SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
AMENDMENT NO.1 TO
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended October 30, 1993
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-10218
COLLINS & AIKMAN HOLDINGS CORPORATION
A Delaware Corporation (IRS Employer Identification
No. 13-3489233)
8320 University Executive Park, Suite 102
Charlotte, North Carolina 28262
Telephone (704) 548-2350
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 .
As of December 13, 1993, the number of outstanding shares of the Registrant's
common stock, $1.00 par value, was 1,000 shares.
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Index to Amendment No.1 on Form 10-Q/A to the Quarterly Report on Form 10-Q
for the fiscal quarter ended October 30, 1993.
Page No.
Introduction i
Item 1. Financial Statements I-1
Item 2. Management's Discussion and Analysis of Financial I-10
Condition and Results of Operations
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
AMENDMENT NO.1 ON FORM 10-Q/A
to the
Quarterly Report on Form 10-Q for
the Fiscal Quarter Ended October 30, 1993
INTRODUCTION
Amendment No.1 on Form 10-Q/A (this "Amendment") to the Quarterly Report on
Form 10-Q for the fiscal quarter ended October 30, 1993 filed December 14, 1993
(the "October 1993 10-Q") of Collins & Aikman Holdings Corporation (the
"Company") is being filed by the Company to amend Items 1 and 2 of Part I of the
October 1993 10-Q as set forth below and in the pages attached hereto.
Item 1 of the October 1993 10-Q is hereby amended to restate the Company's
consolidated financial statements at and for the thirteen and thirty-nine weeks
ended October 30, 1993 to exclude a restructuring charge of $24 million that was
previously recorded in error.
Item 2 of the October 1993 10-Q is hereby amended to make certain revisions
to Management's Discussion and Analysis of Financial Condition and Results of
Operations that are required as a result of the exclusion of the previously
recorded restructuring charge.
Except as described above, this Amendment makes no change to Item 1 and 2
of Part I of the October 1993 10-Q.
Pursuant to Rule 12b-15 of the Rules and Regulations under the Securities
Exchange Act of 1934, the complete text of Items 1 and 2, as amended, are
included in this Amendment.
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 30, October 24, October 30, October 24,
1993 1992 1993 1992
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . $ 334,629 $ 314,873 $ 963,366 $ 954,074
Cost of goods sold . . . . . . . . . 250,184 244,054 738,743 736,610
Selling, general and administrative
expenses . . . . . . . . . . . . . 50,954 51,587 154,386 159,961
Goodwill write-off . . . . . . . . . 129,854 - 129,854 -
430,992 295,641 1,022,983 896,571
Operating income (loss) . . . . . . . (96,363) 19,232 (59,617) 57,503
Interest expense, net . . . . . . . . (28,233) (27,483) (83,267) (81,850)
Dividends on preferred stock of
subsidiary . . . . . . . . . . . . 1,129 1,129 3,386 3,386
Loss from continuing operations
before income taxes . . . . . . . . (125,725) (9,380) (146,270) (27,733)
Income taxes (benefit) . . . . . . . 4,096 (1,928) 9,652 3,628
Loss from continuing operations . . . (129,821) (7,452) (155,922) (31,361)
Discontinued operations:
Loss from operations, net of
income taxes . . . . . . . . . . (50) (9,271) (4,775) (20,076)
Loss on disposal, net of income
taxes . . . . . . . . . . . . . . - - (127,673) -
Net loss . . . . . . . . . . . . . . $(129,871) $ (16,723) $ (288,370) $ (51,437)
</TABLE>
See accompanying notes.
I-1
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
October 30, January 30,
1993 1993
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . $ 122,992 $ 83,688
Accounts and notes receivable, net . . . . . . . 193,547 207,795
Inventories . . . . . . . . . . . . . . . . . . 170,321 222,512
Net assets of discontinued operations . . . . . 114,083 73,743
Other . . . . . . . . . . . . . . . . . . . . . 19,022 28,455
Total current assets . . . . . . . . . . . . 619,965 616,193
Property, plant and equipment, at cost less
accumulated depreciation and amortization of
$238,834 and $232,215 . . . . . . . . . . . . . . 285,008 330,471
Goodwill, net of accumulated amortization . . . . . - 140,176
Other assets . . . . . . . . . . . . . . . . . . . 59,621 104,839
$ 964,594 $1,191,679
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . $ 731 $ 9,067
Current portion of long-term debt . . . . . . . . 94,355 61,266
Accounts payable . . . . . . . . . . . . . . . . 65,712 95,363
Accrued expenses . . . . . . . . . . . . . . . . 264,129 219,290
Total current liabilities . . . . . . . . . . 424,927 384,986
Long-term debt . . . . . . . . . . . . . . . . . . 925,428 920,842
Deferred income taxes . . . . . . . . . . . . . . . 4,838 4,823
Other, including postretirement benefit obligation 220,415 203,540
Commitments and contingencies . . . . . . . . . . .
Redeemable preferred stock of subsidiary
(aggregate preference in liquidation $106) . . . 109 165
Preferred stock of subsidiary (aggregate preference
in liquidation $45,250) . . . . . . . . . . . . . 181 181
Redeemable preferred stock (aggregate preference
in liquidation $150,856) . . . . . . . . . . . . 116,115 98,602
Common stock (1,000 shares issued and outstanding) 1 1
Other paid-in capital . . . . . . . . . . . . . . . 133,862 133,862
Accumulated deficit. . . . . . . . . . . . . . . . (853,793) (547,950)
Foreign currency translation adjustments . . . . . (4,986) (4,870)
Pension equity adjustment . . . . . . . . . . . . . (2,503) (2,503)
Total common stockholder's deficit . . . . . (727,419) (421,460)
$ 964,594 $1,191,679
</TABLE>
See accompanying notes.
I-2
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
October 30, October 24,
1993 1992
<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . $ (288,370) $ (51,437)
Adjustments to derive cash flow from operating
activities:
Depreciation and amortization . . . . . . . . . 62,706 64,533
Goodwill write-off . . . . . . . . . . . . . . 129,854 -
Increase in accounts receivable . . . . . . . . (25,237) (22,336)
Decrease (increase) in inventories . . . . . . (42,085) 7,699
Increase (decrease) in accounts payable. . . . 86,850 (19,398)
Loss on disposal of discontinued operations . . 127,673 -
Other, net . . . . . . . . . . . . . . . . . . (51,881) 1,463
Net cash used in operating activities . . . . (490) (19,476)
INVESTING ACTIVITIES
Proceeds from businesses sold. . . . . . . . . . . 48,993 -
Additions to property, plant and equipment . . . . (35,334) (42,240)
Sales of property, plant and equipment . . . . . . 1,173 2,535
Other, net . . . . . . . . . . . . . . . . . . . . 31,463 13,583
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . 46,295 (26,122)
FINANCING ACTIVITIES
Issuance of long-term debt . . . . . . . . . . . . 73,657 18,399
Reduction of long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . . . (64,183) (10,905)
Net reduction of short-term borrowings . . . . . . (8,336) (4,147)
Other, net . . . . . . . . . . . . . . . . . . . . (7,639) (1,142)
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . (6,501) 2,205
Increase (decrease) in cash and cash equivalents . 39,304 (43,393)
Cash and cash equivalents at beginning of period . 83,688 100,604
Cash and cash equivalents at end of period . . . . $ 122,992 $ 57,211
</TABLE>
See accompanying notes.
I-3
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL REPORT
A. Acquisition by Collins & Aikman Holdings Corporation:
Collins & Aikman Holdings Corporation ("Holdings" or the "Company") is a
Delaware corporation and a wholly owned subsidiary of Collins & Aikman Holdings
II Corporation ("Holdings II"), a corporation jointly owned by Blackstone
Capital Partners L.P. ("Blackstone Partners") and Wasserstein Perella
Partners, L.P. ("WP Partners") (both of which are Delaware limited
partnerships) and their respective affiliates. Holdings was formed on
September 21, 1988 to acquire all the outstanding common stock of
Collins & Aikman Group, Inc. ("Group").
On October 25, 1988, Holdings, Holdings II and Group entered into an Amended
and Restated Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to
the Merger Agreement, the Company commenced a cash tender offer for up to
38,324,444 shares of common stock of Group. On December 8, 1988, the Company
purchased 38,324,444 shares of common stock of Group (approximately 80%) for
cash aggregating approximately $431 million. Pursuant to the Merger Agreement,
on April 13, 1989, each share of common stock was reclassified (the
"Reclassification") into .45 shares of 15-1/2% Junior Cumulative
Exchangeable Redeemable Preferred Stock of Group (the "Intermediate Preferred
Stock"). Immediately following the Reclassification, a
wholly owned subsidiary of the Company was merged into Group (the "Merger"),
and each share of Intermediate Preferred Stock (other than those held by
Group, Holdings II or any subsidiary of either, which were canceled, and any
shares as to which appraisal rights, if any, were validly perfected) was
converted into a share of 15-
1/2% Cumulative Exchangeable Redeemable Preferred Stock of the Company
(the "Merger Preferred Stock") and Group became a direct wholly owned subsidiary
of the Company. The acquisition of Group has been accounted for as a purchase
and results of operations have been included from the effective date of
acquisition.
B. Basis of Presentation:
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. In the opinion of management, the accompanying
condensed consolidated financial statements reflect all adjustments (consisting
of only normal recurring adjustments, except for a special restructuring charge
and the write-off of goodwill) necessary for a fair presentation of financial
position and results of operations. Results of operations for interim periods
are not necessarily indicative of results for the full year. Certain
reclassifications have been made to conform to the current presentation of
continuing operations.
C. Discontinued Operations:
During fiscal 1991, Group discontinued the remaining businesses of
Wickes Manufacturing Company ("Wickes Manufacturing") consisting of its Dura
Convertible ("Dura"), Bumper and H. Koch & Sons ("H. Koch") divisions. In
July 1992, Group sold Bumper and H. Koch. As of the end of fiscal 1992, Group
reclassified Builders Emporium and the Engineering Group as discontinued
operations held for sale. In March 1993, Group sold the Engineering Group.
During the fiscal quarter ended July 31, 1993, Group decided to retain Dura,
which manufactures OEM convertible top
systems for the automotive industry, because no offers were received that met
management's estimate of value. Subsequent to the end of such fiscal quarter,
Group began selling or disposing
I-4
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL REPORT (Continued)
of Builders Emporium's inventory and other assets after Group was unsuccessful
in finding a buyer for the entire home improvement chain. The fiscal quarter
ended July 31, 1993 included a loss on disposal of discontinued operations of
$125.5 million, principally to provide additional reserves for losses and costs
in connection with the sale or disposition of Builders Emporium inventory,
real estate and other assets and to provide for employee severance and other
costs. Subsequent to the end of the current quarter, Group entered into a
definitive agreement for the sale of Kayser-Roth Corporation ("Kayser-Roth"),
which agreement is subject to financing and customary closing conditions. The
results of Kayser-Roth, Builders Emporium, the Engineering Group, Bumper and
H. Koch are classified as discontinued operations for all periods presented.
The results of Dura have been classified as continuing operations for all
periods presented. Sales of discontinued operations
aggregated $704.9 million and $746.2 million for the thirty-nine week periods
ended October 30, 1993 and October 24, 1992, respectively, and $267.6 million
and $234.3 million for the quarters ended October 30, 1993 and October 24,
1992, respectively.
Interest expense has been allocated to discontinued operations based on the
ratio of net book value (including reserves for loss on disposal) of
discontinued operations to consolidated invested capital. Interest allocated
to discontinued operations was $11.1 million and $14.3 million for the
thirty-nine week periods ended October 30, 1993 and October 24, 1992,
respectively, and $2.3 million and $4.7 million for the quarters ended October
30, 1993 and October 24, 1992, respectively.
The Company has disclosed that it may sell additional assets of Group.
See "PART I - FINANCIAL INFORMATION, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" elsewhere herein.
D. Inventories:
Inventory balances are summarized as follows (in thousands):
<TABLE>
October 30, January 30,
1993 1993
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . $ 69,206 $ 66,829
Work in process . . . . . . . . . . . . . . 22,843 41,187
Finished goods . . . . . . . . . . . . . . . 78,272 114,496
$ 170,321 $ 222,512
</TABLE>
E. Goodwill:
At October 30, 1993, before giving effect to the write-off described below,
Holdings had $129.9 million of goodwill which arose as a result of the
acquisition of Group in December 1988. Management concluded that as of
October 30, 1993 conditions had changed to the extent that Holdings' net
income from continuing businesses would not support the future amortization
of its remaining goodwill
balance.
I-5
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL REPORT (Continued)
The specific factors and events considered by management in
reaching this conclusion include the following:
(Bullet) Subsequent to the end of the second fiscal quarter, Group began
selling or disposing of Builders Emporium's inventory and other
assets after management determined that Group would not be able to
find a buyer for the entire Builders Emporium chain of home
improvement stores and that efforts to restore the chain
to profitability were unlikely to succeed. As a result, at July
31, 1993, the Company was required to provide additional reserves for
the significant reduction in estimated proceeds from disposition
and the other costs to be incurred in its sale or disposition
of the inventory and other assets of Builders Emporium.
(Bullet) After actively marketing Dura for more than one year, the
Company did not receive any offers that met management's estimates
of value. As a result, at the end of the second quarter, the
Company reclassified Dura as a continuing operation.
(Bullet) As recently announced, Group has entered into a definitive
agreement for the sale of Kayser-Roth, which agreement is subject
to financing and customary closing conditions. However, the
expected gross proceeds of approximately $233 million (subject to
adjustment) are below management's prior expectations of
value, which management believes largely resulted from downward
revisions in Kayser-Roth's expected operating results for fiscal
1993. This deterioration in outlook is primarily due to a drop
in overall demand in 1993 to date for women's sheer hosiery and
the continuing softness in demand for sock products
in department and specialty stores. In connection with the sale
of Kayser-Roth, the Company will be required to indemnify the
purchaser for certain environmental, lease and other liabilities
of Kayser-Roth.
(Bullet) During the second fiscal quarter it became apparent that the
operations of the Company were not performing up to the Board's
expectations in light of the
cyclical recovery that was occurring in the economy as a whole.
As a result, an Operating Committee of the Board was established.
This Committee undertook a comprehensive strategic review of
Holdings' continuing operations. This review led to the
conclusion that there have been changes in the industries in
which the Company operates. In particular, the automotive
industry is in the process of a major, worldwide realignment that
has created significant overcapacity and disrupted traditional
customer/supplier relationships. This
has intensified competitive pressures and has resulted in the
prospect of lower average margins over the auto cycle than has been
the case historically. In addition, the recovery of housing
activity has been weaker than in prior economic upturns and
consumer preferences have shifted away from wallcovering
material. Although it is difficult to measure, management also
believes the Company's wallcoverings business has lost some
market share pending introduction of new product lines.
Consequently, management has reduced its expectations regarding
the long-term sales potential for wallcoverings and does
not anticipate that margins will reach levels experienced in prior
economic cycles. These constraints on margin recovery are being
intensified by an industry-wide shift in distribution from small
independent dealers to warehouse
clubs and national discount chains.
I-6
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL REPORT (Continued)
[Bullet] Management has recently explored debt recapitalization alternatives
with the financial community. The exploration of alternatives is
continuing but the indications from the financial community are
that debt recapitalization alternatives are not likely to
significantly reduce the interest burden of Holdings and that,
given the earnings history of the continuing operations, it
would not be feasible to deleverage the Company by raising new
equity capital at this time. However, the Company expects that it
will have adequate liquidity to meet its cash requirements through
the end of fiscal 1994 and into fiscal 1995. Beyond that, the Company
expects that it will require alternative
financings or asset sales to meet its cash requirements.
The substantial and continuing losses of Builders Emporium and the
inability of the Company to sell the Builders Emporium chain as an entity
has left the Company with materially higher leverage and interest costs than
previously anticipated. The inability of the Company to sell Dura at an
acceptable price and the anticipated sale of Kayser-Roth on terms that are
worse than management's prior expectations of value are additional adverse
factors. Collins & Aikman Corporation ("C&A") and Dura are now the
Company's only continuing operations and must carry Group's
administrative overhead, debt service and substantial liabilities related to
discontinued operations.
In spite of the industry-wide competitive pressures being experienced,
management of the Company, based on the facts presently known to it, is
currently expecting both cyclical and long-term improvement in the
results of operations. However, management's analysis of the above
factors and the long-term industry trends suggested that, given the
Company's current capital structure, a deterioration of the financial
condition of the Company has occurred. As a result, the Company forecasted
its operating results forward 35 years, which approximates
the remaining amortization period of the Company's goodwill at October 30,
1993, to determine whether net income would be sufficient to recover the
Company's remaining goodwill. The Company's forecast assumes that sales
growth through 1998 will result from a continuation of the recovery in the
automotive and home furnishings markets. After the business cycle peaks in
1998, the forecast reflects a moderate cyclical downturn and a contraction
of margins. Over the long term, sales growth will be
limited by capacity constraints and inflationary growth will be partially
offset by competitive pricing pressures. Capital spending over the next
five years will be increased from levels of the previous five years
principally to support the cyclical growth in the forecast. In general though,
capital spending is limited to repair
and replacement of existing capacity. The existing debt of Group (after
applying the expected proceeds from the sale of Kayser-Roth) is assumed to be
amortized in accordance with its terms. Existing Group debt amortization, as
well as other cash requirements, are assumed to be funded by new Group
borrowings at an interest rate of 11%, which approximates the average
current cost of borrowing of Group. The forecast assumes that Group's
cash flow will be dedicated to the repayment of Group debt and will
be unavailable for the payment of dividends to Holdings until Group
achieves an interest coverage ratio of 4 to 1, based on Group's net income
before interest, taxes and amortization. Based upon the forecast assumptions,
this will not occur until the year 2013. The forecast assumes that the
maturity dates of the Subordinated PIK Bridge Notes will be extended or the
Subordinated PIK Bridge Notes
I-7
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL REPORT (Continued)
will be replaced with notes of similar terms and interest rate. Although there
is no assurance that this will happen, the Company believes that such
assumption is reasonable at this time based on the holders' prior extensions
of the maturity of the Subordinated PIK Bridge Notes. See "PART I - FINANCIAL
INFORMATION, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" elsewhere herein.
Management believes that the projected future results, based on
these assumptions, are the most likely scenario given the Company's
current capital structure. In spite of the fact that the results reflected
in the forecasts show improvement over the historical results achieved
during the past few years, the cumulative net loss (before goodwill
amortization) of approximately $2.6 billion is insufficient to recover the
Company's remaining goodwill balance of $129.9 million. Accordingly, the
Company wrote off its remaining goodwill balance during the third
quarter ended October 30, 1993.
Changes in the Company's goodwill balance are summarized as follows:
<TABLE>
<S> <C>
Balance at January 30, 1993 $ 140,176
Amortization (2,933)
Reclassification to discontinued operations (7,389)
Goodwill write-off (129,854)
Balance at October 30, 1993 $ -
</TABLE>
F. Restructuring Costs:
The third quarter ended October 30, 1993 as originally reported included a
restructuring charge of $24 million which was recorded in error. As a result of
this correction the Company's operating loss, loss from continuing operations
and net loss for the thirteen and thirty-nine weeks ended October 30, 1993,
were reduced by $24 million as compared to the amounts previously reported.
G. Interest Expense, Net:
Interest expense for the thirty-nine week periods ended October 30,
1993 and October 24, 1992 is net of interest income of $3,749,000 and
$3,073,000, respectively. Interest expense for the quarters ended October 30,
1993 and October 24, 1992 is net of interest income of $1,174,000 and $624,000,
respectively.
H. Long-Term Debt:
At October 30, 1993, WP Partners and Blackstone Partners were holders of
the Company's Subordinated PIK Bridge Notes with aggregate principal and accrued
interest balances of approximately $90.3 million and $86.1 million,
respectively. The remainder of the Subordinated PIK Bridge Notes
outstanding aggregated approximately $8.8 million at October 30, 1993. The
Subordinated PIK Bridge Notes mature December 2, 1996, unless extended by
the holders. Holdings anticipates that, at least if certain debt of Group
continues to be outstanding or is refinanced with similarly
restrictive debt, Holdings will not have sufficient cash to pay the
Subordinated PIK Bridge Notes in cash at
I-8
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL REPORT (Concluded)
maturity in 1996 and, unless such maturity is extended by the holders, Holdings
will issue replacement notes as permitted by the terms of the Subordinated
PIK Bridge Notes. If issued, each replacement note will mature December 8,
1998, with sinking fund payments equal to one-third of the outstanding
principal amount due December 1996 and 1997. Holdings' ability to satisfy
the sinking fund payments and the final payment at maturity of the
replacement notes, if issued, will depend on the availability of cash at
Holdings. Holdings anticipates that, at least if certain
debt of Group continues to be outstanding or is refinanced with
similarly restrictive debt, Holdings will not have sufficient cash to satisfy
the sinking fund payments or the final payment at maturity of the replacement
notes, if issued, unless the sinking fund and final maturity dates are extended
by the holders. See Note E elsewhere in this Condensed Consolidated
Financial Report and "PART I -FINANCIAL INFORMATION, Item 2. Management's
Discussion and Analysis of Financial
Condition and Results of Operations" elsewhere herein.
I. Commitments and Contingencies:
See "PART II - OTHER INFORMATION, Item 1. Legal Proceedings" elsewhere
herein.
The ultimate outcome of any 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 effect on the Company's consolidated
financial condition or future results of operations.
J. Subsequent Event:
On November 22, 1993, Group entered into a definitive agreement for the
sale of Kayser-Roth, which agreement is subject to financing and customary
closing conditions. The Company intends to utilize expected proceeds from
the disposition to repay outstanding bank debt of Kayser-Roth and to redeem
a portion of Group's outstanding 15% Subordinated Notes Due 1995. The
balance of the expected proceeds will be used to increase the cash reserves of
Group. In connection with the sale of Kayser-Roth, Group will be
required to indemnify the purchaser for certain
environmental, lease and other liabilities of Kayser-Roth.
I-9
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
As previously announced, on November 22, 1993, Group entered into a
definitive agreement for the sale of Kayser-Roth for gross proceeds of
approximately $233 million (subject to adjustment), which agreement is
subject to financing and customary closing conditions. Approximately $70.5
million of the expected proceeds will be utilized to repay outstanding
borrowings under the Kayser-Roth Credit Agreement described below.
A portion of the remaining expected proceeds is intended
to be utilized to redeem a portion of Group's 15% Subordinated Notes Due 1995
and the balance is to be used to increase the cash reserves of Group. In
connection with the sale of Kayser-Roth, the Company will be required to
indemnify the purchaser for certain environmental, lease and other
liabilities of Kayser-Roth.
During the current quarter, the Company recorded a non-cash charge of
$129.9 million to write off the Company's goodwill balance. The write-off does
not impact the Company's liquidity or future cash flows.
Group's agreements governing outstanding debt restrict the payment of
dividends on its Common Stock. Since January 26, 1991, no dividends could be
paid by Group to Holdings under the most restrictive provisions in the
existing debt agreements of Group. Under these provisions, which are
contained in the indenture (the "11-7/8% Indenture") governing the 11-7/8%
Senior Subordinated Debentures due 2001 (the "11-7/8% Securities"), as of
October 30, 1993, Group would have needed to earn an
additional $872 million of consolidated net income (as defined in the
11-7/8% Indenture, as amended) in order to eliminate the deficit in its
dividend capacity (assuming no change in the other factors used to determine
Group's dividend capacity). Accordingly, the Company does not expect Group to
be permitted to pay dividends to Holdings during fiscal 1993 or 1994 or in
the foreseeable future beyond fiscal 1994, at least so long as the 11-7/8%
Securities are outstanding. Even if the 11-7/8% Securities are refinanced,
there can be no assurance that any new debt would not contain similarly
restrictive covenants. See Note E to Condensed Consolidated Financial Report.
All the consolidated indebtedness of the Company is indebtedness of Group
and its subsidiaries, except for the Subordinated PIK Bridge Notes described
below, which mature December 2, 1996, unless extended by the holders, and
bear interest payable in cash or in additional Subordinated PIK Bridge Notes,
at the option of the Company.
As of October 30, 1993, the Company had total outstanding indebtedness of
$1,020.6 million. Cash interest expense on that indebtedness for the remainder
of fiscal 1993 and for 1994 will be approximately $25 million and $90 million,
respectively. At the end of fiscal 1992, the Company had total outstanding
indebtedness of $997.1 million. Cash interest paid during the thirty-nine week
periods ended October 30, 1993 and October 24, 1992 was approximately $64.0
million and $72.5 million, respectively.
I-10
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
The maturities of long-term debt of the Company (excluding borrowings
under the Kayser-Roth Credit Agreement described below, which the Company
expects to prepay with the expected proceeds from the sale of Kayser-Roth)
during the fourth quarter of fiscal 1993 are $6.0 million and for the 1994
and 1995 fiscal years are $24.4 million and $169.5 million, respectively.
The maturities due in 1995 include $137.4 million of 15% Subordinated Notes,
a portion of which the Company intends to call for early redemption out of
the expected proceeds from the sale of Kayser-Roth. During the thirty-nine
week periods ended October 30, 1993 and October 24, 1992, the Company expended
$72.5 million and $15.1 million, respectively, for the reduction of
indebtedness.
The Company makes capital expenditures on a recurring basis
primarily for repairs and replacement of existing capacity. During the
thirty-nine week periods ended October 30, 1993 and October 24, 1992, the
Company's capital expenditures were $35.3 million and $42.2 million,
respectively. The Company anticipates that capital expenditures for the
full fiscal year will approximate the fiscal 1992 level of $54.2 million.
The Company expects capital spending over the next five years to be increased
from levels of the previous five years principally to support cyclical
growth.
Group has significant obligations relating to postretirement,
casualty, environmental and other liabilities of divested businesses and will
have additional such obligations after the sale of Kayser-Roth. The Company
currently expects that most of these liabilities will be paid over the next
15 years, and a substantial amount of these liabilities will be paid in each
of the next five years.
The Company will require substantial amounts of cash to fund cash
interest payments on its outstanding indebtedness, current maturities of
long-term debt, capital expenditure requirements, liabilities of divested
businesses and seasonal increases in working capital. The Company
presently anticipates that its present cash balances, cash generated from
operations, proceeds from the sale of Kayser-Roth, and borrowings under
existing credit agreements will provide for the Company's cash requirements
through the end of fiscal 1994 and into fiscal 1995. Beyond that, the
Company expects that it will require alternative financings or asset sales
to meet its cash requirements. There can be no assurance as to the timing of
any such financings or asset sales or the proceeds the Company could
realize therefrom. In addition, restrictions in existing debt agreements
of the Company could limit the ability of the Company to effect future
financings or asset sales.
As reflected in the accompanying Consolidated Balance Sheets, the
Company had $123.0 million in cash and cash equivalents at October 30,
1993, as compared to $83.7 million at the beginning of the fiscal year.
Cash and cash equivalents at October 30, 1993 include Group's cash balance
of $119.9 million of which $.3 million was held by C&A and $4.9 million was
held by Kayser-Roth Corporation, each a wholly owned subsidiary of Group,
and $21.6 million was cash on deposit with an insurer to cover future
self-insured losses.
Net cash used in operating activities for the thirty-nine week period
ended October 30, 1993 was $.5 million compared to cash used of $19.5 million
for the thirty-nine week period ended October 24, 1992.
I-11
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
On March 25, 1993, Group sold the Engineering Group for total proceeds,
before transaction expenses and including cash generated by the Engineering
business, of $51.0 million. On October 22, 1993, Group received $35.1 million
from Wickes Lumber Company in exchange for a Wickes Lumber Company
promissory note and warrant that Group had received in partial consideration
for the sale of Wickes Lumber Company in 1988.
In connection with the acquisition of Group by Holdings in 1988,
Group and Holdings entered into a credit agreement with certain banks,
which, as amended through fiscal 1992, made available $30 million in
revolving loans to Group and certain subsidiaries (the "Working Capital
Facility"). Effective March 12, 1993, the credit agreement was further
amended, among other things, to permit the Kayser-Roth financing described
below to take place, to reduce the maximum size of the Working Capital
Facility to $5 million and to limit its use solely to the issuance of
letters of credit. As a result of the reduced availability of letters of
credit under this facility, the Company was required to increase its cash
deposits with an insurer to cover future self-insured losses, which deposits
were approximately $21.6 million at October 30, 1993. Effective
September 10, 1993, certain financial covenants of the Working Capital
Facility were amended and waived and the expiration date was extended to
September 30, 1994. At October 30, 1993, accounts receivable aggregating
approximately $1.6 million, including approximately $1.2 million of Dura
accounts receivable, were pledged as collateral under the Working Capital
Facility. At October 30, 1993, $.9 million of letters of credit were
outstanding under the Working Capital Facility. As a result of Group's
write-down of its goodwill balance by $144.8 million at October 30, 1993,
Group was in default of the net worth and maximum leverage ratio covenants
of the Working Capital Facility as of the last day of the fiscal quarter
ended October 30, 1993. On December 13, 1993, the Working Capital Facility
was amended to waive the default and to reduce the maximum size of
the Working Capital Facility to $1 million.
Group's C&A subsidiary consummated a $225 million credit agreement
with a syndicate of banks on May 22, 1991 that expires on May 15, 1998 (the
"C&A Credity Agreement"). During the thirty-nine week period ended October
30, 1993, C&A made net principal repayments under the C&A Credit Agreement
of $16.5 million and paid Group dividends aggregating $30 million.
Availability under the C&A Credit Agreement is determined monthly based
upon C&A's receivables balance. The C&A Credit Agreement permits C&A to
pay additional dividends to Group only if C&A satisfies a minimum
liquidity requirement of $25 million and then limits the amount
of total dividends to $175 million plus 90% (or 100% if certain specified
ratios are met) of C&A's net income (excluding the impact of Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions") subsequent to April 27,
1991. As of October 30, 1993, an additional $19.6 million was available
to C&A under the C&A Credit Agreement. Although, as of that date,
approximately $46.1 million of additional dividends could be paid to Group
under the dividend restriction in the C&A Credit Agreement, other financial
covenants in the C&A Credit Agreement would limit the amount of
dividends to approximately $3.5 million. C&A and its subsidiaries are
separate corporate entities and the assets of C&A and its subsidiaries are
available first and foremost to satisfy the claims of the creditors of C&A and
such subsidiaries. At October 30, 1993, receivables and fixed assets pledged
as collateral
I-12
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
under the C&A Credit Agreement aggregated approximately $173 million
and $110 million, respectively.
On March 12, 1993, Kayser-Roth and a bank consummated a $40 million
credit agreement. Kayser-Roth initially borrowed $35 million under the credit
agreement of which $26 million was paid to Group as a dividend. On May 27,
1993, Kayser-Roth completed a $75 million credit facility (the "Kayser-Roth
Credit Agreement") with a group of banks to replace the $40 million credit
agreement and, on July 6, 1993, Kayser-Roth paid an additional dividend of
$26 million to Group. The maximum size of the Kayser-Roth Credit Agreement
reduces by $7 million per year and expires on May 31, 1998. The
Kayser-Roth Credit Agreement permits Kayser-Roth to pay additional
dividends to Group in the amount of $9 million, then after May 1994, if
Kayser-Roth satisfies a minimum liquidity requirement of $7.5 million
and certain financial ratios, $5 million plus 50% (or 75% if certain
financial ratios are met) of Kayser-Roth's net income subsequent to January
30, 1993. Kayser-Roth and its subsidiaries are separate corporate entities
and the assets of Kayser-Roth and its subsidiaries are available first and
foremost to satisfy the claims of the creditors of Kayser-Roth and such
subsidiaries. At October 30, 1993, receivables and fixed assets pledged
as collateral under the Kayser-Roth Credit Agreement aggregated
approximately $40 million and $28 million, respectively. Group used
approximately $41 million of the proceeds from the original and the
replacement Kayser-Roth credit facilities to redeem all of its outstanding
12% Sinking Fund Debentures due January 31, 1994 on July 7, 1993. As
indicated above, the outstanding borrowings under the Kayser-Roth Credit
Agreement of $70.5 million will be repaid with the expected proceeds
from the sale of Kayser-Roth.
Group's Canadian subsidiaries have a bank demand line of credit
that made available to them approximately $15.2 million at
October 30, 1993, of which approximately $6.7 million was outstanding as
of that date.
The Company is continually exploring borrowing opportunities and
evaluating financing and strategic alternatives. In the latter part of
fiscal 1992, the Company discussed with its financial advisors the
possible issuance of new indebtedness for the purpose of refinancing
existing debt. In order to enhance its ability to pursue the proposed
refinancing and generally provide the Company with greater flexibility to
position itself for potential debt refinancings and an eventual initial
public equity offering, Group obtained consents of registered holders of
its 11-7/8% Securities to certain amendments of the 11-7/8% Indenture.
During the current quarter, management was informed by its financial advisors
that a refinancing, if accomplished, would not significantly reduce
the Company's consolidated interest expense. In addition, the Company has
been advised that it would not be feasible to raise new equity capital
at this time in order to deleverage the Company.
In 1989 and 1990, Group's Board of Directors authorized expenditures
for the voluntary repurchase from time to time of Group's outstanding publicly
traded debt securities. There were no repurchases of publicly traded
debt during the thirty-nine week periods ended October 30, 1993 and
October 24, 1992. Repurchases may be made from time to time through open
market or privately negotiated transactions. The Company expects to fund
any additional repurchases out of cash from operating activities or
I-13
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
borrowings under existing or new lines of credit. The timing of
any such repurchases will depend on market conditions, available cash and
other factors that the Board of Directors of Group in its sole
discretion deems relevant to the advisability of repurchasing publicly
traded debt.
Additionally, the Board of Directors of the Company has authorized
expenditures for the repurchase from time to time of shares of Merger
Preferred Stock. No new purchases have been made since fiscal 1991.
The timing of any additional repurchases will depend on market conditions,
available cash and other factors that the Board of Directors of the Company in
its sole discretion deems relevant.
Holdings continually evaluates the strategic fit of its various
businesses. As previously announced, Group began selling or disposing
of Builders Emporium's inventory and other assets after Group was
unsuccessful in finding a buyer for the entire home improvement chain.
The Company does not expect the disposition of Builders Emporium to have
a significant impact on the liquidity of the Company. As described above,
the Company entered into a definitive agreement for the sale of Kayser-Roth
on November 22, 1993, which agreement is subject to financing and
customary closing conditions. The expected proceeds from the sale of
Kayser-Roth will be used to repay debt and for general corporate purposes.
In addition, from time to time the Company has evaluated, and continues to
evaluate, acquisitions of other businesses.
On December 8, 1988, the Company borrowed $142 million from
Blackstone Partners, WP Partners and other lenders through the issuance of the
Subordinated PIK Bridge Notes. At October 30, 1993, $185.2 million of the
Subordinated PIK Bridge Notes was outstanding. The Subordinated PIK Bridge
Notes mature December 2, 1996, unless extended by the holders. In the event
the maturity date is not extended by the holders, the Company may, as
permitted by the terms of the Subordinated PIK Bridge Notes, discharge its
obligation to pay each Subordinated PIK Bridge Note at its maturity by
delivering one or more replacement notes in an aggregate principal amount
equal to the principal of and accrued interest on such Subordinated PIK
Bridge Note through the maturity date. Holdings' ability to pay the
Subordinated PIK Bridge Notes at maturity in cash will depend on the
availability of cash at Holdings. As discussed above, since January 26,
1991, no additional cash dividends to Holdings have been permitted under
the most restrictive provisions in the existing debt agreements of
Group, and Holdings does not expect Group to be permitted to pay
dividends to Holdings during fiscal 1993 or 1994 or in the foreseeable
future beyond fiscal 1994, at least so long as the 11-7/8% Securities are
outstanding. Even if the 11-7/8% Securities are refinanced, there can be
no assurance that any new debt would not contain similarly restrictive
covenants. Accordingly, Holdings anticipates that, at least if the 11-7/8%
Securities continue to be outstanding or are refinanced with similarly
restrictive debt, Holdings will not have sufficient cash to pay the
Subordinated PIK Bridge Notes in cash at
maturity in 1996 and, unless such maturity is extended by the holders, Holdings
will issue the replacement notes. The holders of the Subordinated PIK Bridge
Notes have three times extended the maturity date and, in the event
Holdings does not have sufficient cash to repay the Subordinated PIK Bridge
Notes at December 2, 1996, it is possible that the holders would again
extend the maturity date, although there can be no assurance that this would
happen. If issued, each replacement note would
I-14
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
mature December 8, 1998, with sinking fund payments equal to one-third
of the outstanding principal amount due in each of December 1996 and
1997. Holdings' ability to satisfy the sinking fund payments and the
final payment at maturity of the replacement notes, if issued, will
depend on the availability of cash at Holdings. Holdings anticipates that,
at least if the 11-7/8% Securities continue to be outstanding or are
refinanced with similarly restrictive debt, it will not have sufficient
cash to satisfy the sinking fund payments or the final payment at
maturity of the replacement notes, if issued, unless the sinking fund
and final maturity dates are extended by the holders. Any such principal
payment default would enable the holders of more than 25% of the outstanding
principal amount of all notes to accelerate the notes, provided that
Blackstone Partners and WP Partners concur. In addition, with or without
such concurrence, the holders could pursue any other right or remedy
available under law. Upon any voluntary or involuntary liquidation
(including pursuant to any bankruptcy proceeding), dissolution or
winding up of Holdings, holders of its debt would be entitled to be paid out
of the assets of Holdings in full before any distribution is made to
any preferred or common stockholders of Holdings. For information regarding
certain assumptions used in the Company's 35-year forecast, see Note E to
Condensed Consolidated Financial Report.
In connection with the Merger, approximately 4,250,000 shares of
Merger Preferred Stock were issued. In addition, approximately 7,125
shares of Merger Preferred Stock may be issued upon exchange of outstanding
shares of Intermediate Preferred Stock of Group, at the holder's option.
Dividends on the Merger Preferred Stock are payable quarterly and dividends
accruing on or prior to February 1, 1995 may be paid, at the option of the
Company, in cash (at the rate of $3.875 per year) or in additional shares of
preferred stock (at the rate of .04 shares for each $1 of dividends not paid
in cash). Dividends accruing after February 1, 1995 may be paid only in
cash. To date, all dividends have been paid in additional shares of
preferred stock and at October 30, 1993, approximately 6,034,000
shares were outstanding. Since January 25, 1992, and as of October 30,
1993, total liabilities of the Company exceeded total assets based on its
balance sheet and therefore, under Delaware law, the payment of dividends
on the Merger Preferred Stock will require a determination by the Board of
Directors, based on a current valuation of the Company's assets and
liabilities, that adequate surplus exists under Delaware law for the purpose
of paying dividends. The Board of Directors made that determination
with respect to the dividends paid through November 1, 1993, but it is not
possible to predict whether or not such a determination will be able to be
made with respect to future dividends. In addition, Holdings' ability to
pay cash dividends on the Merger Preferred Stock will depend on the
availability of cash at Holdings. As discussed above, since January 26,
1991, no additional cash dividends to Holdings have been permitted under
the most restrictive provisions in the existing debt agreements of Group,
and Holdings does not expect Group to be permitted to pay
dividends to Holdings during fiscal 1993 or 1994 or in the foreseeable future
beyond fiscal 1994, at least so long as the 11-7/8% Securities are
outstanding. Even if the 11-7/8% Securities are refinanced, there can be no
assurance that any new debt would not contain similarly restrictive
covenants. (See Note E to Condensed Consolidated Financial Report).
To the extent that dividends were permitted and there was available cash,
it is the Company's present expectation that it would direct Group from
time to time to declare and pay cash dividends in such available amounts,
if any,
I-15
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
until Holdings had paid in full the principal and interest on the
Subordinated PIK Bridge Notes and, if issued, the replacement notes.
In addition, under certain circumstances, available cash may be used by
the Company to repurchase Merger Preferred Stock or to pay dividends on
the Company's Common Stock.
For information regarding commitments and contingencies,
see Note I to Condensed Consolidated Financial Report.
Results of Operations
As described below, management determined that at the end of the
current quarter the Company's goodwill balance was not recoverable.
Accordingly, the Company wrote off its remaining goodwill balance of $129.9
million as of the end of the current quarter. Except as otherwise noted,
the following discussion of operating results excludes the impact of
this write-off.
During fiscal 1993 and 1992, the Company has had significant changes
in the composition of its continuing operations which are important to
understanding the financial statements. During fiscal 1991, Group
discontinued the remaining businesses of Wickes Manufacturing consisting
of its Dura, Bumper and H. Koch divisions. In July 1992, Group sold the
Bumper and H. Koch divisions. As of the end of fiscal 1992, Group
reclassified Builders Emporium and the Engineering Group as discontinued
operations held for sale. In March 1993, the Company sold the
Engineering Group. At the end of the Company's second fiscal quarter ended
July 31, 1993, the Company decided to retain Dura, which manufactures OEM
convertible top systems for the automotive industry, because no offers
were received that met management's estimate of value. As previously
announced, on November 22, 1993, Group entered into a definitive agreement
for the sale of Kayser-Roth, which agreement is subject to financing and
customary closing conditions. The results of Kayser-Roth, Builders Emporium,
the Engineering Group, Bumper and H. Koch are classified as discontinued
operations for all periods presented. The results of Dura are now
classified in the specialty textiles segment and prior reporting periods
have been restated to reflect Dura as a continuing operation.
For the quarter and thirty-nine weeks ended October 30, 1993, net
sales increased 6.3% to $334.6 million and 1.0% to $963.4 million,
respectively, as compared to the same periods of the prior year. Including
the goodwill write-off, operating loss for the quarter and thirty-nine weeks
ended October 30, 1993 was $96.4 million and $59.6 million, respectively,
compared to operating income of $19.2 million and $57.5 million in the
same periods of the prior year. Excluding the write-off of goodwill in the
current quarter of $129.9 million, operating income increased to $33.5 million
and $70.2 million for the quarter and thirty-nine weeks ended October 30,
1993. Operating income is determined by deducting all operating expenses,
including amortization of goodwill and the write-off of goodwill from
revenues. Operating expenses do not include interest expense.
I-16
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
The Company's specialty textiles segment had operating income of $20.6
million in the current quarter compared to operating income of $15.0 million
in the third quarter last year, principally due to an 8.8% increase in sales
from $181.9 million to $197.9 million. For the thirty-nine week period
ended October 30, 1993, sales increased 2.8% to $562.8 million and
operating income increased 12.8% to $49.0 million as compared to the same
period of the prior year. This segment continues to experience intense
customer pricing pressures as a result of excess capacity at both the
automotive assembly plant and supplier levels. The improvement in sales
and operating income during the quarter resulted from strong demand
generated by a cyclical recovery in the industry as well as a rebound in
sales of certain car models for which the Company is a principal supplier.
Operating income for the home furnishings segment increased from $6.8
million in the third quarter last year to $14.8 million this year on a sales
increase from $132.9 million to $136.7 million. For the thirty-nine weeks
ended October 30, 1993, sales declined 1.5% to $400.5 million and
operating income increased to $28.0 million from $21.8 million in the same
period of the prior year. The increase in sales during the quarter is
principally due to strong sales by the Company's decorative fabrics
business offset by the continued sales decline in the wallcoverings
business. Although housing activity shows signs of a cyclical
recovery, the Company has not experienced increased sales of wallcovering
products. Management attributes this to the shift in consumer demand away
from wallcoverings and the adverse changes in consumer buying patterns
described in Note E of Notes to Condensed Consolidated Financial Report
elsewhere herein. Although it is difficult to measure, management also
believes the Company has lost some market share pending introduction of new
product lines. This segment's increase in operating income resulted from
the strong decorative fabric sales, the benefits of previous
restructuring programs in the wallcoverings business and the reversal
of unneeded inventory reserves of approximately $4.0 million.
The substantial and continuing losses of Builders Emporium and the
inability of Group to sell the Builders Emporium chain as an entity has
left the Company with materially higher leverage and interest costs than
previously anticipated. The inability of the Company to sell Dura at
an acceptable price along with the anticipated sale of Kayser-Roth at a
price and on terms that are worse than management's prior expectations
of value are additional adverse factors. This situation, along with the
adverse industry developments discussed in detail in Note E to Condensed
Consolidated Financial Report elsewhere herein, were considered by
management in its continuing evaluations of the recoverability of the
full cost of its continuing operations.
In spite of the industry-wide competitive pressures being
experienced, the Company, based on the facts presently known to it, is
currently expecting both cyclical and long-term improvement in the
results of operations. However, management's analysis of the above
factors and the long-term industry trends suggested that, given the
Company's current capital structure, a deterioration of the financial
condition of the Company has occurred. As a result, the Company
forecast its operating results forward 35 years, which approximates the
remaining amortization period at October 30, 1993, to determine whether
net income would be sufficient to recover the Company's remaining
goodwill. The Company's forecast assumes that sales growth through 1998
will result
I-17
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (Continued)
from a continuation of the recovery in the automotive and home furnishings
markets. After the business cycle peaks in 1998, the forecast reflects a
moderate cyclical downturn and a contraction of margins. Over the long
term, sales growth will be limited by capacity constraints and inflationary
growth will be partially offset by competitive pricing pressures. Capital
spending over the next five years will be increased from levels of the
previous five years, principally to support the cyclical growth in the
forecast. In general though, capital spending is limited to repair and
replacement of existing capacity. The existing debt of Group (after
applying the proceeds from the sale of Kayser-Roth) is assumed to be
amortized in accordance with its terms. Existing Group debt amortization, as
well as other cash requirements, are assumed to be funded by new borrowings
at an interest rate of 11%, which approximates the current average cost of
borrowing of Group. The forecast assumes that Group's cash flow will be
dedicated to the repayment of Group debt and will be unavailable for the
payment of dividends to Holdings until Group achieves an interest coverage
ratio of 4 to 1, based on Group's net income before interest,
taxes and amortization. Based upon the forecast assumptions, this will
not occur until the year 2013. The forecast assumes that the maturity
dates of the Subordinated PIK Bridge Notes will be extended or the
Subordinated PIK Bridge Notes will be replaced with notes of similar terms
and interest rate. Although there is no assurance that this will happen,
the Company believes that such assumption is reasonable at this time based
on the holders' prior extensions of the maturity of the Subordinated PIK
Bridge Notes.
Management believes that the projected future results, based on
these assumptions, are the most likely scenario given the Company's
current capital structure. In spite of the fact that the operating
results reflected in the forecasts show improvement over the historical
results achieved during the past few years, the cumulative net loss (before
goodwill amortization) of approximately $2.6 billion is insufficient to
recover the Company's remaining goodwill balance of $129.9 million, and
the Company wrote off its goodwill during the third quarter
ended October 30, 1993.
Interest expense, including amounts allocated to discontinued
operations and excluding interest income, increased to $102.5 million for
the thirty-nine week period ended October 30, 1993 compared to $101.9 million
for the same period of the prior year. Loss from continuing operations,
net of tax, was $129.8 million and $155.9 million for the quarter and
thirty-nine week periods ended October 30, 1993 as compared to $7.5 million
and $31.4 million in the comparable periods of the prior year. The
thirty-nine weeks ended October 30, 1993 includes a loss on disposal of
discontinued operations of $127.7 million, principally to provide
additional reserves for losses and costs in connection with the sale or
disposition of Builders Emporium inventory, real estate and other assets
and to provide for employee severance and other costs. Results for the
quarter and thirty-nine week periods ended October 30, 1993 included losses
from discontinued operations, net of tax, of $.1 million and $4.8 million,
respectively, resulting in net losses of $129.9 million and $288.4
million, respectively.
I-18
<PAGE>
COLLINS & AIKMAN HOLDINGS CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (Concluded)
Environmental Matters
The Company's operations are subject to increasingly stringent Federal,
state and local laws and regulations concerning the environment.
These laws and regulations govern ongoing operations and require the
remediation of sites associated with former operations. The Company has,
over time, received notices that it is a potentially responsible party in a
number of administrative proceedings at various sites. It is difficult to
estimate the total cost of remediation due to the complexity of the
environmental laws and regulations, the uncertainty regarding the extent of
the environmental risks and the Company's responsibility and the
selection of alternative compliance approaches. When it has been
possible to reasonably estimate the Company's liability with respect to
environmental matters, provisions have been made in accordance with
generally accepted accounting principles. In the opinion of the
Company's management based on the facts presently known to it, the ultimate
outcome of any of these environmental matters will not have a material
effect on the Company's consolidated financial condition or future results of
operations.
For additional information regarding the foregoing, see "PART II -
OTHER INFORMATION Item 1. Legal Proceedings" elsewhere herein.
I-19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this amendment to be signed on
its behalf by the undersigned thereunto duly authorized on the 20th day
of June 1994.
COLLINS & AIKMAN HOLDINGS CORPORATION
(Registrant)
By: /s/ DAVID J. MCKITTRICK
David J. McKittrick
(on behalf of the Registrant
and as Principal Financial
and Accounting Officer)
