Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended May 1, 2004

Commission File Number 333-88212

COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number: (706) 259-9711

Securities registered pursuant to Section 12(b) of the Act: None

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 mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The Registrant had 1,000 shares of Common Stock, par value $.01 per share, issued and outstanding as of June 14, 2004.

Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

INDEX

2

Table of Contents

PART 1 – FINANCIAL INFORMATION

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)

The accompanying notes are an integral part of these consolidated financial statements.

3

Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and In Thousands)

The accompanying notes are an integral part of these consolidated financial statements.

4

Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE THIRTEEN WEEKS ENDED MAY 1, 2004

(Unaudited and In Thousands, Except Share Amounts)

The accompanying notes are an integral part of these consolidated financial statements.

5

Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and In Thousands)

The accompanying notes are an integral part of these consolidated financial statements.

6

Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Form 10-K, which was filed with the Securities and Exchange Commission. The accompanying unaudited consolidated financial statements, in the opinion of management, include all adjustments necessary for fair presentation. All such adjustments are of a normal and recurring nature.

Based on annual sales and product brands, Collins & Aikman Floorcoverings, Inc. (the “Company”), a Delaware corporation, is a leading manufacturer of floorcovering products for the North American specified commercial carpet market. The Company’s floorcovering products include (i) vinyl-backed six-foot roll carpet and modular carpet tile, and (ii) high style tufted and woven broadloom carpet. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. The ability to provide a “package of product offerings” in various forms, coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions for each of its customers. The Company is headquartered in Georgia, with additional locations in California, Canada, the United Kingdom, Singapore and China.

The Company is a wholly-owned subsidiary of Tandus Group, Inc. (“Tandus Group”). Subsequent to a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree Capital Management, LLC (“Oaktree”) and Banc of America Capital Investors (“BACI”) control a majority of the outstanding capital stock of Tandus Group.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

Cash and cash equivalents include all cash balances and investments with an original maturity of three months or less.

7

Table of Contents

Net inventory balances are summarized below (in thousands):

Revenue is recognized when goods are shipped, which is when legal title passes to the customer. For product installations subject to customer approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively. These billings and expenses were $2.6 million and $2.4 million for the thirteen weeks ended May 1, 2004 and April 26, 2003, respectively.

A customer claims reserve and allowance for product returns is established based upon historical claims experience as a percent of gross sales. The allowance for customer claims is recorded upon shipment of goods and is recorded as a reduction of sales. While we believe the customer claims reserve and allowance for product returns is adequate and the judgment applied is appropriate based upon historical experience for these items, actual amounts determined to be due and payable could differ and additional allowances may be required.

Accrued expenses are summarized below (in thousands):

8

Table of Contents

The Company adopted the provisions of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) on January 27, 2002.

The gross carrying amount and accumulated amortization of the intangible assets subject to amortization as of May 1, 2004 are as follows:

The non-compete was being amortized over a seven-year period using the double-declining balance method and was fully amortized as of January 31, 2004. The patent is being amortized over an eleven-year period using the straight-line method. The supply agreement is being amortized over a three-year period using the straight-line method. In the fourth quarter of fiscal 2003, CAF Extrusion, Inc. (“Extrusion”), a wholly-owned subsidiary, recorded a non-cash impairment charge of $1.6 million, net of tax, related to the supply agreement with the seller. The impairment charge was to reduce the net carrying value of the agreement to its fair value.

For the period ended May 1, 2004, there were no changes to the carrying value of goodwill.

9

Table of Contents

As of May 1, 2004, the Company had one stock-based employee compensation plan, which is described more fully in Note 13 of the audited consolidated financial statements included in the Company’s Form 10-K which was filed with the Securities and Exchange Commission. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company accounts for these options as variable options and records expense based on increases and decreases in the fair market value of the Company’s common stock at the end of each reporting period. These options vest only upon the achievement of certain earnings targets, as defined. As of May 1, 2004 and April 26, 2003, the Company had not recorded any expense related to this plan as the Company had not achieved its earnings targets, and the fair market value of the Company’s common stock has not increased from the date of grant. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,” to the stock-based employee compensation (in thousands).

10

Table of Contents

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46”). Generally, a variable interest entity (“VIE”) is any legal structure used for business purposes that either (1) does not have equity investors with voting rights or (2) has equity investors that do not provide sufficient financial resources for the entity to support its operations. FIN 46 requires a VIE to be consolidated by the company if it is subject to a majority of the risk of loss from the variable interest entity’s operations or entitled to receive a majority of the entity’s residual returns. FIN 46 requires consolidation of a VIE created after January 31, 2003 and initially applied to existing variable interest entities in the first year or interim period beginning after June 15, 2003. In October 2003, a FASB Staff position, No. FIN 46-6, was issued, which deferred the implementation of FIN 46 until the end of the first interim or annual period ending after December 15, 2003 when an interest in a VIE was created before February 1, 2003. The Company adopted the provisions of FIN 46 effective October 26, 2003, which did not have an impact on our financial position, results of operations or cash flows.

The Company’s wholly owned subsidiary Monterey Carpets, Inc. (“Monterey Carpets”) holds a variable interest in a partnership, Chroma Systems Partners (“Chroma”), described in further detail in Note 13 to the consolidated financial statements included herein. The Company currently accounts for the partnership under the equity method of accounting. Although the partnership qualifies as a VIE, the Company does not qualify as a primary beneficiary and is not required to consolidate the partnership. Consolidated net income for the period and the Company’s partnership equity at the end of the period are the same whether the investment in the partnership is accounted for under the equity method or the partnership is consolidated. Any change in disclosure or presentation has no impact on the Company’s debt covenants. The Company’s maximum exposure to loss as a result of its involvement with the partnership is limited primarily to its initial investment in the partnership and its undistributed share of the partnership’s earnings. The partners have historically financed the operation of the partnership by utilizing the initial capital contributions of the partners, internally generated funds and proceeds from the third party loans. To the extent that the operations of the partnership cannot be financed in this manner, the partnership agreement allows for a call for additional capital contributions, which is obligatory to the partners. Historical and current results of the partnership’s operations indicate that current sources of funds will continue to be adequate, and that no such call for an additional capital contribution should be required.

In May 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 modifies the accounting for certain financial instruments that, under previous guidance could be accounted for as either a liability or equity, to require liability treatment for those instruments in a company’s statement of financial position. This statement is effective for our interim periods beginning after December 15, 2003. The adoption of SFAS 150 did not have an impact on our financial position, results of operations or cash flows.

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosure about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132”). The revision of SFAS No. 132 provides for additional disclosures including the description of the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows and components of net periodic benefit cost recognized in interim periods. The revision of SFAS No. 132 is effective for our consolidated financial statements as of January 31, 2004 and did not have an impact on our financial position, results of operations or cash flows.

11

Table of Contents

Effective May 1, 2004, the Company amended its Senior Credit Facility to revise certain covenants. The newly amended principal financial covenants are as follows:

The Company’s fixed charge coverage ratio and interest coverage ratio were 1.3:1.0 and 2.08:1.0, respectively, at May 1, 2004. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Senior Subordinated Notes. The Company was in compliance with all covenants as of May 1, 2004 and, with the amendment, expects to remain in compliance throughout fiscal 2004, although no assurances to that effect can be given.

Total net interest expense was $5.1 million and $5.4 million for the thirteen weeks ended May 1, 2004 and April 26, 2003, respectively, which included minimal interest income.

The Company has adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). This statement addresses reporting of operating segment information and disclosures about products, services, geographic areas, and major customers. Management has reviewed the requirements of SFAS No. 131 concluding that the Company operates its business as two reportable segments: Floorcoverings and Extrusion.

Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance of the segments is evaluated on Adjusted EBITDA, which represents earnings before interest, taxes, depreciation and amortization plus Chroma cash dividends and minority interest in income (loss) of subsidiary, less equity in earnings of Chroma.

The Floorcoverings segment represents all floorcoverings products. These products are six-foot roll carpet, modular carpet tile and tufted and woven broadloom carpet. The Extrusion segment represents the Company’s extrusion plant which was acquired on May 8, 2002. Products in this segment are nylon and polypropylene extruded yarn.

No single customer amounted to or exceeded 10% of the Floorcovering segment’s sales for any period presented. The Extrusion segment’s largest customer accounted for 62.8% and its second largest customer 12.3% of external sales in the thirteen weeks ended May 1, 2004.

12

Table of Contents

The table below provides certain unaudited financial information by segment (in thousands):

13

Table of Contents

Monterey Carpets has a fifty percent (50%) ownership interest in Chroma, which operates a carpet dyeing and finishing plant. Because the Company does not exercise control over Chroma, the Company accounts for its interest in Chroma under the equity method of accounting. The unaudited condensed financial information of Chroma for the thirteen weeks ended May 1, 2004 and April 26, 2003 and as of May 1, 2004 and January 31, 2004, are summarized below (in thousands):

14

Table of Contents

During March 2004, a jury found in favor of Employers Mutual Insurance Companies (“EMC”) related to alleged violations of express oral warranty and implied warranty of fitness for particular purpose and awarded damages totaling $0.8 million. The Company has accrued the full judgment of $0.8 million as of January 31, 2004. During the thirteen weeks ended May 1, 2004, the Company paid approximately $0.7 million of legal expenses related to this lawsuit. The Company continues to deny liability and is evaluating its options, which include a motion for a new trial. If the Company pursues those options and is unsuccessful, it will be required to pay the $0.8 million judgment and related legal and professional fees.

Substantially all domestic employees of the Company who meet eligibility requirements can participate in the Company administered defined benefit plan. Plan benefits are generally based on years of service and employee’s compensation during their years of employment. Our contributions are based on computations by independent actuaries, although the Company may decide to make additional contributions to the plan beyond minimum funding requirements as is deemed appropriate by management. Plan assets at May 1, 2004 and January 31, 2004 were invested primarily in mutual funds and money market funds. During fiscal 2002, the Company elected to freeze the plan.

Net periodic pension cost for the thirteen weeks ended May 1, 2004 and April 26, 2003 comprised the following components:

Employer contributions of $0.3 million and $0.2 million were made for the thirteen weeks ended May 1, 2004 and April 26, 2003, respectively. Required minimum employer contributions of approximately $0.3 million are projected for the remainder of fiscal 2004. The Company also expects to contribute up to an additional $0.9 million above the required minimum contributions during fiscal 2004 as deemed appropriate by management.

Canadian Defined Benefit Plan

Substantially all Canadian employees of Crossley Carpets Ltd. (“Crossley”) who meet eligibility requirements can participate in a defined benefit plan 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 income tax purposes. Assets of the pension plan are held in a trust invested primarily in mutual funds.

15

Table of Contents

Net periodic pension cost for the thirteen weeks ended May 1, 2004 and April 26, 2003 comprised the following components:

Employer contributions for fiscal 2004 are dependent upon the amounts contributed by employees and were $0.1 million for the thirteen weeks ended May 1, 2004. Company contributions are expected to be approximately $0.3 million in fiscal 2004.

Postretirement Benefit Plan

The Company provides a fixed dollar reimbursement for life and medical coverage for certain of the Company’s retirees (over age 65 with 10 years of service or more) under the plan currently in effect. The plan is unfunded.

Net periodic pension costs for the thirteen weeks ended May 1, 2004 and April 26, 2003 comprised the following components:

The 9.75% Notes of the Company are guaranteed by the Company’s domestic subsidiaries. The guarantee of the guarantor subsidiaries is full and unconditional and joint and several and arose in conjunction with the Company’s issuance of the 9.75% Notes on February 20, 2002 and the $109.0 million Senior Credit Facility, which was amended by the Company on February 20, 2002 and May 1, 2004. The guarantees’ terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of May 1, 2004 is $215.6 million. This represents the principal amount outstanding of the Company’s Senior Credit Facility, the 9.75% Notes and accrued interest on both obligations. The condensed consolidating financial information of the Company and its subsidiaries as of May 1, 2004 and January 31, 2004 and for the thirteen weeks ended May 1, 2004 and April 26, 2003 are as follows:

16

Table of Contents

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

May 1, 2004

(Unaudited and In Thousands)