -- | 8,468 7,375
-------- -------- -------- | --------- --------
Operating income....................................... 20,710 19,599 23,907 | 19,234 26,034
Loss on sales of accounts receivable (e)............... 1,261 3,269 3,489 | -- --
Interest expenses (f).................................. 2,454 3,098 2,854 | 15,122 14,715
-------- -------- -------- | --------- --------
Income before income taxes............................. 16,995 13,232 17,564 | 4,112 11,319
Income tax expense.................................... 6,645 5,127 6,729 | 1,710 4,871
Minority interest in income of subsidiary -- -- -- | -- 10
-------- -------- -------- | --------- --------
Net Income............................................. $ 10,350 $ 8,105 $ 10,835 | $ 2,402 $ 6,438
======== ======== ======== | ========= ========
Other Data: |
EBITDA (g)............................................. $ 23,247 $ 23,371 $ 27,118 | 35,085 $ 39,268
Capital expenditures................................... 1,823 4,290 7,897 | 5,119 7,972
Depreciation and amortization.......................... 2,237 2,154 2,201 | 13,263 13,244
|
Cash Flows Data: |
Net cash provided by operating activities.............. $ 24,912 $ 11,744 12,375 | 24,201 19,514
Net cash used in investing activities.................. (972) (4,270) (7,856) | (202,856) (12,680)
Net cash provided by (used in) financing |
activities (h).................................. (23,959) (7,347) (4,508) | 184,210 (10,322)
|
Balance Sheet Data (end of period): |
Working capital (i).................................... $ 3,268 $ 3,805 $ 6,485 | 27,454 27,561
Total assets (i)....................................... 27,312 31,231 39,614 | 216,823 215,414
Long-term debt (j)..................................... 43,800 43,300 25,400 | 142,000 132,382
Stockholder's equity (deficit)......................... (32,999) (29,645) (3,780) | 54,076 60,529
</TABLE>
10
<PAGE>
(a) The fiscal period ended January 31, 1998 included 53 weeks.
(b) Amounts include costs incurred by the Company relating to certain matters
retained by C&A Products totaling $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 remediation, legal expenses, travel expenses and claim
settlements, incurred by the Company in connection with certain claims and
litigation that either were retained by C&A Products or were incurred by
the Company in anticipation of the sale of the Company.
(c) Prior to fiscal 1997, 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 on
which these costs were allocated was 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. Fiscal 1997 amounts relate to amounts paid to
the majority shareholder as a management fee and amounts paid to C&A
Products to provide the Company with services as described above.
(d) In connection with the Floorcoverings Acquisition, the Company recorded
goodwill and other intangible assets of $137.3 million, which are being
amortized over lives of 7 to 40 years.
(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 Floorcoverings Acquisition, the Company was terminated as a seller
under the receivables sale agreement. Subsequent to the Floorcoverings
Acquisition, the Company does not sell its accounts receivable and, as a
result, does not incur any losses related to third-party discounts
associated with such sales.
(f) Substantially all of the Company's interest expense prior to the fiscal
year ended January 31, 1998 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
sales of accounts receivable, income tax expense, depreciation,
amortization, non-recurring charges related to the costs incurred in
connection with certain matters retained by C&A Products (see note (b)
above), the effect of writing up inventory to fair value at the time of the
Floorcoverings Acquisition and (for fiscal 1998) minority interest in
income of subsidiary. 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) Prior to the Floorcoverings Acquisition, net cash used in financing
activities includes net cash transactions with C&A Products.
(i) For periods prior to the Floorcoverings Acquisition, amounts exclude all
domestic trade accounts receivable sold by the Company pursuant to the
receivables sale agreement referred to in note (e) above.
(j) Amounts for periods prior to fiscal 1998 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.
11
<PAGE>
Item 7. 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 a
leading 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, education, health care and
government facilities. The Company believes that the diversity of its target
markets softens the impact of economic downturns.
As discussed in Item 1, 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
$197.0 million (including $27.0 million in consideration of the Tradename
License Agreement) which was reduced to $195.6 million after a $1.4 million
working capital adjustment (the "Acquisition"). Immediately subsequent to the
Acquisition, CAF was merged with Collins & Aikman Floor Coverings, Inc. with the
Company as the successor company. Financing for the 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 CAF of its 10% Senior Subordinated Notes due in 2007, and (iii)
$51.0 million in contributed capital. In connection with the Acquisition, the
Company made an election under Section 338 (h) (10) of the Internal Revenue
Code, which provides for the Acquisition to be treated as a purchase of assets
for federal income tax purposes. As a result of this 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. The balance of the purchase price was
allocated to goodwill and other intangibles, which is amortizable for tax
purposes over fifteen years.
The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting generally results in
increased amortization and depreciation reported in periods subsequent to the
Acquisition. In addition, the 1996 results include accruals and costs allocated
by C&A Products. Accordingly, pre-Acquisition results of the Company and post-
Acquisition results are not comparable in all material respects.
In 1998 the Company had $175.7 million in sales and $39.3 million in
EBITDA, which is the sixth consecutive record year for both measurements. For
the five-year period from 1994 to 1998, sales and EBITDA experienced compounded
annual growth rates of 12.9% and 14.1%, respectively. The Company's success
over the last five years is attributable to (i) the sales to diverse end-use
markets served, (ii) the highly focused segmentation philosophy within sales and
marketing, (iii) the continued strong demand of the customers to utilize the
Company's Source One program of turn-key services, (iv) the focus on cost
containment through all operations of the Company, and (v) the continued input
from all associates of the Company through the formalized suggestion systems in
place and day to day interaction.
In June 1998, the Company acquired all of the outstanding capital stock of
Advance 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.
12
<PAGE>
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
The following table sets forth certain operating results as a percentage of
net sales for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
January 25, January 31, January 30,
1997 1998 1999
(fiscal 1996) (fiscal 1997) (fiscal 1998)
------------- ------------- -------------
(Percentage of net sales)
<S> <C> <C> <C>
Net sales.................................................................. 100.0% 100.0% 100.0%
Cost of goods sold......................................................... 60.0 60.6 59.1
----- ----- -----
Gross profit............................................................... 40.0 39.4 40.9
Selling, general and administrative expenses............................... 21.3 21.7 21.9
Corporate general and administrative allocated cost........................ 1.1 .4 --
Goodwill and intangible amortization....................................... 0.0 5.3 4.2
----- ----- -----
Operating income........................................................... 17.6 12.0 14.8
Interest expense........................................................... 2.1 9.4 8.4
Loss on sales of accounts receivable....................................... 2.6 0.0 0.0
----- ----- -----
Income before income taxes................................................. 12.9 2.6 6.4
Income tax expense......................................................... 4.9 1.1 2.8
----- ----- -----
Net income................................................................. 8.0% 1.5% 3.6%
===== ===== =====
EBITDA margin............................................................. 19.9% 21.9% 22.4%
===== ===== =====
</TABLE>
Fiscal Year Ended (52 weeks) January 30, 1999 ("fiscal 1998")
Compared with Fiscal Year Ended (53 weeks) January 31, 1998 ("fiscal 1997")
Net Sales. Net sales represent gross sales less product returns, customer
allowances and various customer discounts. Sales are comprised of six-foot roll
goods, modular carpet tile and other products, including adhesives, industrial
floor block and walk-off mats. Sales in 1998 also include the commission
finishing revenue of Advance Carpet Tile. The Company's net sales increased to
$175.7 million in fiscal 1998, an increase of $15.3 million or 9.5% over fiscal
1997. The increase in net sales in fiscal 1998 was due to sales growth in the
government, healthcare and education end use markets as well as the addition of
Advance Carpet Tiles. The Company experienced strong volume increases in six-
foot roll goods with minor average price decreases in both six-foot roll goods
and modular carpet tiles.
Cost of Goods Sold. Cost of goods sold increased to $103.7 million in
fiscal 1998 from $97.3 million, an increase of $6.5 million or 6.6%. As a
percentage of sales, these costs were 59.1% and 60.6%, respectively. This cost
increase was due to increased sales volume offset by improved manufacturing
efficiencies on the higher volume and, during fiscal 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 fiscal 1997 as the inventory completely turned.
Excluding the $2.6 million inventory effect, cost of goods sold for fiscal 1997
was $94.7 million resulting in a 9.6% increase when comparing fiscal 1998 to
fiscal 1997.
Selling, General and Administrative ("SG&A") Expenses. The Company's SG&A
expenses, including goodwill and intangible assets amortization of $7.4 million,
in fiscal 1998 increased to $45.9 million from $43.9 million, an increase of
4.6% over fiscal 1997 which included goodwill and intangible assets amortization
of $8.5 million and corporate, general and administrative allocated costs of
$0.6 million. This cost increase is primarily due to increased costs related to
(i) investment in the Company's administrative infrastructure, (ii) higher sales
commissions related to the higher sales volume and (iii) continued investment in
the Company's segmentation marketing strategy partially offset by reduced
amortization of intangible assets.
13
<PAGE>
Interest expense. Net interest expense for fiscal 1998 decreased to $14.7
million, from $15.1 million in fiscal 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 5 additional days of
outstanding indebtedness during fiscal 1998 due to the timing of the
Floorcoverings Acquisition in the first quarter of 1997.
Net Income. Net income for fiscal 1998 increased to $6.4 million from net
income of $2.4 in fiscal 1997. This increase of $4.0 million was due to the
combined result of the factors described above. The Company's effective tax rate
was 43.0% and 41.5% for fiscal 1998 and 1997, respectively.
EBITDA. EBITDA is defined as operating income plus depreciation,
amortization and, for fiscal 1997, the effect of the write-up of inventory to
fair market value. EBITDA of $39.3 million in fiscal 1998 was $4.2 million or
11.9% higher than the $35.1 million for fiscal 1997. As a percentage of sales,
EBITDA increased to 22.4% in fiscal 1998 from 21.9% in fiscal 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.
Fiscal Year Ended (53 weeks) January 31, 1998 ("fiscal 1997")
Compared with Fiscal Year Ended (52 weeks) January 25, 1997 ("fiscal 1996")
Net Sales. The Company's net sales increased to $160.4 million in fiscal
1997 from $136.1 million, an increase of $24.3 million or 17.8% over fiscal
1996. The increase in net sales in fiscal 1997 was due to strength in most of
the Company's end-markets plus the inclusion of one extra week in 1997. The
Company experienced strong volume and average selling price increases in both
six-foot roll goods and modular carpet tiles.
Cost of Goods Sold. Cost of goods sold increased to $97.3 million in
fiscal 1997 from $81.7 million in fiscal 1996, an increase of $15.5 million or
19.0%. As a percentage of sales, these costs were 60.6% and 60.0%,
respectively. This cost increase was due to increased sales volume offset by
improved manufacturing efficiencies on the higher volume and, for fiscal 1997,
the effect of a $2.6 million inventory charge previously mentioned. Excluding
the $2.6 million inventory effect, cost of goods sold for fiscal 1997 was $94.7
million resulting in a 15.9% increase over fiscal 1996.
Selling, General and Administrative Expenses. The Company`s SG&A expenses
increased to $43.2 million in fiscal 1997 from $29.0 million, an increase of
$14.2 million or 49.0% over fiscal 1996. As a percentage of sales, SG&A
expenses increased to 27.0% during fiscal 1997 from 21.3% in fiscal 1996. SG&A
expenses (excluding expenses relating to the matters retained by C&A Products
for fiscal 1996) increased due to (i) $8.5 million in goodwill and intangible
assets amortization resulting from the Acquisition, (ii) personnel additions to
handle growth under the Company's segmentation marketing strategy, (iii) higher
sales commissions due to the increase in sales, (iv) increased sample expense
and (v) increased costs due to services no longer performed by C&A Products
which, in fiscal 1996, were previously included in corporate general and
administrative costs. Excluding goodwill and intangible assets amortization,
the Company's SG&A expense increased by $5.8 million or 20.0% over fiscal 1996.
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
had the option to continue receiving certain of these services from C&A Products
under a Management Services Agreement, for up to a one-year period. These costs
in fiscal 1997 were lower than comparable charges in fiscal 1996 due to the
lower cost as stipulated in the Management Services Agreement. As a percentage
of sales, the allocated costs decreased to 0.4% during fiscal 1997 from 1.1% in
fiscal 1996.
14
<PAGE>
Interest Expense. Interest expense during fiscal 1998 represented the
charges related to the Company's direct loans and indebtedness incurred as a
result of the Acquisition, as previously discussed. Interest expense during
fiscal 1996 was the result of the Company's guarantee of certain debt of C&A
Products. Interest expense was allocated based upon the ratio of the Company's
net assets to the consolidated invested capital of C&A Products. Accordingly,
interest expense of $15.1 million in fiscal 1997 increased from the fiscal 1996
level of $2.9 million.
Net Income. The Company's net income of $2.4 million in fiscal 1997 was
$8.4 million lower than the $10.8 million in fiscal 1996. The decrease was a
result of the factors described above, offset by $5.0 million in lower taxes
from the decrease in pretax earnings. The Company's effective tax rate was
41.5% in fiscal 1997 and 38.3% in fiscal 1996.
EBITDA. The Company's EBITDA of $35.1 million in fiscal 1997 was $8.0
million or 29.4% higher than the $27.1 million in fiscal 1996. As a percentage
of sales, EBITDA increased to 21.9% in fiscal 1997 from 19.9% in fiscal 1996.
The increase in EBITDA and the increase in EBITDA margin were the combined
result of the factors described above.
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,
prior to February 1997, intercompany advances from C&A Products.
Net cash provided by operating activities in the fiscal 1998 was $19.5
million compared to $24.2 million in the fiscal 1997. The change is primarily
due to a negative net working capital swing of $11.6 million in fiscal 1998
offset by an increase in net income of $4.0 million.
Capital expenditures totaled $8.0 million during fiscal 1998 compared to
$5.1 million during fiscal 1997. This increase was primarily due to expansions
in the Company's tufting and finishing plants. Additional capital expenditures
were focused on cost reduction/maintenance measures, efficiency improvements and
other capacity enhancements.
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 (the "Senior Notes"), $55.0 million in
term loan borrowings and $2.0 million in revolving credit borrowings under the
Credit Facility. During fiscal 1998, the Company voluntarily prepaid $12.1
million of the term loan borrowings. Additionally, on February 18, 1999, the
Company prepaid an additional $1.9 million of the term loan borrowings. The
term loan portion of the Credit Facility will mature on June 30, 2002 and, as of
January 30, 1999, will require annual principal payments (payable in quarterly
installments) totaling $3.2 million in the third quarter of fiscal 2000 and $3.7
million in the fourth quarter of fiscal 2000, $15.0 million in fiscal 2001 and
$8.0 million in fiscal 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 January 30, 1999, 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.
The Company must satisfy certain financial and other covenants specified
within the Credit Facility. As of January 30, 1999, the Company was in default
under one such covenant. The Company has received from the banks an amendment
to the Credit Facility and waiver of default for the non-conformance for the
year ended January 30, 1999.
15
<PAGE>
The Company has made four amendments to the Credit Facility. 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. The second amendment
provided better interest rates based on the Company's leverage ratio for the
immediately preceding twelve months. The third amendment provided for the
ability to purchase up to $5.0 million of the Company's Senior Subordinated
Notes on open markets. The fourth amendment increased the limit for capital
expenditures during fiscal 1998.
Concurrent with the consummation of the ACT Acquisition, the Company agreed
to pay to the seller $1.9 million in September 2000 at an effective interest
rate of 8.5%. In addition, the Company assumed $0.6 in vendor financing related
to equipment purchases which are payable monthly.
The Company's ability to make scheduled payments of principal or to
pay interest on, or to refinance its indebtedness (including the Senior Notes),
depends on its future performance, which, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other
factors beyond the Company's control. Based upon the current level of
operations and anticipated growth, management 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. 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 Senior Notes, or to make necessary
capital expenditures.
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 and fourth quarters of the fiscal year and
higher sales and gross profit in the second and third quarters of the fiscal
year. The seasonality of sales and profitability is primarily a result of
disproportionately higher education end 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 while
remaining reviews were completed during the first quarter of 1999. Due to
conversions already completed to address the separation from its former parent
and conversions completed in the first quarter of 1999, the Company considers
its IT systems risk to be minimal and will formulate contingency plans should it
become necessary. Costs associated with these conversions were planned outside
of the Company's Year 2000 review.
16
<PAGE>
The Company's review of Non-IT systems is ongoing with expected completion
by June 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 formulate
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 June 1999.
Contingency plans for critical relationships are being developed and are
expected to be in place by August 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 and similar uncertainties.
Recent Accounting Pronouncements
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.
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The statement addresses reporting of operating segment
information and disclosures about products, services, geographic areas and major
customers. Management has reviewed the requirements of SFAS 131 noting the
Company has no separate businesses and all products and end-use markets are
within the specified commercial floorcoverings market. Additionally, all
Company resources support all products and end-use markets with no allocation to
one product or end use other than specific assignments among the sales and
marketing staffs. Consequently, the Company considers its business as one
reportable segment. In addition, sales to all countries outside the United
States are immaterial to the consolidated results of the Company, and sales to
one customer do not amount to or exceed 10% of the Company's sales.
Accordingly, SFAS 131 does not have an impact on the financial reporting of the
Company.
The Company has adopted Statement of Financial Accounting Standards No.
132, "Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132"). The statement revises disclosures regarding pension and other
postretirement benefit plans. The Company's disclosures in the accompanying
consolidated financial statements regarding its pension and postretirement
benefits plans have been reformatted to meet the requirements of SFAS 132.
During 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.
17
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Disclosures are not required at this time.
Item 8. Financial Statements and Supplemental Data
See the consolidated financial statements of Collins & Aikman
Floorcoverings, Inc. and subsidiaries included herein beginning on page F-1 and
listed on the index to financial statements set forth in Item 14 (a) of this
Form 10-K report.
Item 9. Change In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
18
<PAGE>
PART III
Item 10. 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 has been a
director of the Company since February 6, 1997 and will continue to hold office
until the next annual meeting of the shareholder of the Company or until his
successor has been elected and qualified. The Shareholders Agreement governs
the election of directors of the Company. See "Item 12. Security Ownership--
Shareholders Agreement". Officers of the Company are elected by the Board of
Directors of the Company and serve at the discretion of the Board of Directors.
There are no family relationships among any of the directors or executive
officers.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Positions
Edgar M. Bridger........ 47 President, Chief Executive Officer and Director
Lee H. Schilling........ 58 Senior Vice President of Marketing & Sales
Darrel V. McCay......... 38 Vice President and Chief Financial Officer
Jeffrey M. Raabe........ 37 Vice President of Sales
Wallace J. Hammel....... 53 Vice President of Manufacturing
Henry L. Millsaps, Jr... 43 Vice President of Human Resources
Terrence D. Daniels..... 56 Chairman of the Board
Gary A. Binning......... 38 Director
Stephen M. Burns........ 37 Director
Stephen Eisenstein...... 37 Director
J. Hunter Reichert...... 32 Director
R. Ted Weschler......... 37 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 February 1997, he
served as the Company's President since December 1993. He previously served as
Vice President of Sales and as National Sales Manager. Mr. Bridger is also a
director of a privately-held corporation.
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, Vice President and 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 in February 1997.
Jeffrey M. 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.
19
<PAGE>
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 IGI, Inc., Stimsonite Corporation and several privately-held
corporations.
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
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 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
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.
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, Virginia National Bank, Nucentrix Broadband Network, Inc. and
several privately-held corporations.
Compliance with Section 16(a) of the Exchange Act.
The Company does not have a class of equity securities registered
pursuant to Section 12 of the Exchange Act.
20
<PAGE>
Item 11. 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 ("Named Executive Officers") during
the fiscal years presented.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation ($) (a) Compensation
------------------------------------ ---------------------
Securities Underlying All Other
Name and Principal Position Year Salary Bonus (b) Options (#) Compensation
--------------------------- ----- ------ --------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Edgar M. Bridger........................... 1998 $259,398 $139,776 -- $7,747 (e)
President and Chief 1997 250,000 250,000(b) 205,020 (c) 6,918
Executive Officer 1996 190,000 73,200 25,000 (d) 6,462
Lee H. Schilling........................... 1998 $154,500 $ 66,144 -- $8,840 (f)
Senior Vice President of 1997 150,000 120,000(b) 97,920 (c) 7,420
Marketing & Sales 1996 137,084 27,160 -- 3,905
Jeffrey M. Raabe........................... 1998 $131,246 $ 57,200 -- $5,410 (g)
Vice President of 1997 125,000 100,000(b) 88,740 (c) 3,145
Sales 1996 108,000 20,952 -- 3,250
Wallace J. Hammel.......................... 1998 $131,246 $ 57,200 -- $1,784 (h)
Vice President of 1997 125,000 100,000(b) 88,740 (c) 1,548
Manufacturing 1996 100,250 19,788 -- 3,385
Darrel V. McCay............................ 1998 $126,251 $ 54,080 -- $1,929 (i)
Vice President and 1997 115,000 92,000(b) 88,740 (c) 228
Chief Financial Officer 1996 85,000 16,490 -- 2,297
</TABLE>
(a) None of the Named Executive Officers received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of the total of their
salary and bonus.
(b) In connection with the Acquisition, C&A Products, the Company's parent
prior to the Acquisition, paid bonuses conditioned upon the sale of the
Company in the approximate amounts of $576,120, $295,352, $237,740,
$217,868 and $187,740 to Messrs. Bridger, Schilling, Raabe, Hammel and
McCay, respectively.
(c) Shares of CAF Holdings, the Company's parent subsequent to the Acquisition.
(d) Subsequent to the Acquisition, Messrs. Bridger, Schilling, Raabe, Hammel
and McCay held 127,149, 22,246, 10,000, 15,000 and 8,000, respectively,
options for shares of Collins & Aikman Corporation, C&A Products' parent.
All of these shares were exercised during fiscal 1997 which resulted in
compensation of $312,818, $80,864, $12,500, $19,500 and $9,750 for Messrs.
Bridger, Schilling, Raabe, Hammel and McCay, respectively.
(e) Reflects $5,000 401(k) plan employer matching contribution and $2,747
premiums for life insurance made on Mr. Bridger's behalf.
(f) Reflects $5,000 401(k) plan employer matching contribution and $3,840
premiums for life insurance made on Mr. Schilling's behalf.
(g) Reflects $5,000 401(k) plan employer matching contribution and $410
premiums for life insurance made on Mr. Raabe's behalf.
(h) Reflects $1,784 premiums for life insurance made on Mr. Hammel's behalf.
(i) Reflects$1,625 401(k) plan employer matching contribution and $304 premiums
for life insurance made on Mr. McCay's behalf.
21
<PAGE>
Stock Option Grants in Last Fiscal Year
No options were granted during fiscal 1998 to the Named Executive Officers.
Aggregated Option Exercises in Last Fiscal Year And Fiscal Year End Option
Values
No options were exercised and there is no market for Holdings' common
stock.
Retirement Plan
Provided certain eligibility requirements are met, at the end of each
calendar month, pay credits are applied to a participant's account under the
Company's Employees' Pension Account Plan (the "Plan") based on the
participant's length of credited service and compensation (as defined in the
Plan) during that month. For participants aged 50 or older, the monthly pay
credit was based on either credited service compensation or age and
compensation, whichever resulted in the higher amount.
The following chart sets forth how pay credits were determined under the
Company's plan:
<TABLE>
<CAPTION>
Percentage of Compensation
Eligibility Requirements Used to Determine Pay Credits
------------------------------------ ------------------------------
Years of Up to 1/3 Over 1/3
Credited of the S.S. of the S.S.
Service or Age Wage Base Wage Base
------------- ----------- ----------- -----------
<S> <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 are applied each month to the account
balance. Participants make no contributions to the plan. Employer
contributions are 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 plan. The estimated annual benefits payable upon retirement
at normal retirement age under the plan for Messrs. Bridger, Schilling, Raabe,
Hammel and McCay are $3,300, $2,290, $4,345, $2,773 and $4,230, respectively.
Participants in the plan have the option, however, of receiving the value of
their vested account in a lump sum following termination of employment.
Director Compensation
The Company pays no additional remuneration to its employees or to
executives of Quad-C or Paribas for serving as directors.
Employment Agreements
The Company has no employment agreement with any Named Executive
Officer.
Compensation Committee Interlocks
The compensation committee consists of Terrence D. Daniels, R. Ted
Weschler and Gary A. Binning, none of which are officers or employees of the
Company. No interlocking relationship exists between any member of the
Compensation Committee and any member of any other company's board of directors
or compensation committee, nor did any such interlocking relationship exist
during the fiscal year ended January 30, 1999.
22
<PAGE>
Item 12. Security Ownership
The authorized capital stock of the Company consists of 1,000 shares
of common stock, par value $.01 per share, all of which are issued and
outstanding and are presently held by Holdings.
Holdings' authorized capital stock consists of 50,000,000 common shares, no
par value (the "Common Shares"). Holdings has outstanding 5,157,600 Common
Shares. The table below sets forth certain information, as of April 29, 1999,
regarding equity ownership of Holdings by (i) each director or executive officer
of Holdings who owns Common Shares, (ii) all directors and executive officers of
Holdings as a group and (iii) each person or entity who beneficially owns 5% or
more of the Common Shares. There is no established public trading market for the
securities of Holdings.
<TABLE>
<CAPTION>
NUMBER OF COMMON PERCENTAGE OF COMMON
NAME SHARES SHARES
- ------------------------------------------------------------------- --------------------- ----------------------
<S> <C> <C>
DIRECTORS:
Terrence D. Daniels (c)....................................... 70,000 1.37%
Gary A. Binning (b) (d)....................................... -- *
Stephen M. Burns.............................................. 15,000 *
Stephen Eisenstein (b) (d).................................... -- *
J. Hunter Reichert............................................ 4,000 *
R. Ted Weschler............................................... 15,000 *
Edgar M. Bridger **.......................................... 30,000 *
NAMED EXECUTIVE OFFICERS:
Lee H. Schilling.............................................. 17,500 *
Jeffrey M. Raabe.............................................. 12,500 *
Wallace J. Hammel............................................. 12,500 *
Darrel V. McCay............................................... 10,000 *
All Directors & Named Executive Officers as a group........... 186,500 3.61
BENEFICAL OWNERS OF MORE THAN 5%:
Quad-C Partners II, L.P. (a).................................. 190,000 3.68
Quad-C Partners III, L.P. (a)................................. 360,000 6.98
Quad-C Partners IV, L.P. (a).................................. 2,295,000 44.50
Paribas Principal, Inc. (b)................................... 2,000,000 38.78
</TABLE>
* Less than 1%.
** Mr. Bridger is also a Named Executive Officer.
(a) The address of Quad-C Partners II, L.P., Quad-C Partners III, L.P., Quad-C
Partners IV, L.P is 230 East High Street, Charlottesville, Virginia 22902.
(b) The address of Paribas Principal Inc. is 787 Seventh Avenue, New York, New
York 10019.
(c) Excludes 2,845,000 Common 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 includes 20,000 Common Shares held by
children of Mr. Daniels, as to which shares Mr. Daniels disclaims
beneficial ownership.
(d) Excludes 2,000,000 Common Shares held by Paribas Principal Inc., as to
which shares Messrs. Binning and Eisenstein disclaim beneficial ownership.
23
<PAGE>
Shareholders Agreement
Quad-C, Paribas and the other shareholders of Holdings entered into a
shareholder's agreement effective as of February 6, 1997. Subject to certain
requirements under the shareholder's agreement, 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.
Item 13. Certain Relationships and Related Transactions
Quad-C and Paribas. In connection with the Floorcoverings Acquisition,
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 acquisition and
for analyzing, arranging and negotiating the financing for the Floorcoverings
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 for its out-
of-pocket expenses in connection with the Floorcoverings Acquisition.
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.
24
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) FINANCIAL STATEMENTS:
---------------------
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Statements of Operations for the years ended January 25, 1997,
January 31, 1998 and January 30, 1999 F-2
Consolidated Statements of Comprehensive Income for the years ended
January 25, 1997, January 31, 1998 and January 30, 1999 F-3
Consolidated Balance Sheets as of January 31, 1998 and January 30, 1999 F-4
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended January 25, 1997, January 31, 1998, and January 30,1999 F-5
Consolidated Statements of Cash Flows for the years ended January 25, 1997,
January 31, 1998, and January 30, 1999 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
(2) FINANCIAL SCHEDULES:
--------------------
The following financial statement schedule of Collins & Aikman
Floorcoverings, Inc. and Subsidiaries for the fiscal years ended January 25,
1997, January 31, 1998 and January 30, 1999 is filed as part of this Report and
should be read in conjunction with the consolidated financial statements of
Collins & Aikman Floorcoverings, Inc. and Subsidiaries.
Page
Number
------
Report of Independent Public Accountants on Schedule.................. S-1
Schedule II- Valuation and Qualifying Accounts........................ S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are omitted
because they are not required, are inapplicable, or the information is included
in the consolidated financial statements or notes thereto.
25
<PAGE>
(3) EXHIBITS:
---------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
* 1.1 Purchase Agreement among CAF Holdings, Inc., CAF Acquisition
Corporation and BT Securities Corporation, dated as of January 29,
1997, incorporated by reference to Exhibit 1.1 of the Registration
Statement of Form S-4 filed with the Securities and Exchange
Commission on June 4, 1997 under the Securities Act of 1933, as
amended (SEC file number 333-24699) (the "Registration Statement").
* 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, incorporated by reference to Exhibit 2.1 of the
Registration Statement.
* 3.1 Certificate of Incorporation of the Registrant, as amended to date,
incorporated by reference to Exhibit 3.1 of the Registration
Statement.
* 3.2 By-Laws of the Registrant, incorporated by reference to Exhibit 3.2 of
the Registration Statement.
* 4.1 Indenture, dated as of February 6, 1997, by and among CAF Acquisition
Corporation and IBJ Schroder Bank & Trust Company, incorporated by
reference to Exhibit 4.1 of the Registration Statement.
* 4.2 First Supplemental Indenture, dated as of February 6, 1997, by and
among the Registrant and IBJ Schroder Bank & Trust Company,
incorporated by reference to Exhibit 4.2 of the Registration
Statement.
* 4.3 Form of Series B 10% Senior Subordinated Note, incorporated by
reference to Exhibit 4.3 of the Registration Statement.
* 4.4 Registration Rights Agreement, dated as of February 6, 1997, by and
between CAF Acquisition Corporation and BT Securities Corporation,
incorporated by reference to Exhibit 4.4 of the Registration
Statement.
*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, incorporated by reference to
Exhibit 10.1 of the Registration Statement.
*10.1(a) First Amendment to the Credit Agreement among CAF Holdings, Inc., CAF
Acquisition Corporation, various lending institutions and Bankers
Trust Company as Agent, incorporated by reference to Exhibit 10.1(a)
of the Company's report on Form 10-Q for the fiscal quarter ended
April 30, 1998.
*10.1(b) Second Amendment to the Credit Agreement among CAF Holdings, Inc.,
Collins & Aikman Floorcoverings, Inc., various lending institutions
and Bankers Trust Company as Agent, incorporated by reference to
Exhibit 10.1(b) of the Company's report on Form 10-Q for the fiscal
quarter ended August 1, 1998.
*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, incorporated by reference to
Exhibit 10.1(c) of the Company's report on Form 10-Q for the fiscal
quarter ended October 31, 1998.
26
<PAGE>
10.1(d) Fourth Amendment to the Credit Agreement among CAF Holdings, Inc.,
Collins & Aikman Floorcoverings, Inc., various lending institutions
and Bankers Trust Company as Agent.
*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, incorporated by reference to Exhibit 10.2 of
the Registration Statement.
*10.3 Consulting Services Agreement dated as of February 6, 1997, among CAF
Holdings, Inc., the Registrant and Quad-C, Inc., incorporated by
reference to Exhibit 10.3 of the Registration Statement.
*10.4 1997 Stock Option Plan and Form of Grant Letter, incorporated by
reference to Exhibit 10.4 of the Registration Statement.
*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, incorporated by reference to Exhibit 10.5 of
the Registration Statement.
*10.6 Tax Sharing Agreement, dated as of February 6, 1997, between CAF
Holdings, Inc. and the Registrant, incorporated by reference to
Exhibit 10.6 of the Registration Statement.
21.1 Subsidiaries of Registrant.
27.1 Financial Data Schedule.
*99.1 Form of Letter of Transmittal for the 10% Senior Subordinated Notes
due 2007, incorporated by reference to Exhibit 99.1 of the
Registration Statement.
*99.2 Notice of Guaranteed Delivery, incorporated by reference to Exhibit
99.2 of the Registration Statement.
* Previously filed.
(b) REPORTS ON FORM 8-K
-------------------
None
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on April 29, 1999.
COLLINS & AIKMAN FLOORCOVERINGS, INC.
By: /s/ Edgar M. Bridger
------------------------------------
Edgar M. Bridger
President and ChiefExecutive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Edgar M. Bridger President, Chief Executive April 29, 1999
- ------------------------------- Officer and Director
Edgar M. Bridger (Principal Executive Officer)
/s/ Darrel V. McCay Vice President and Chief April 29, 1999
- ------------------------------- Financial Officer (Principal
Darrel V. McCay Financial & Accounting Officer)
/s/ Terrence D. Daniels Director April 29, 1999
- -------------------------------
Terrence D. Daniels
/s/ Stephen M. Burns Director April 29, 1999
- -------------------------------
Stephen M. Burns
/s/ Gary A. Binning Director April 29, 1999
- -------------------------------
Gary A. Binning
/s/ Stephen Eisenstein Director April 29, 1999
- -------------------------------
Stephen Eisenstein
/s/ R. Ted Weschler Director April 29, 1999
- -------------------------------
R. Ted Weschler
/s/ J. Hunter Reichert Director April 29, 1999
- -------------------------------
J. Hunter Reichert
28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Collins & Aikman Floorcoverings, Inc.:
We have audited the accompanying consolidated balance sheets of COLLINS & AIKMAN
FLOORCOVERINGS, INC. (a Delaware corporation) and Subsidiaries ("Company") as of
January 31, 1998 and January 30, 1999 and the related consolidated statements of
operations, comprehensive income, stockholder's equity and cash flows for the
years then ended. We have also audited the accompanying consolidated statements
of operations, comprehensive income, stockholder's deficit, and cash flows of
Collins & Aikman Floor Coverings, Inc. (a Delaware Corporation) and Subsidiary
("Predecessor") for the year 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 the Company as of January 31,
1998 and January 30, 1999 and the results of their operations and their cash
flows for the years then ended and the results of the Predecessor's operations
and their cash flows for the year ended January 25, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
April 15, 1999
F-1
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES (Company)
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (Predecessor)
Consolidated Statements of Operations
For The Years Ended January 25, 1997, January 31, 1998 and January 30, 1999
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------
(Predecessor) | (Company) (Company)
January 25, 1997 | January 31, 1998 January 30, 1999
(52 weeks) | (53 weeks) (52 weeks)
------------------ | ---------------- ----------------
<S> <C> | <C> <C>
NET SALES..................................................... $136,124 | $160,383 $175,662
-------- | -------- --------
COST OF GOODS SOLD............................................ 81,715 | 97,263 103,739
SELLING, GENERAL & ADMIN. EXPENSES........................... 30,502 | 43,886 45,889
-------- | -------- --------
112,217 | 141,149 149,628
-------- | -------- --------
OPERATING INCOME.............................................. 23,907 | 19,234 26,034
NET INTEREST EXPENSE.......................................... 2,854 | 15,122 14,715
LOSS ON SALES OF ACCOUNTS RECEIVABLE.......................... 3,489 | -- --
-------- | -------- --------
INCOME BEFORE INCOME TAXES.................................... 17,564 | 4,112 11,319
INCOME TAX EXPENSE............................................ 6,729 | 1,710 4,871
MINORITY INTEREST IN INCOME OF SUBSIDIARY..................... -- | -- 10
-------- | -------- --------
NET INCOME.................................................... $ 10,835 | $ 2,402 $ 6,438
======== | ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES (Company)
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (Predecessor)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended January 25, 1997, January 31, 1998 and January 30, 1999
(In Thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------
(Predecessor) | (Company) (Company)
January 25, | January 31, January 30,
1997 | 1998 1999
------------------ | --------------------- --------------------
|
<S> <C> | <C> <C>
NET INCOME........................................ $10,835 | $2,402 $6,438
|
OTHER COMPREHENSIVE INCOME (EXPENSE) NET OF TAX: |
Foreign Currency Translation Adjustments..... 40 | (124) 15
Additional Minimum Pension Liability......... (80) | -- --
------- | ------ ------
COMPREHENSIVE INCOME.............................. $10,795 | $2,278 $6,453
======= | ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of January 31, 1998 and January 30, 1999
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
January 31, January 30,
ASSETS 1998 1999
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents.............................................................. $ 5,699 $ 2,211
Accounts Receivable, Net of Allowances of $300 and $335 in Fiscal
1997 and Fiscal 1998, Respectively................................................ 20,578 23,465
Inventories............................................................................ 15,849 17,343
Deferred Tax Assets.................................................................... 1,533 1,098
Prepaid Expenses and Other............................................................. 222 752
-------- --------
Total Current Assets......................................................... 43,881 44,869
PROPERTY, PLANT AND EQUIPMENT, NET........................................................ 34,320 40,085
DEFERRED TAX ASSETS....................................................................... 1,368 --
GOODWILL AND OTHER INTANGIBLES, NET....................................................... 128,840 123,365
OTHER ASSETS.............................................................................. 8,414 7,095
-------- --------
$216,823 $215,414
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts Payable....................................................................... $ 7,150 $ 8,442
Accrued Expenses....................................................................... 9,277 8,704
Current Portion of Long Term Debt...................................................... -- 162
-------- --------
Total Current Liabilities.................................................... 16,427 17,308
OTHER LIABILITIES, INCLUDING POSTRETIREMENT BENEFIT
OBLIGATION........................................................................ 4,320 4,041
DEFERRED TAX LIABILITIES.................................................................. -- 1,163
LONG TERM DEBT............................................................................ 142,000 132,220
MINORITY INTEREST......................................................................... -- 153
COMMITMENTS AND CONTINGENCIES (Note 16)...................................................
STOCKHOLDER'S EQUITY:
Common Stock ($.01 Par Value per Share, 1,000 Shares
Authorized, Issued and Outstanding Fiscal 1997 and Fiscal 1998)..................... -- --
Paid-in Capital........................................................................ 51,576 51,576
Retained Earnings...................................................................... 2,402 8,840
Accumulated Other Comprehensive Income................................................. 98 113
-------- --------
54,076 60,529
-------- --------
$216,823 $215,414
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES (Company)
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (Predecessor)
Consolidated Statements of Stockholder's Equity (Deficit)
For the Years Ended January 25, 1997, January 31, 1998, and January 30, 1999
(In Thousands)
<TABLE>
<CAPTION>
Investments & Accumulated
Advances from Other
Common Paid-In Retained (to) C&A Comprehensive
Stock Capital Earnings Products Income Total
------ ------- -------- ------------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance, January 27, 1996.......................... $ -- $ 7,821 $ 8,105 $(45,456) $(115) $(29,645)
Net Income......................................... -- -- 10,835 10,835 -- --
Foreign Currency Translation Adjustment............ -- -- -- -- 40 40
Additional Minimum Pension Liability................. -- -- -- -- (80) (80)
Net Transactions With C&A Products................. -- -- -- 15,070 -- 15,070
BALANCE, January 25, 1997............................ -- 7,821 18,940 (30,386) (155) (3,780)
----- ------- -------- -------- ----- --------
===============================================================================================================================
COMPANY
Acquisition of C&A Floor Coverings, Inc.:
Elimination of Predecessor Accounts............. -- (7,821) (18,940) 30,386 377 4,002
Purchase of C&A Floor Coverings, Inc............ -- 51,000 -- -- -- 51,000
Capital Contribution by CAF Holdings, Inc.......... -- 576 -- -- -- 576
Net Income......................................... -- -- 2,402 -- -- 2,402
Foreign Currency Translation Adjustment............ -- -- -- -- (124) (124)
----- ------- -------- -------- ----- --------
BALANCE, January 31,1998............................. -- 51,576 2,402 -- 98 54,076
----- ------- -------- -------- ----- --------
Net Income...................................... -- -- 6,438 -- -- 6,438
Foreign Currency Translation Adjustment......... -- -- -- -- 15 15
----- ------- -------- -------- ----- --------
BALANCE, January 30, 1999............................ $ -- -- $ 8,840 $ -- $ 113 $ 60,529
----- ------- -------- -------- ----- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES (Company)
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (Predecessor)
Consolidated Statements of Cash Flows
For The Years Ended January 25, 1997, January 31, 1998 and January 30, 1999
(In Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------
(Predecessor) | (Company) (Company)
January 25, | January 31, January 30,
1997 | 1998 1999
------------ | ----------- -----------
<S> <C> | <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net Income............................... $10,835 | $ 2,402 $ 6,438
------- | --------- --------
Adjustments to reconcile net income to |
net cash |
Provided by operating activities: |
Depreciation and leasehold |
amortization.................. 2,201 | 4,795 5,869
Amortization of goodwill & |
other intangible assets....... -- | 8,468 7,375
Amortization of deferred |
financing fees................ -- | 1,314 1,316
Deferred income tax expense.... -- | 78 2,966
Minority interest in income of |
subsidiaries.................. -- | -- 10
Changes in operating assets and |
liabilities net of |
effects of acquisitions: |
Accounts receivable.............. 670 | (2,062) (2,502)
Inventories...................... (3,907) | 2,519 (1,237)
Accounts payable................. 1,703 | 362 615
Accrued expenses................. -- | 5,785 (868)
Other, net....................... 873 | 540 (468)
------- | --------- --------
Total adjustments............ 1,540 | 21,799 13,076
------- | --------- --------
Net cash provided by |
operating activities........ 12,375 | 24,201 19,514
------- | --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Acquisition of C&A Floor Coverings, Inc.. -- | (197,737) --
Acquisition of Advance Carpet Tiles, |
Ltd., Net of Cash Acquired.............. -- | -- (5,001)
Additions to Property, Plant & Equipment. (7,897) | (5,119) (7,972)
Other, net............................... 41 | -- 293
------- | --------- --------
Net cash used in investing |
activities.................. (7,856) | (202,856) (12,680)
------- | --------- --------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
Proceeds from Issuance of Long Term Debt. -- | 157,000 1,906
Repayments of Long Term Debt............. -- | (15,000) (12,228)
Capital Contributions from CAF Holdings.. -- | 51,576 --
Financing Costs.......................... -- | (9,366) --
Net Transactions with C&A Products ...... (4,508) | -- --
------- | --------- --------
Net cash (used in) provided |
by financing activities.... (4,508) | 184,210 (10,322)
------- | --------- --------
|
|
NET CHANGE IN CASH......................... 11 | 5,555 (3,488)
|
CASH, Beginning of Year.................... 133 | 144 5,699
------- | --------- --------
CASH, End of Year.......................... $ 144 | $ 5,699 $ 2,211
======= | ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Collins & Aikman Floorcoverings, Inc. (a Delaware Corporation incorporated
on January 29, 1995), together with its subsidiaries (the "Company") is a
leading manufacturer of floorcoverings for the specified commercial
floorcoverings market.
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 is a
wholly owned subsidiary of Collins & Aikman Products Co. ("C&A Products"), which
is 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 entered into by C&A Products,
C&A Group, the Company, CAF Holdings, Inc. ("Holdings"), and CAF Acquisition
Corporation ("CAF"), a wholly owned subsidiary of Holdings, CAF acquired from
C&A Group all the outstanding capital stock of the Company (the "Acquisition")
for $197.0 million which was reduced to $195.6 million after a $1.4 million
working capital adjustment, plus transaction costs. Simultaneous with the
consummation of the Acquisition, CAF was merged with and into the Company (see
Note 3) and the Company changed its name from Collins & Aikman Floor Coverings,
Inc. to Collins & Aikman Floorcoverings, Inc.
Financing for the Acquisition was provided by (i) borrowings of $57.0
million under an $85.0 million senior secured credit facility (the "Credit
Facility") among the Company, 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 (the
"Senior Subordinated Notes"), and (iii) capital investments of $51.0 million by
affiliates of Quad-C, Inc., Paribas Principal Partners ("Paribas"), management
of the Company and certain other investors in Holdings.
2. BASIS OF PRESENTATION
The purchase method of accounting was used to record assets acquired and
liabilities assumed by the Company. Such accounting generally results in
increased amortization and depreciation reported in future periods. In
addition, the 1996 results include accruals and costs allocated by C&A Products.
Accordingly, the accompanying consolidated financial statements of the Company
and of Collins & Aikman Floor Coverings, Inc. and subsidiary (collectively
referred to as the "Predecessor") are not comparable in all material respects.
A vertical black line on the accompanying consolidated financial statements
distinguishes between the Predecessor and the Company.
The Acquisition was accounted for by the purchase method of accounting,
whereby 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 is being amortized over 40 years using the
straight line method (See Note 10).
The following summary presents unaudited pro forma results of operations as
if the Acquisition occurred as of January 28, 1996 (in thousands):
Net Sales..................... $136,124
Operating Income.............. 16,674
Net Income.................... 413
F-7
<PAGE>
These pro forma results do not purport to represent what the Company's
results of operations would have been if the Acquisition had occurred as of such
date nor what results will be for any future period.
3. PREDECESSOR BASIS OF PRESENTATION
At January 27, 1996, Collins & Aikman Floor Coverings, Inc. and Collins &
Aikman UK Limited were separate indirect subsidiaries of C&A Products. In
preparation for the sale of the Company, on August 3, 1996, C&A Products
contributed its ownership in Collins & Aikman UK Limited to Collins & Aikman
Floor Coverings, Inc., making Collins & Aikman UK Limited a wholly owned
subsidiary. 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.
Prior to January 29, 1995, the business of the Predecessor 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 Predecessor and prior to the Acquisition,
transfers of operating funds between C&A Products and the Predecessor 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 as the amount was forgiven at the time of the Acquisition.
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 Product's 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 No.
73, a portion of the debt and the related interest expense of C&A Products has
been allocated to the Company in 1995 and 1996 as a result of its guarantee of
certain C&A Products debt. The allocations have been made based upon the ratio
of the Predecessor's net assets to the consolidated invested capital of C&A
Products, which approximates the Predecessor'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 Predecessor's previous
financial statements that excluded these allocated amounts. The average
interest rates in effect for fiscal 1996 was 7.9%. In connection with the
Acquisition, 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.
Prior to the Acquisition, C&A Products performed certain services and
incurred certain costs for the Predecessor. 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 were allocated to the Predecessor
based on a combination of estimated use and the relative sales of the
Predecessor's business to the total consolidated operations of C&A Products.
Corporate costs of C&A Products totaling $1.5 million have been allocated
to the Predecessor for fiscal 1996. In the opinion of management, the method of
allocating these costs was reasonable. However, the costs of services charged
to the Predecessor are not necessarily indicative of the costs that would have
been incurred if the Predecessor had performed these functions prior to the
Acquisition. Subsequent to the Acquisition, the Company performed these
functions using its own resources and purchased services, including services
purchased from C&A Products during a transition period ended January 31, 1998.
F-8
<PAGE>
C&A Products administers its self-insurance programs on a corporate wide
basis and charges its individual participating subsidiaries and divisions based
on estimated claims and loss experience. Costs charged by C&A Products to the
Predecessor for product, automotive and general liability, workers'
compensation, employee group health claims, and insurance amounted to
approximately $1.7 million in fiscal 1996.
Subsequent to the Acquisition, the Company is insured for product,
automotive, general liability and workers' compensation. The Company
administers its self-insurance program for employee group health claims.
Accordingly, the accompanying consolidated balance sheets as of January 31, 1998
and January 30, 1999 include an accrual for employee group health claims.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Collins &
Aikman Floorcoverings, Inc., its subsidiaries and its equity investment. All
significant intercompany items have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform to the 1998 presentation.
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 reported
period. Actual results could differ from those estimates.
Fiscal Year
The fiscal year of the Company ends on the last Saturday of January.
Fiscal 1996 was a 52-week year which ended on January 25, 1997, fiscal 1997 was
a 53-week year which ended on January 31, 1998 and fiscal 1998 was a 52-week
year which ended on January 30, 1999.
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 changes in accumulated other
comprehensive income of approximately $40,000 in fiscal 1996, $(124,000) in
fiscal 1997 and $15,000 in fiscal 1998.
Gains and losses resulting from foreign currency transactions are
recognized in income.
F-9
<PAGE>
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 cash and cash equivalents,
trade accounts receivable and long term debt. Because of the short maturity of
cash and cash equivalents and trade accounts receivables, carrying value
approximates fair value.
The carrying value of the senior credit facility portion of the Company's
long term debt approximates the fair value as the Credit Facility (see Note 12)
is subject to variable interest rates. The fair value of the Senior Subordinated
Notes (see Note 12) at January 30, 1999, representing the amount at which the
debt could be exchanged on the open market, is $105.3 million.
Reliance on Principal Supplier
One supplier currently supplies a significant amount 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 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 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
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized for the difference between the fair
value and carrying value of the asset.
Advertising Costs
The Company expenses all advertising costs as they are incurred.
F-10
<PAGE>
Income Taxes
The Company accounts for income taxes under an asset and liability approach
pursuant to statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes". This method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the company's financial statements or tax returns. In estimating
future tax consequences, the Company generally considers all expected future
events other than enactments of changes in tax laws or rates. The effect on
deferred tax asset and liabilities of a change in tax rates will be recognized
as income or expense in the period that includes the enactment date.
Recent Accounting Pronouncements
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.
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The statement addresses reporting of operating segment
information and disclosures about products, services, geographic areas and major
customers. Management has reviewed the requirements of SFAS 131 noting the
Company has no separate businesses and all products and end-use markets are
within the specified commercial floorcoverings market. Additionally, all
Company resources support all products and end-use markets with no allocation to
one product or end use other than specific assignments among the sales and
marketing staffs. Consequently, the Company considers its business as one
reportable segment. In addition, sales to all countries (outside the United
States) are immaterial to the consolidated results of the Company, and sales to
one customer do not amount to or exceed 10% of the Company's sales.
Accordingly, SFAS 131 does not have an impact on the financial reporting of the
Company.
The Company has adopted Statement of Financial Accounting Standards No.
132, "Disclosures about Pension and Other Postretirement Benefits" ("SFAS 132").
The statement revises disclosures regarding pension and other postretirement
benefit plans. The Company's disclosures regarding its pension and
postretirement benefits plans have been reformatted to meet the requirements of
SFAS 132 (see Note 11).
During 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.
F-11
<PAGE>
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 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.
6. INVENTORIES
Net inventory balances are summarized below (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
---------- ----------
<S> <C> <C>
Raw materials..................................................... $ 7,596 $ 8,951
Work in process................................................... 2,986 2,440
Finished goods.................................................... 5,267 5,952
------- -------
$15,849 $17,343
======= =======
</TABLE>
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment, net, are summarized below (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
---------- -----------
<S> <C> <C>
Land and improvements................................... $ 1,528 $ 1,600
Buildings............................................... 8,739 12,051
Machinery and equipment................................. 24,696 34,162
Leasehold improvements.................................. 21 43
Construction in progress................................ 4,131 2,851
------- --------
39,115 50,707
Less accumulated depreciation and
amortization................................... (4,795) (10,622)
------- --------
$34,320 $ 40,085
======= ========
</TABLE>
Depreciation and leasehold amortization of property, plant and equipment
were $2.2 million for fiscal 1996, $4.8 million for fiscal 1997 and $5.9 million
for fiscal 1998.
F-12
<PAGE>
8. ACCRUED EXPENSES
Accrued expenses are summarized below (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Payroll and employee benefits........................... $4,354 $4,228
Accrued taxes........................................... 1,153 901
Customer claims......................................... 1,502 1,507
Accrued interest........................................ 1,134 828
Other................................................... 1,134 1,240
------ ------
$9,277 $8,704
====== ======
</TABLE>
9. RECEIVABLES FACILITY
Effective July 13, 1994, C&A Products and certain other subsidiaries,
including the Predecessor, (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 purchased on a revolving basis, without
recourse, virtually all trade receivables generated by the Sellers. Carcorp
sold certain interests in the purchased receivables to outside parties. C&A
Products retained the responsibility of servicing the trade receivables sold to
Carcorp, and it was compensated by Carcorp for its servicing activities.
As of January 25, 1997, the face value of the open accounts receivable of
the Predecessor that had been purchased by Carcorp aggregated to $17.8 million.
The receivables were purchased by Carcorp at the face amount of the
receivables, less a defined discount. The discount percentage included a yield
factor, factors for Carcorp's servicing and processing expenses, as well as
other factors, which were subject to variation, based upon the collectibility
and aging of the receivables purchased. In connection with the sale of the
receivables to Carcorp, the Predecessor recorded losses of $3.5 million for
fiscal 1996.
In connection with the Acquisition, the Predecessor was terminated as a
Seller under the Receivables Sale Agreement. Receivables sold by the
Predecessor to Carcorp prior to the termination of the Predecessor as a Seller
remained with Carcorp. Under the terms of the Acquisition, C&A Products
remitted, as collected, the accounts receivable receipts relating to the
Predecessor's open accounts held by Carcorp at the date of closing. As of
January 31, 1998, all accounts receivable held by Carcorp at the date of closing
had been collected.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of the net assets of the
acquired entity over the fair market value of net tangible and identified
intangible assets in connection with the acquisition. The Company reviews the
carrying value of goodwill for impairment using undiscounted cash flows whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable.
F-13
<PAGE>
Goodwill and Other Intangible Assets consisted of the following:
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Goodwill......................................................... $ 71,308 $ 73,207
Patent........................................................... 27,000 27,000
Tradename Use Agreement.......................................... 27,000 27,000
Non-Compete Agreement............................................ 12,000 12,000
Accumulated Amortization......................................... (8,468) (15,842)
-------- --------
$128,840 $123,365
======== ========
</TABLE>
Amortization is calculated on the straight-line basis over the following
lives:
Goodwill................... 40 Years
Patent..................... 11 Years
Tradename Use Agreement.... 40 Years
Amortization for the Non-Compete Agreement is calculated using the double-
declining balance method over seven years.
11. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
Subsequent to the Acquisition, the Company began a defined contribution
plan in which certain of the Company's employees who met eligibility
requirements were included. The Company's contributions are based on specified
formulas as specified in the plan document. The accompanying statements of
operations includes expenses of approximately $514,000 and $467,000 for fiscal
1997 and 1998, respectively, for the Company's contributions to the plan.
Defined Benefit Plan
Subsequent to the Acquisition, substantially all domestic employees of
the Company who met eligibility requirements participate in a defined benefit
plan, which is administered by the Company. Plan benefits are generally based
on years of service and employees' compensation during their years of
employment. The Company's policy is to contribute annually the maximum amount
that can be deducted for federal income tax purposes. Assets of the pension
plan are held in a trust invested primarily in mutual funds.
F-14
<PAGE>
The following tables provide a reconciliation of the projected benefit
obligation, a reconciliation of plan assets, the funded status of the plans, and
amounts recognized in the Company's consolidated financial statements at January
31, 1998 and January 30, 1999 (in thousands).
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year...................... $ -- $ 452
Service cost................................................. 422 533
Interest cost................................................ 30 75
Actuarial losses............................................. -- 102
Benefits paid................................................ -- --
----- ------
Benefit obligation at end of year............................ $ 452 $1,162
===== ======
Change in Plan Assets:
Fair value of plan assets at beginning of year............... $ -- $ --
Company contributions........................................ -- 298
Actual return on plan assets................................. -- 32
Benefits paid................................................ -- --
----- ------
Fair value of plan assets at end of year..................... $ -- $ 330
===== ======
Funded Status of the Plan:
Funded status at end of year................................. $(452) $ (832)
Unamortized net actuarial losses............................. -- 74
----- ------
Accrued benefit cost......................................... $(452) $ (758)
===== ======
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Net Pension Cost Includes the Following Components:
Service cost--benefits earned during the period.............. $ 422 $ 533
Interest cost on project benefit obligations................. 30 75
Expected return on plan assets............................... -- (9)
Recognized net actuarial losses.............................. -- 5
----- ------
Net periodic pension expense for year........................ $ 452 $ 604
===== ======
</TABLE>
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7.0% at January 31, 1998 and January 30, 1999.
The expected rate of increase in future compensation levels was 5.0% in fiscal
1997 and 1998 and the expected long-term rate of return on plan assets was 9.0%
in fiscal 1997 and 8.0% in fiscal 1998.
Postretirement Benefit Plan
The Company provides life and health coverage for certain of the Company's
retirees under plan currently in effect. The plan is closed to new enrollment;
therefore, the Company's current employees will not be eligible for coverage
when they reach retirement age. Participation in the plan is limited to those
employees retired as of February 6, 1997.
F-15
<PAGE>
The following tables provide a reconciliation of the projected benefit
obligation, a reconciliation of plan assets, the funded status of the plans, and
amounts recognized in the Company's consolidated financial statements at January
31, 1998 and January 30, 1999 (in thousands).
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year................... $ 1,239 $ 1,344
Service cost.............................................. 43 47
Interest cost............................................. 88 93
Actuarial losses.......................................... -- 27
Benefits paid............................................. (26) (34)
------- -------
Benefit obligation at end of year......................... $ 1,344 $ 1,477
======= =======
Funded Status of the Plan:
Funded status at end of year.............................. $(1,344) $(1,477)
Unamortized net actuarial losses.......................... -- 27
------- -------
Accrued Benefit Cost...................................... $(1,344) $(1,450)
======= =======
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Net Pension Cost Includes the Following Components:
Service cost--benefits earned during the period......... $ 43 $ 47
Interest cost on project benefit obligations............ 88 93
-------- -------
Net periodic pension expense for year................... $ 131 $ 140
======== =======
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at January 31, 1998 and January 30,
1999. This plan is unfunded. For measurement purposes, 6.0% increase in the
per capita cost of covered health care benefits was assumed for 1998. The Plan
allowed for an increase in employer-paid cost for 1998 of 6.0% over 1997 costs
with no additional increases after 1998; therefore, the health care cost trend
rate assumption has no impact on the obligation of the Company.
12. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
10% Senior Subordinated Notes, due 2007.............. $100,000 $100,000
Senior Secured Credit Facility....................... 42,000 29,900
Other Debt........................................... -- 2,482
-------- --------
Total Debt................................. $142,000 $132,382
Less Current Maturities.............................. -- 162
-------- --------
$142,000 $132,220
======== ========
</TABLE>
F-16
<PAGE>
SENIOR SUBORDINATED NOTES
Concurrent with the consummation of the Acquisition, the Company
issued $100.0 million of 10% Senior Subordinated Notes ("the Senior Notes") due
January 15, 2007. Interest is payable semi-annually commencing July 15, 1997.
The notes are unsecured obligations of the Company and are subordinated in right
of payment to all existing and future senior debt of the Company. The indenture
governing the Senior Notes contains certain restrictive covenants that limit the
ability of the company, among other things, to incur additional indebtedness,
pay dividends or make certain other restricted payments, limitations on the
incurrence of indebtedness, asset dispositions and transactions with affiliates.
SENIOR SECURED CREDIT FACILITY
Also concurrent with the consummation of the Acquisition, the Company
entered into a Senior Secured Credit Facility (the "Credit Facility"). The
Credit Facility consists of a term loan facility in the amount of $55.0 million
due in quarterly installments through June 30, 2002 and a revolving credit
facility in the amount of $30.0 million due June 30, 2002, which includes a
letter of credit sublimit of $8.0 million. Loans under the term loan facility
and $2.0 million under the revolving credit facility were borrowed to finance
the Acquisition. During fiscal 1997, $2.0 million of the revolving credit
facility was repaid, $3.0 million of the term loan facility was repaid and $10.0
million of the term loan facility was voluntarily prepaid. During fiscal 1998,
$12.1 million of the term loan facility was voluntarily prepaid.
The Company's obligations under the Credit Facility are secured by a
pledge of all the capital stock and the tangible and intangible assets of the
Company and 65% of the capital stock of, or equity interests in, each foreign
subsidiary of the Company.
The Credit Facility contains restrictive covenants including minimum
levels of consolidated EBITDA (earnings before interest, taxes, depreciation,
amortization and other non-cash charges), interest coverage and leverage ratios.
In addition, the Credit Facility also contains covenants which, among other
things, limit the incurrence of additional indebtedness, capital expenditures,
dividends, transactions with affiliates, asset sales, acquisitions, mergers,
prepayments of other indebtedness, liens and encumbrances, and other matters
customarily restricted in loan agreements. As of January 30, 1999, the Company
was in default under one of these covenants and has received an amendment to the
Credit Facility and waiver of default for this non-conformance for the year
ended January 30, 1999.
The Company has made four amendments to the Credit Facility. 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. The second amendment
provided better interest rates based on the Company's leverage ratio for the
immediately preceding twelve months. The third amendment provided for the
ability to purchase up to $5.0 million of the Company's Senior Subordinated
Notes on open markets. The fourth amendment increased the limit for capital
expenditures during fiscal 1998.
The Credit Facility bears interest at a per annum rate equal to the
Company's choice of (a) an adjusted rate based on the Eurodollar Rate plus a
Eurodollar margin or (b) Base Rate, as defined by the Credit Facility, plus a
Base Rate Margin. The Eurodollar Margin and the Base Rate Margin adjust
quarterly on a sliding scale based on the Company's leverage ratio for the
immediately preceding twelve months. The weighted average interest rate under
the Credit Facility at January 30, 1999 was 7.20%.
OTHER LONG-TERM DEBT
Concurrent with the consummation of the ACT Acquisition, the Company agreed
to pay to the seller $1.9 million in September 2000 at an effective interest
rate of 8.5%. In addition, the Company assumed $0.6 in vendor financing related
to equipment purchases which are payable monthly.
F-17
<PAGE>
Financing costs of 8.3 million and $7.0 million associated with the
issuance of the Credit Facility and Senior Notes are included in other assets on
the accompanying Balance Sheets as of January 31, 1998 and January 30, 1999,
respectively. These costs are being amortized on the straight-line method over
the term of the respective debt agreements. Amortization expense charged to
interest expense was $1.3 million in fiscal 1997 and 1998.
At January 30, 1999, the scheduled annual maturities of long-term debt
are as follows (in thousands):
Fiscal Year:
1999................................ $ 162
2000................................ 9,010
2001................................ 15,135
2002................................ 8,075
2003................................ --
Thereafter.......................... 100,000
--------
$132,382
========
Total interest paid by the Company on all indebtedness was $12.8
million and $13.6 million for fiscal 1997 and 1998, respectively.
13. INCOME TAXES
Prior to the Acquisition, the Predecessor was included in the
consolidated federal income tax return of C&A Corporation and state and foreign
income taxes were provided on a separate return basis. C&A Products and its
subsidiaries, including the Predecessor, were parties to a tax-sharing agreement
with C&A Corporation which provided 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, paid 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 1996, the Predecessor
received, under the tax-sharing agreement, an additional benefit of $5 million
that has been reported as a component of net transactions with C&A Products.
Domestic and foreign components of income before income taxes are
summarized as follows
(in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
(Predecessor) | (Company) (Company)
January 25, | January 31, January 30,
1997 | 1998 1999
------------ | ----------- -----------
<S> <C> | <C> <C>
Domestic................................ $17,430 | $4,112 $12,176
Foreign................................. 134 | -- (857)
------- | ------ -------
$17,564 | $4,112 $11,319
======= | ====== =======
</TABLE>
F-18
<PAGE>
Components of the income tax provision for fiscal 1996, fiscal 1997, and
fiscal 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
(Predecessor) | (Company) (Company)
January 25, | January 31, January 30,
1997 | 1998 1999
------------ | ----------- -----------
<S> <C> | <C> <C>
Current: |
Federal................................... $5,289 | $1,485 $1,682
State..................................... 838 | 147 223
------ | ------ ------
6,127 | 1,632 1,905
====== | ====== ======
Deferred: |
Federal................................... 521 | 71 2,758
State..................................... 81 | 7 208
------ | ------ ------
602 | 78 2,966
------ | ------ ------
Income tax expense............................. $6,729 | $1,710 $4,871
====== | ====== ======
</TABLE>
Collins & Aikman Floorcoverings UK Limited had sufficient loss
carryforwards to offset taxable income in fiscal 1996. No benefit was recorded
for the foreign operating losses in fiscal 1997 and 1998. Therefore, no foreign
income tax expense is reflected in the statements of operations.
Reconciliation between income taxes computed at the federal rate and the
provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
(Predecessor) | (Company) (Company)
January 25, | January 31, January 30,
1997 | 1998 1999
------------ | ----------- -----------
<S> <C> | <C> <C>
Amount at statutory federal rate of 35%........ $6,147 | $1,439 $3,962
State income taxes, net of federal income |
tax benefit.............................. 597 | 142 385
Foreign taxes.................................. (47) | -- --
Change in valuation allowance.................. -- | -- 257
Other.......................................... 32 | 129 267
------ | ------ ------
Income tax expense............................. $6,729 | $1,710 $4,871
====== | ====== ======
</TABLE>
F-19
<PAGE>
The components of the net deferred tax assets as of January 31, 1998 and
January 30, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
January 31, January 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Warranty & customer claims accruals................ $1,230 $1,232
Employee benefits.................................. 875 861
Inventory reserves................................. 890 98
Other liabilities and reserves..................... 756 714
Foreign net operating loss carryforwards........... 91 348
Valuation allowance................................ (91) (348)
------ ------
Total deferred tax assets................ 3,751 2,905
------ ------
Deferred tax liabilities:
Deferred financing fees............................ 656 416
Property, plant and equipment...................... 174 1,774
Goodwill and intangible amortization............... 20 780
------ ------
Total deferred tax liabilities.......... 850 2,970
------ ------
Net deferred tax assets (liabilities)................... $2,901 $ (65)
====== ======
</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.
Payments for income taxes by the Company amounted to $1.3 million and
$3.4 million for fiscal 1997 and 1998, respectively.
14. STOCK OPTIONS
In February 1997, Holdings adopted the 1997 Stock Option Plan (the "Plan"),
under which 800,000 shares of CAF Holdings, Inc. common stock are authorized and
reserved for use in the Plan. The Plan allows the issuance of nonqualified
stock options at an exercise price determined by Holdings' board of directors.
A certain number of options granted during 1997 become exercisable over nine
years and expire eleven years from the date of grant. Accelerated vesting may
occur for these options, as well as for incremental levels of additional
options, based on achievement of specific performance targets. Accelerated
vesting may also occur due to a change in control. At January 31, 1998 and
January 30, 1999, no shares are exercisable. The following table summarizes the
activity in the Plan for fiscal 1997 and 1998:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price
----------- ---------
<S> <C> <C>
Granted in fiscal 1997 and outstanding at January 31, 1998................. 714,609 $1.00
Granted.................................................................... 7,770 $1.00
Canceled................................................................... (11,426) $1.00
------- -----
Outstanding at January 30, 1999............................................ 710,953 $1.00
======= =====
</TABLE>
The Company has elected to account for its stock-based compensation
plan under Accounting Principles Board Opinion No. 25; however, the Company has
computed for pro forma disclosure purposes the value of all options granted
during 1997 and 1998 using the minimum value option pricing model as prescribed
by SFAS No. 123 "Accounting for Stock-Based Compensation" and using a weighted
average risk free interest rate of 6.5%, an expected dividend yield of 0%, and
an expected life of nine years for fiscal 1997 grants and eight years for 1998
grants.
The total values of the options granted during 1997 and 1998 were
approximately $313,000 and $128,000, respectively, which would be amortized over
the vesting period of the options. If the Company had accounted for the plan in
accordance with SFAS No. 123, additional compensation expense related to these
options would have been immaterial for fiscal 1997 and 1998.
F-20
<PAGE>
15. RELATED-PARTY TRANSACTIONS
Prior to January 25, 1997, the Predecessor, together with other
subsidiaries of C&A Products, was guarantor of certain indebtedness of C&A
Products. In connection with the Acquisition, the Company was released from
this guarantee.
C&A Products performed certain services and incurred 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 Predecessor for these services totaled $1.5 million in fiscal 1996.
The Predecessor utilized facilities and services available at C&A Products'
New York office. The Predecessor was allocated a portion of the cost for these
facilities based on the actual facilities and services utilized. Costs for
these facilities and services totaling $171,000 in fiscal 1996 are included in
the accompanying consolidated statements of operations.
Certain of the Predecessor's employees participated in C&A Corporation's
stock option plans, which provided 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 Predecessor 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 Predecessor with exercise prices equal to
the market value at the time of grant. In connection with the sale of the
Predecessor, all outstanding options held by employees of the Company
automatically vested and the employees have exercised all options as of January
31, 1998.
In connection with the Acquisition, the Company 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 security
holders, 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 expense. 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 Acquisition and the operations of the
Company.
16. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company is obligated under various leases for office space, machinery
and equipment. At January 30, 1999 future minimum lease payments under operating
leases are as follows (in thousands):
Fiscal Year:
1999.......................... $ 961
2000.......................... 880
2001.......................... 717
2002.......................... 634
2003.......................... 486
Thereafter.................... 803
------
$4,481
======
Rental expense under operating leases was approximately $816,000,
$942,000 and $1,307,000 in fiscal 1996, fiscal 1997 and fiscal 1998,
respectively.
F-21
<PAGE>
Environmental
The Company is subject to federal, state and local laws and regulations
concerning the environment. At January 30, 1999, 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 condition or results of operations.
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 that may or may not be covered by insurance. 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
condition 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 have been
and will be fulfilled in accordance with their terms.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Collins & Aikman Floorcoverings, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Collins & Aikman Floorcoverings, Inc. and
Subsidiaries ("Company") and Collins & Aikman Floor Coverings, Inc. and
Subsidiary ("Predecessor") included in this Form 10-K, and have issued our
report thereon dated April 15, 1999. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in Item 14 of this Form 10-K is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chattanooga, Tennessee
April 15, 1999
S-1
<PAGE>
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES (Company)
COLLINS & AIKMAN FLOOR COVERINGS, INC. AND SUBSIDIARY (Predecessor)
Schedule II--Valuation and Qualifying Accounts
For the Years ended January 25, 1997, January 31, 1998 and January 30,1999
(In Thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING OF COSTS AND OTHER DEDUCTIONS AT END OF
DESCRIPTION PERIOD EXPENSES ADDITIONS ACCOUNTS (a) PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Year ended January 25, 1997
Allowance for doubtful
accounts..................... $ 88 $ 18 $ -- $ -- $ (91) $ 15
- -----------------------------------------------------------------------------------------------------------------------------------
COMPANY
Year ended January 31, 1998
Allowance for doubtful
accounts..................... $ 15 $116 $303(b) $ -- $(134) $300
Year ended January 30, 1999
Allowance for doubtful
accounts................... $300 $159 47(c) $ -- $(171) $335
</TABLE>
Notes:
(a) Represents write-off accounts to be uncollectible, less recovery of amounts
previously written off.
(b) Represents additional provision recorded at the purchase of C&A Floor
Coverings, Inc.
(c) Represents provision acquired at the purchase of Advance Carpet Tiles, Ltd.
S-2
<PAGE>
FOURTH AMENDMENT AND WAIVER
---------------------------
FOURTH AMENDMENT AND WAIVER (this "Amendment"), dated as of April 29,
1999, 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 and waiver 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 and the Banks wish to waive
certain Defaults or Events of Default , in each case as herein provided;
NOW, THEREFORE, it is agreed:
I. Amendments and Waivers to Credit Agreement.
------------------------------------------
1. Section 8.08(a) of the Credit Agreement is hereby amended by deleting
the amount "$7,400,000" appearing in the table in said Section opposite the
fiscal year ended "January, 1999" and inserting the amount "$7,800,000" in lieu
thereof.
2. The Banks hereby waive any Default or Event of Default that may have
arisen under (i) Section 9.03 of the Credit Agreement prior to the Fourth
Amendment Effective Date solely as a result of the Borrower's failure to comply
with the covenant contained in Section 8.08(a) of the Credit Agreement for the
fiscal year ended January 30, 1999 and (ii) Section 9.02 of the Credit Agreement
prior to the Fourth Amendment Effective Date solely as a result of any
misrepresentation made pursuant to the last paragraph of Section 5 of the Credit
Agreement or in a Notice of Borrowing as a result of the Borrower's failure to
comply with the covenant contained in Section 8.08(a) of the Credit Agreement.
<PAGE>
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 Fourth Amendment
Effective Date, 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 Fourth 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 Fourth
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).
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 "Fourth
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 Fourth 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.
* * *
-2-
<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 & 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:
------------------
Title:
HELLER FINANCIAL, INC.
By: /s/ Linda W. Wolf
-----------------
Linda W. Wolf
Title: Senior Vice President
-3-
<PAGE>
LASALLE NATIONAL BANK
By: /s/ David Knapp
---------------
David Knapp
Title: Senior Vice President
BANKBOSTON, N.A.
By:
------------------
Title:
FIRST UNION NATIONAL BANK
By: /s/ David Silander
------------------
David Silander
Title: Vice President
FLEET BUSINESS CREDIT CORPORATION
By: /s/ Matthew R. Van Steenhuyse
-----------------------------
Matthew R. Van Steenhuyse
Title: Senior Vice President
SENIOR DEBT PORTFOLIO
By:
------------------
Title:
WACHOVIA BANK, N.A.
By: /s/ Richard E. S. Bowen
-----------------------
Richard E. S. Bowen
Title: Assistant Vice President
-4-
<PAGE>
EXHIBIT 21.1
COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
List of Subsidiary Corporations
Entity Jurisdiction of Origin
- ------ ----------------------
Collins & Aikman Floorcoverings UK Limited United Kingdom
Advance Carpet Tiles, Ltd. United Kingdom
Collins & Aikman Floorcoverings Asia Pte. Ltd. Singapore
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED JANUARY 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 2,211
<SECURITIES> 0
<RECEIVABLES> 23,800
<ALLOWANCES> 335
<INVENTORY> 17,343
<CURRENT-ASSETS> 44,869
<PP&E> 50,707
<DEPRECIATION> 10,622
<TOTAL-ASSETS> 215,414
<CURRENT-LIABILITIES> 17,308
<BONDS> 132,220
0
0
<COMMON> 0
<OTHER-SE> 60,529
<TOTAL-LIABILITY-AND-EQUITY> 215,414
<SALES> 175,662
<TOTAL-REVENUES> 175,662
<CGS> 103,739
<TOTAL-COSTS> 103,739
<OTHER-EXPENSES> 45,889
<LOSS-PROVISION> 159
<INTEREST-EXPENSE> 14,715
<INCOME-PRETAX> 11,319
<INCOME-TAX> 4,871
<INCOME-CONTINUING> 6,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,438
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
