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UNITED STATES
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 27, 2007
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 000-22791
COLLINS & AIKMAN FLOORCOVERINGS, INC.
(Exact name of registrant as specified in its charter)
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)
(706) 259-9711
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None*
* | The Issuer filed a registration statement on Form S-4 (Registration No. 333-88212) effective pursuant to the Securities Act of 1933, as amended, on August 12, 2002. Accordingly, the Issuer files this report pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended, and Rule 15(d)-1 of the regulations thereunder. |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 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
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined by Rule 12b-2 of the Act). Large accelerated filer ¨ Accelerated filer ¨ Non-Accelerated filer x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 9, 2007, 1,000 shares of the Registrant’s common stock, par value $.01 per share, were outstanding and held entirely by Tandus Group, Inc. None of the Registrant’s common stock was held by non-affiliates.
Documents incorporated by reference: None.
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Cautionary Statement Regarding Forward-Looking Statements
Collins & Aikman Floorcoverings, Inc., together with its subsidiaries, unless the context implies otherwise (“the Company”), has made in this Form 10-K and from time to time may make written and oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to investors. The Private Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. All statements contained in this Annual Report on Form 10-K as to future expectations and financial results including, but not limited to, statements containing the words “plans,” “believes,” “intends,” “anticipates,” “expects,” “projects,” “should,” “will” and similar expressions, should be considered forward-looking statements subject to the safe harbor. The forward-looking statements are based on management’s current beliefs and assumptions about expectations, estimates, strategies and projections for the Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The risks, uncertainties and assumptions regarding forward-looking statements include, but are not limited to, product demand and market acceptance risks; product development risks, such as delays or difficulties in developing, producing and marketing new products; the impact of competitive products, pricing and advertising; constraints resulting from the financial condition of the Company, including the degree to which the Company is leveraged; cycles in the construction and renovation of commercial and institutional buildings; failure to retain senior executives and other qualified personnel; unanticipated termination or interruption of the Company’s arrangement with its primary third-party supplier of nylon yarn; debt service requirements and restrictions under credit agreements and indentures; general economic conditions in the United States and in markets outside of the United States served by the Company; government regulations; risks of loss of material customers; and environmental matters. The Company undertakes no obligation to revise these statements following the date of the filing of this Form 10-K for any reason.
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All references in this Form 10-K to the “Company” refer to Collins & Aikman Floorcoverings, Inc. and its subsidiaries.
General
Collins & Aikman Floorcoverings, Inc., a Delaware Corporation formed in 1995, is a manufacturer of floorcovering products principally for the North American specified commercial carpet market. It 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”), specifically OCM Principal Opportunities Fund II, L.P. (the “Oaktree Fund”) and BancAmerica Capital Investors II, L.P. (the “B of A Fund”), respectively, control a majority of the outstanding capital stock of Tandus Group.
The fiscal year of the Company ends on the last Saturday of January. Fiscal years are identified according to the calendar year in which the majority of the months fall. Fiscal years 2006, 2005 and 2004 were 52-week years which ended on January 27, 2007, January 28, 2006 and January 29, 2005, respectively.
The Company’s floorcovering products include (i) six-foot roll carpet and modular carpet tile and (ii) high-style tufted and woven broadloom carpets. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands under the Tandus name 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. The Company is headquartered in Georgia, with additional manufacturing locations in Canada and China.
The Company’s C&A brand products, six-foot roll carpet and modular carpet tile, are highly regarded as a result of their long-term performance, comfort under foot, installation ease, long useful life and advanced backing technology, which includes our RS “peel & stick” adhesive system for structure-backed product installation, and our ER3 carpet recycling technology.
The Company’s Monterey brand is a known design leader in the high-style, fashion-oriented sector of the commercial broadloom carpet market due to its creative designs and intricate patterns in a wide variety of colors, textures, pile heights and densities. The brand has been acknowledged on numerous occasions with various awards for its design leadership.
The Company’s Crossley brand is a recognized design leader in Canada in the tufted and woven broadloom commercial carpet markets. The Crossley brand uses crossweave looms and state of the art tufting technology to produce high-quality woven and tufted products in a wide variety of patterns and prices to meet the needs of interior design professionals, flooring contractors and end users.
The U.S. commercial carpet market is comprised of the specified and non-specified segments. The Company focuses on the specified commercial carpet market, which makes up the majority of the total U.S. commercial carpet market. In the specified commercial carpet market, products are manufactured to the specifications of architects, designers and owners, as compared to the non-specified market in which products are purchased off-the-shelf. The key competitive factors in the specified carpet market are product durability, long-term performance, product design, service and price. The Company believes it is well-positioned to capitalize on trends within the specified commercial carpet market, including (1) six-foot roll carpet continuing to gain market share from other floorcoverings in end markets in which it has distinct performance advantages, such as ease of maintenance, long-term performance and longer useful life; (2) modular carpet tile increasingly being used instead of other flooring surfaces due to increased raised flooring applications, the continuing trend toward modular furniture systems, greater use of modular tile as a design tool, and acceptance of tile in new markets; and (3) increasing customer demand for high-style broadloom carpet with complex patterns and textures.
During the fourth quarter of fiscal 2006, the Company announced its intent to exit manufacturing in the United Kingdom. The Company subsequently entered into a definitive agreement to sell its wholly-owned United Kingdom subsidiary, Tandus Europe Ltd., to Interior Projects Solutions Limited. The transaction closed during the first quarter of fiscal 2007. The subsidiary is accounted for as an asset held for sale at January 27, 2007 and is reported as discontinued operations in the consolidated financial statements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Notes to Consolidated Financial Statements” contained herein in Items 7 and 8 for further discussion relative to discontinued operations.
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Products
The Company designs, manufactures and markets a comprehensive package of complementary products under the C&A, Monterey and Crossley brands, including six-foot roll carpet, modular carpet tile and woven and tufted broadloom carpets. With a portfolio of products available in a wide variety of colors, textures, pile heights, densities and prices, the Company is able to market itself as a one-stop solution for specified commercial carpet. The Company believes that each of its products offers distinctive characteristics for use and application. The Company believes its ability to offer a complete package of product offerings is an advantage since each product provides distinct features and benefits to each application.
Six-Foot Roll Carpet. The Company’s C&A brand holds a leading market position in structure-backed, six-foot roll carpet. Six-foot roll carpet provides performance advantages over twelve-foot broadloom carpet and hard surface flooring and is used primarily in applications that require (i) long-term appearance retention, (ii) ease of maintenance and (iii) comfort under foot. The Company’s six-foot roll carpet utilizes the Powerbond andethos backing technologies and the patented RS “peel and stick” installation system.
Modular Carpet Tile. The Company believes it was the first manufacturer in North America to introduce modular carpet tile technology and is among the leading brands within the domestic modular carpet tile market. The Company’s modular carpet tile products are offered in a variety of sizes to accommodate a range of domestic and international requirements. The Company’s C&A brand carpet tile is being made with ER3, a patented recycled content backing.
Broadloom Carpet. The Monterey and Crossley brands are recognized design leaders in the high-style, fashion-oriented sector of the commercial broadloom carpet market. Sold in twelve-foot rolls, Monterey broadloom is tufted, while Crossley provides both tufted and woven broadloom. In woven broadloom carpet, yarn is woven together to form a single integrated fabric and is distinguishable from tufted broadloom in which yarn is sewn into a primary backing with the later addition of a second backing. Broadloom is particularly suited for fashionable designs and stylish interiors as its width provides a broad area upon which creative designs and intricate patterns can be displayed in a wide variety of colors, textures, pile heights and densities. Specified broadloom carpet is primarily used in end markets where aesthetics and style are the drivers rather than durability or long-term appearance retention. In general, broadloom carpet is more frequently replaced than six-foot roll goods or carpet tile because of its prevalence in spaces which are regularly renovated in order to reflect current fashion trends and styles. The Company’s broadloom carpet utilizes the LifeLONG high-performance, recycled content backing.
Product Features
Powerbond. In 1967, the Company’s C&A brand introduced Powerbond, the industry’s first vinyl cushioned backing system. This closed-cell backing technology exhibits superior durability and cleaning characteristics and reduced seam visibility. Powerbond combines the best attributes of hard surfaces (longer useful life and ease of maintenance) and carpet floorcoverings (comfort, acoustics and aesthetics). It eliminates problems associated with traditional broadloom carpet, including delamination (separation of carpet backing), zippering and unraveling. In addition, these products are installed using chemically welded seams rather than conventional glued seams to provide a homogeneous, impermeable moisture barrier. Other Powerbond features include its ease of repair, long-term appearance retention, a 50% to 100% longer useful life than conventional broadloom carpet and 15 to 25 year non-prorated warranty against delamination, loss of cushion resiliency and watermarking.
RS. In 1988, the Company introduced its RS technology, a patented releasable “peel & stick” adhesive system for Powerbond product installation, which dramatically simplifies installation. The RS technology enables products to be bonded to a surface without the use of wet adhesives thus minimizing disruption to customers during the installation process. Conventional installations with wet adhesives normally require significant downtime for the adhesive to cure prior to installation. The RS technology also addresses carpet-related indoor air quality concerns by eliminating the fumes typically associated with wet adhesives. The RS technology minimizes disruption to usable space, which is critical in each of the Company’s end markets.
ER3. Introduced in 1994, ER3 is a patented 100% recycled content backing for modular carpet tile produced from both post-consumer and post-industrial carpet waste. This closed-loop system (waste-to-product) allows the Company to take used carpet tile (including tile manufactured by other carpet producers) from its customers and use it as raw material for producing new carpet tile. This system eliminates our customers’ disposal costs and keeps waste out of landfills. The 100% recycled content backing results in an overall 34% to 51% total recycled content carpet, when adding in the face fiber weight.
ethos. In 2004, the Company introducedethos, an evolutionary, recycled-content carpet backing, which is a non-chlorinated, high-performance backing for commercial carpet that provides all of the durability attributes of polyvinyl chloride, or PVC. It is made
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from the polyvinyl butyral film reclaimed from recycled laminated safety glass. There was no previous commercial use for this used material that accounts for millions of pounds of landfill waste. Theethos backing represents an alternative to PVC, ethylene vinyl acetate, polyurethane, and polyolefin carpet backings. Additional features are extremely low volatile organic compound emissions, permanent closed cell cushion for durability and lifelong resilience, molecularly bonded seams and repairs, better comfort under foot than conventional cushion or non-cushion backings, better rollability than alternative cushion backings, and better flexibility for ease of installation and positive conformity to the floor. Theethos backing is 100% recyclable into new carpeting.
LifeLONG. In 2006, the Company introduced LifeLONG, a cost-effective, high-performance, recycled content carpet backing for broadloom products. LifeLONG backings contain from 22% to 37% recycled content, depending on style. As a complement to LifeLONG, the Company also introduced Greenbond B-19 during 2006. Greenbond B-19 is a fast-grabbing commercial carpet adhesive that contains 20% post-consumer recycled content.
Crossley Weaving Heritage. Weaving continues to be an important differentiation for the Company in high-end markets. Woven fabrics are unique in construction and valued by professional designers as a result of their more refined styling capability and pattern flexibility. Woven carpets are a single, integrated fabric that offer strength, stability and locked-in-yarns to prevent zippering or pulling. Today, the Company is one of only a few manufacturers in North America with weaving capability.
End Markets
Corporate.The Company offers a complete package of product offerings that addresses virtually every carpeting need of the corporate facility manager and their interior designers and architects, including six-foot roll carpet, modular carpet tile and tufted and woven broadloom carpets. The Company has a dedicated sales force that focuses exclusively on marketing its brands to corporate end use markets. This group works with the individual brands to develop flooring solutions for corporate facility managers, architects and designers. The Company has focused on projects where it tends to excel on the basis of product durability, appearance retention, production design and service rather than pricing. As part of its strategy to increase penetration of this market, the Company has a national accounts program that targets the country’s largest corporations. This group focuses on Fortune 1000 corporations by developing relationships at the senior levels in facility management and purchasing.
Education. The education market has been a primary focus for the C&A brand since the development of Powerbond in 1967. Powerbond’s long-term appearance retention characteristics have been the principal factor behind its success in this market, as customers tend to be particularly sensitive to longer useful life, comfort, acoustics and ease of maintenance. The Powerbond product in many of these installations has been in use for more than 20 years. The Company’s education market includes primary and secondary school markets in addition to the college and university market.
Healthcare. We believe that Powerbond RS is particularly well suited to the healthcare 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 healthcare market, and its moisture impermeability and welded seams make it easy to maintain. Long-term care is the fastest growing segment within the healthcare market due to the compelling demographics of an aging U.S. population. These facilities strive to create a home-like environment for residents, which provides an opportunity for the Company to promote all its products, including the broadloom brands.
Government. The Company markets and sells to federal, state and local governments. The Company is a supplier to the U.S. 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. The Company believes that its success in the government market is due in part to its environmental initiatives, including both the Powerbond RS “peel & stick” backing system and its ER3,ethos and LifeLONG recycled content product offerings.
Retail Stores. The Company focuses on major retail chains, which have the potential for large, nationwide volumes. This segment requires a diverse product offering, as needs vary from high-end boutiques to mass merchandisers. The Company believes that its products are particularly suited to fulfill these needs and provide the added advantage of reducing potential “slip and fall” liability. A significant portion of these sales is managed by the Company’s Source One department, which arranges turnkey product installation for its customers. These installation services and comprehensive project management capabilities are critical to meeting tight construction schedules inherent in the retail market.
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International Markets. The Company participates in the Asian market through its production facility located outside Shanghai in Suzhou, China. The Company maintains sales personnel and distributor relationships that allow the Company to distribute products around the world and strengthen its relationships with the U.S.-based multinational corporate accounts. The Company intends to continue to grow its distributors and sales personnel in strategic international geographic locations to increase its worldwide sales of its products.
The Company exited its manufacturing operations in the United Kingdom through the sale of its subsidiary, Tandus Europe Ltd., at the beginning of fiscal 2007. As part of the sale agreement, the purchaser became the exclusive distributor of the Company’s products in several European countries provided that certain minimum performance and other requirements are satisfied. Management believes this distribution arrangement will allow the Company to reach significantly more of the European market than was possible with its internal sales force.
Sales and Segmentation Strategy
The Company utilizes a segmented sales and marketing strategy to target the specific needs of the customers in each of its end markets. This segmented marketing strategy requires each sales person to develop an expertise in a specific end market, which generally results in greater customer-focused service, comprehensive market coverage and increased sales productivity.
The Company’s C&A, Monterey and Crossley brands provide custom designed products and promotional materials for each end market that highlight the advantages of its products in several key performance categories. Each end market is sensitive to different issues and places value on different product characteristics. The Company has developed its proprietary products and technical innovations in response to the needs of its target customers and segments. While the Company will assist a distributor in order to arrange for delivery and sale, the Company’s primary contact with the customer or customer representative is through its sales force and not through an intermediary. This enables the Company to continue to customize its products and services to respond to the specific needs of the customer. The Company has an in-house design team for each brand that is dedicated to developing new, innovative designs for each primary end market.
Across the brands, the majority of sales are specified by the facility owner or a professional architect or designer. Because each market has distinct performance, design and installation requirements, the Company’s account managers focus on educating the facility owners and architect and design professionals on (i) the technical specifications and proprietary advantages of each product, (ii) unique design capabilities for specific market segments, (iii) environmental initiatives and (iv) available unique, value-added services. The Company believes this end market-oriented strategy has resulted in greater visibility for its brands.
Distribution
The Company sells and distributes its products through three primary channels: direct to the end customer, Source One and dealers. Although a majority of invoicing is through floorcovering dealers, the Company’s primary marketing efforts are focused on the end customer and professional designers and architects who create specifications for the Company’s products. By focusing on the needs of the end customer, the Company’s distribution strategy enables the sales and marketing personnel to establish multiple relationships within specific segments and regions. This flexible distribution philosophy allows the needs of the customer to be the priority rather than mandating from whom the customers can purchase products. The distribution channels are outlined below.
Direct. Direct distribution allows customers to purchase floorcovering products directly from the Company. 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 sub-contracting the project management and installation.
Source One. Source One, an in-house project management department, was the first single-source coordination and turnkey project management service offered by a floorcoverings manufacturer. The department was established to provide a “one phone call,” “single-source” project management service to meet the specific needs of the customer base. The service includes facility measurement, project coordination, order entry, delivery and installation of a wide range of interior finishes from the Company’s broad product offerings. A network of over 300 certified installers and strategic dealer partnerships throughout the United States provides installation.
Dealers. The carpet industry has traditionally sold products to customers through the use of local dealers, who typically broker products from manufacturers and subcontract installation through local installers. Many customers request that the product be
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delivered through a local dealer who provides a range of project management services, including carpet removal, staging and installation services.
Backlog
The backlog of unshipped orders as of January 27, 2007 was approximately $16.2 million. Historically, backlog is subject to significant fluctuations due to the timing of orders for individual large projects.
Product Development and Design
Leadership in product development and design is important in the commercial floorcovering marketplace as designers and customers seek up-to-date product aesthetics. Unlike many competitors, which manufacture standard products that serve a wide cross-section of markets, the Company develops products tailored to the requirements of specific market segments. This process begins with feedback from leading designers and customers in each segment relating to product features such as color, texture and pattern. This marketplace input is vital as the product/styling needs vary for each end market. The product development group is integrated with the sales organization and customer base, which increases the effectiveness of the product development process.
A portion of the Company’s sales involve custom colors or designs requiring accurate interpretation of customer needs and timely conversion into a sample fabric. Each manufacturing facility has dedicated sample equipment that facilitates quick turnaround of custom design requests.
Competition
The commercial floorcovering industry is highly competitive. The C&A brand competes with other brands of structure-backed carpet, as well as twelve-foot broadloom carpet and other types of commercial floorcoverings. The major competitors to the C&A brand are Interface, Inc., Mohawk Industries, Inc. and Shaw Industries, Inc. in six-foot roll goods, and FLOR Commercial (owned by Interface, Inc.), Milliken, Mohawk Industries, Inc. and Shaw Industries, Inc. in modular carpet tile products. The Monterey and Crossley brands compete with other broadloom manufacturers. The major competitors to the Monterey and Crossley brands are Bentley Prince Street (owned by Interface, Inc.), Mohawk Industries, Inc., Atlas Carpets, Masland Carpets and Shaw Industries, Inc. Although the industry recently has experienced consolidation, a large number of manufacturers remain. In North America, the Company maintains that it is the largest manufacturer of six-foot roll carpet, a leading manufacturer of modular carpet tile and a design leader in the high-style specified commercial broadloom carpet market. There are a number of domestic competitors that manufacture these products and certain of these competitors have greater financial resources than the Company.
The Company believes the key competitive factors in its primary floorcovering markets are product durability, product design and color, appearance retention, service and price. In the specified commercial market, six-foot roll carpet and modular carpet tiles compete with various floorcoverings, of which broadloom carpet has the largest market share. The Company’s six-foot roll carpet has gained market share from traditional broadloom carpet in end markets in which it has distinct performance advantages, such as ease of maintenance, appearance retention and longer useful life. Modular carpet tile has also increasingly been used in place of other flooring surfaces due to raised flooring applications, which enable under-the-floor cable management and air delivery systems, and the continuing trend toward modular furniture systems, which require the functionality of tile. Ease of maintenance (replacement) and flexibility of design are also emerging trends for tile. In the high-style specified commercial broadloom carpet market, Monterey and Crossley primarily compete based upon aesthetics, service, quality, and price.
Manufacturing and Facilities
The Company currently operates four manufacturing facilities in Dalton, Georgia including (i) a yarn processing plant with carpet dyeing capabilities, (ii) a carpet tufting plant, (iii) a carpet finishing and tile cutting plant, which includes tile printing and recycling operations and (iv) a customer service center and distribution warehouse. CAF Extrusion, Inc. (“Extrusion”), a yarn extrusion facility, operates in Calhoun, Georgia. The Company also operates a manufacturing, administrative and warehouse facility in Truro, Nova Scotia. On August 10, 2004, the Company and its parent announced plans to consolidate its broadloom operations by closing its Santa Ana, California production facility and moving equipment and production to its manufacturing facility in Truro (the “Facility Maximization”). The Facility Maximization was approved by the Company’s Board of Directors on August 9, 2004, and was completed during fiscal year 2005. The Company operates a tufting and finishing operation outside Shanghai in Suzhou, China which began production in July 2005. The Company operated two manufacturing facilities in the United Kingdom, in addition to leasing one sales and service facility, until the sale of that subsidiary on February 5, 2007. The Company believes its manufacturing capacity is
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sufficient to meet its requirements for the foreseeable future. In addition to these facilities, the Company leases a number of sales and service facilities and one warehouse in the United States.
The following table summarizes our manufacturing, distribution and sales facilities:
Location | Operation | Segment | Owned/Leased | Approximate Square Feet | ||||||
United States | Dalton, Georgia | Yarn Processing | Floorcovering | Owned | 161,500 | |||||
Carpet Dyeing | ||||||||||
Dalton, Georgia | Tufting | Floorcovering | Owned | 154,900 | ||||||
Corporate Offices | ||||||||||
Dalton, Georgia | Six-Foot Finishing | Floorcovering | Owned | 245,800 | ||||||
Tile Finishing | ||||||||||
Tile Printing | ||||||||||
Recycling | ||||||||||
Dalton, Georgia | Environmental Center | Floorcovering | Leased | 198,850 | ||||||
Warehouse | ||||||||||
Dalton, Georgia | Distribution Warehouse | Floorcovering | Owned | 133,200 | ||||||
Sales Service Office | ||||||||||
Finance & Administration | ||||||||||
Dalton, Georgia | Sample Warehouse | Floorcovering | Leased | 105,000 | ||||||
Chicago, Illinois | Sales / Showroom | Floorcovering | Leased | 3,819 | ||||||
Dallas, Texas | Sales / Showroom | Floorcovering | Leased | 1,725 | ||||||
Denver, Colorado | Sales / Showroom | Floorcovering | Leased | 3,214 | ||||||
Marietta, Georgia | Sales / Showroom | Floorcovering | Leased | 2,129 | ||||||
New York, New York | Sales / Showroom | Floorcovering | Leased | 5,821 | ||||||
Los Angeles, California | Sales / Showroom | Floorcovering | Leased | 5,300 | ||||||
San Francisco, California | Sales / Showroom | Floorcovering | Leased | 4,858 | ||||||
Santa Ana, California | Sales / Showroom | Floorcovering | Leased | 3,959 | ||||||
Atlanta, Georgia | Sales / Showroom | Floorcovering | Leased | 4,200 | ||||||
Chicago, Illinois | Sales / Showroom | Floorcovering | Leased | 2,914 | ||||||
Houston, Texas | Sales / Showroom | Floorcovering | Leased | 1,015 | ||||||
Reston, Virginia | Sales / Showroom | Floorcovering | Leased | 3,405 | ||||||
Calhoun, Georgia | Yarn Extrusion | Extrusion | Owned | 125,400 | ||||||
Canada | Truro, Nova Scotia | Administration | Floorcovering | Owned | 367,000 | |||||
Manufacturing | ||||||||||
Warehouse | ||||||||||
Mississauga, Ontario | Sales / Showroom | Floorcovering | Leased | 4,027 | ||||||
United Kingdom* | Blaina, Gwent Wales | Six Foot and Tile | Floorcovering | Owned | 32,000 | |||||
Blaina, Gwent Wales | Finishing | |||||||||
Blaina, Gwent Wales | Warehousing | Floorcovering | Owned | 14,000 | ||||||
Blaina, Gwent Wales | Sales / Warehouse | Floorcovering | Leased | 4,860 | ||||||
Blaina, Gwent Wales | Chemical Mixing | Floorcovering | Leased | 4,000 | ||||||
Sales / Showroom | Floorcovering | Leased | 5,500 | |||||||
Other | Singapore | Sales / Showroom | Floorcovering | Leased | 2,106 | |||||
Singapore | Sales / Showroom | Floorcovering | Leased | 2,153 | ||||||
Malaysia | Office | Floorcovering | Leased | 926 | ||||||
Shanghai, China | Office | Floorcovering | Leased | 915 | ||||||
Suzhou, China | Office / Manufacturing | Floorcovering | Leased | 63,669 | ||||||
Duiven, The Netherlands* | Sales / Office | Floorcovering | Leased | 3,000 |
* | Represent discontinued operations as of January 27, 2007. |
Raw Materials
The Company’s raw materials, including yarn, nylon and polypropylene chip, primary backing, coater materials, and dye chemicals, represent the single largest component of its carpet production costs. Yarn comprises approximately one-third of the total carpet cost structure and in excess of one-half of total raw material costs.
Invista, Inc. (“Invista”) currently supplies a majority of the Company’s requirements for nylon yarn, the primary raw material used in the Company’s floorcovering products. The unanticipated termination or interruption of the supply arrangement with Invista could
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have a material adverse effect on the Company because of the cost and delay associated with shifting this business to another supplier. Historically, the Company has not experienced significant interruptions in the supply of nylon yarn from Invista, although no assurances can be given that it will not experience interruption in supply in the future.
While Invista is an important vendor, it is believed that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista, there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.
The other significant raw materials used by the Company in its carpet manufacturing process include coater materials, such as vinyl resins and primary backing.
The Company has not experienced a problem sourcing nylon, processed yarn or any other raw material used in the manufacture of carpet from suppliers and does not anticipate any difficulties in sourcing these raw materials in the future, although no assurances can be given.
At the Company’s yarn extrusion facility, the significant raw materials are nylon and polypropylene polymer and dye pigments. The chips purchased are used to manufacture the nylon and polypropylene yarn. The dye and pigments give the yarn color for solution dyed yarns.
Patents, Copyrights and Trademarks
The Company owns numerous copyrights and patents in the United States and certain other countries, including the Powerbond RS patent, which expires in 2008, and patents (process and product) for the ER3 backing, which expire in 2014. The Company also owns numerous registered trademarks in the United States, including Powerbond, Powerbond RS,ethos, LifeLONG and Greenbond. Industry knowledge and technology are considered more important to the current business than patents, copyrights or trademarks and, accordingly, the expiration of existing patents or loss of a copyright or trademark is not expected to have a material adverse effect on operations, although no assurances can be given. However, the patents, trademarks, copyrights and trade secrets are actively maintained and enforced.
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 sales in the education end market during the summer months while schools generally are closed and floorcovering can be installed.
Financial Information About Operating Segments and Geographic Areas
The Company operates in two industry segments: Floorcoverings and Extrusion. Information relating to the Company’s two operating segments can be found in Note 14 to the Company’s consolidated financial statements for the year ended January 27, 2007, contained herein in Part II, Item 8. Certain information concerning net sales and long-lived assets by geographic areas can also be found in Note 14.
Customers
No single customer represented 10% or more of the Floorcovering segment’s sales for any year presented in the accompanying financial statements. In the Extrusion segment, the Company had two external customers in each of fiscal years 2006, 2005 and 2004 that exceeded 10% of the segment’s total net sales. For 2006, these customers represented 18.9% and 16.1%. For 2005, these customers represented 22.9% and 12.8%. For 2004, these customers represented 35.4% and 14.0%.
International Sales
International net sales of the Company, excluding those reported as discontinued operations, were $43.6 million, or 12.4%, $28.4 million, or 9.0%, and $32.8 million, or 9.9%, of the Company’s total net sales for fiscal years 2006, 2005 and 2004, respectively. Canadian customers comprised $34.2 million, or 9.7%, $25.9 million, or 8.2%, and $31.0 million, or 9.3%, of total net sales for fiscal years 2006, 2005 and 2004, respectively, while the remaining international sales, primarily to customers in Southeast Asia and South
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America, were $9.4 million, or 2.7%, $2.5 million, or 0.8%, and $1.8 million, or 0.5% in fiscal years 2006, 2005 and 2004, respectively.
Employees
At January 27, 2007, the Company had a total of 1,579 employees of which 1,029 were paid hourly and 550 were salaried. The Company has experienced no work stoppages and it is believed that employee relations are good. All employees are non-union with the exception of approximately 352 manufacturing workers in Canada who are subject to a collective bargaining agreement. The collective bargaining agreement that represents this union expires on June 30, 2009.
Environmental Matters
The Company’s operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. The costs of complying with environmental protection laws and regulations have not had a material adverse impact on the financial condition or results of operations in the past and are not expected to have a material adverse impact in the future. The environmental management systems of the floorcovering manufacturing facilities are certified under ISO 14001.
Available Information
The Company electronically files periodic reports (Forms 10-K, 10-Q and 8-K) with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company also makes its filings available, free of charge, through its website, www.tandus.com, as soon as reasonably practical after the electronic filing of such material with the SEC.
Reports to Security Holders
The Company provides its stockholder with audited annual financial information that has been examined and reported on with an opinion expressed by the Company’s independent auditor, as well as unaudited interim financial information.
The revolver and the indenture governing the Company’s 9.75% notes impose limitations on how the Company conducts its business; as a result, it may not be able to pursue strategies that could be in the best interests of holders of the notes.
The revolver and the indenture governing the 9.75% notes contain restrictions on the Company that could increase its vulnerability to general adverse economic and industry conditions by limiting its flexibility in planning for and reacting to changes in its business and industry. Specifically, these restrictions limit the Company’s ability, to:
• | incur additional debt; |
• | pay dividends and make other distributions; |
• | make investments and other restricted payments; |
• | create liens; |
• | sell assets; and |
• | enter into transactions with affiliates. |
As a result of these restrictions, the Company may not be able to pursue business strategies that could be in the best interests of holders of the notes.
The Company is controlled by two principal shareholders and they may require it to take actions, such as increasing the Company’s indebtedness, which may not be in the best interests of holders of the 9.75% notes.
The Company is a wholly-owned subsidiary of Tandus Group. The Oaktree Fund and the B of A Fund, together with members of
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management, own approximately 65% of the issued and outstanding voting stock of Tandus Group. Consequently, these owners have the ability to control the Company’s business and affairs by virtue of their ability to elect a majority of Tandus Group’s and the Company’s board of directors. The directors have the authority to make decisions affecting the Company’s capital structure, including the issuance of additional indebtedness. The Company cannot make any assurances that the interests of the Oaktree Fund and the B of A Fund do not or will not conflict with the interests of the holders of the 9.75% notes.
Raw materials price increases may reduce results of operations.
The cost of raw materials represents the single largest component of the Company’s manufacturing costs. Of the raw materials used, yarn constitutes in excess of one half of total raw materials costs. Increases in the costs of raw materials could adversely affect profitability. Although pricing may be increased in an effort to offset increases in raw material costs, such adjustments may not be sufficient to, or occur in a timely manner such as to, prevent a materially adverse effect on results of operations and cash flows.
The commercial floorcovering industry is highly competitive.
The floorcovering industry is highly competitive. The Company faces competition from a number of domestic manufacturers and independent distributors of floorcovering products and, in certain product areas, foreign manufacturers. There has been significant consolidation within the floorcovering industry during recent years that has caused a number of the Company’s existing and potential competitors to be larger and have greater resources and access to capital. Competitive pressures may result in decreased demand for the Company’s products and in the loss of market share. In addition, the Company faces, and will continue to face, pressure on sales prices of its products from competitors.
The floorcovering industry is cyclical and prolonged declines in commercial construction activity or corporate remodeling and refurbishment could have a material adverse effect on the Company’s business.
The U.S. floorcovering industry is cyclical and is influenced by a number of general economic factors including commercial construction activity in new construction as well as remodeling. New construction is cyclical in nature. To a somewhat lesser degree, this also is true with commercial remodeling. A prolonged decline in any of these industries could have a material adverse effect on the Company’s business, financial condition and results of operations.
Fuel and energy price increases may reduce results of operations.
The Company’s manufacturing operations and shipping needs require the use of substantial amounts of electricity, natural gas, and petroleum based products, which are subject to price fluctuations due to changes in supply and demand. Significant increases in the cost of these commodities may have adverse effects on the Company’s results of operations and cash flows should the Company be unable to pass these increases to its customers through means of price increases in a timely manner.
The Company is subject to federal, state and local laws and regulations relating to environmental matters.
While the costs of complying with environmental protection laws and regulations have not had a material adverse impact on the financial condition or results of operations of the Company in the past, changes in laws and regulations or the discovery of new information could have a potential future adverse effect.
Item 1B. Unresolved Staff Comments
None.
For information concerning the principal physical properties of the Company, see “Item 1. Business – Manufacturing and Facilities” contained herein.
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On September 18, 1998, James Bradley Thomason (“Thomason”) filed an action in the District Court, 285th Judicial District, Bexar County, Texas (the “Court”) against Linda Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the “Gomez Defendants”), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas agencies (the “Contract”). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Company’s motion for summary judgment and as a result, all of Thomason’s claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the “Appellate Court”) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys’ fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys’ fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.
Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006, has filed its brief as Appellant, and the Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability, including post judgment interest of approximately $2,069,000 related to this case in its accompanying statements of financial condition.
On June 21, 2005, the Company filed in the United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the “Court”) a joint lawsuit with Shaw Industries Group, Inc. (“Shaw”) and Mohawk Industries, Inc. (“Mohawk”) against Interface, Inc. (“Interface”), regarding a patent on a particular pattern of carpet tile that Interface recently received (the “Rome Action”). The Rome Action asks the Court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interface’s suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. On December 19, 2006, the Court conducted what is known as a “MarkmanHearing” regarding interpretation of four disputed terms used in Interface’s patent. To date, the Court has not yet issued its order regarding the disputed terms and no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.
The Company is involved in litigation from time to time. When litigation arises, the Company may create a litigation accrual in order to pay for damages for which it might be liable. In some circumstances, it may settle litigation without going to trial. During fiscal 2005, the Company released a litigation accrual of $0.8 million related to a suit with Employers Mutual Insurance Companies and settled a suit for $0.4 million brought by Enron Energy Services.
From time to time the Company is also 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. Management believes 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 or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
As of April 9, 2007, there was one holder of record of the Company’s common stock. There is no public trading market for the Company’s common stock, and the Company did not repurchase any of its stock in the fourth quarter of fiscal 2006.
For information relating to compensation plans under which equity securities are authorized for issuance, see Item 12 contained herein.
Dividends
The declaration and payment of dividends is at the discretion of the Board of Directors and depends upon, among other things, investment policy and opportunities, results of operations, financial condition, cash requirements, future prospects, and other factors that may be considered relevant by the Board at the time of its determination. Such other factors include certain limitations in covenants contained in the Company’s credit facilities and in the indentures governing the public indebtedness. The Company paid dividends of $16.1 million to its parent, Tandus Group, Inc., in fiscal 2006. No dividends were paid during fiscal years 2005 and 2004.
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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 in this Annual Report on Form 10-K. The financial data as of and for the years ended January 27, 2007, January 28, 2006, January 29, 2005, January 31, 2004 and January 25, 2003 have been derived from the audited financial statements of the Company. The following financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto contained in Item 8 herein.
Fiscal Year Ended (1) | ||||||||||||||||||||
January 27, 2007 (Fiscal 2006) | January 28, 2006 (Fiscal 2005) | January 29, 2005 (Fiscal 2004) | January 31, 2004 (3) (Fiscal 2003) | January 25, 2003 (2) (Fiscal 2002) | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Operating Data: | ||||||||||||||||||||
Net Sales | $ | 350,365 | $ | 316,213 | $ | 331,946 | $ | 302,016 | $ | 315,072 | ||||||||||
Cost of Goods Sold | 231,891 | 221,039 | 219,496 | 201,588 | 205,573 | |||||||||||||||
Gross Profit | 118,474 | 95,174 | 112,450 | 100,428 | 109,499 | |||||||||||||||
Selling, General and Administrative Expenses | 78,523 | 76,654 | 75,943 | 71,993 | 66,503 | |||||||||||||||
Other Intangible Asset Amortization (4) | 2,455 | 2,620 | 3,112 | 8,846 | 5,461 | |||||||||||||||
Operating Income (Loss) | 37,496 | 15,900 | 33,395 | 19,589 | 37,535 | |||||||||||||||
Equity in Earnings of Affiliate | — | — | 893 | 1,386 | 1,733 | |||||||||||||||
Net Interest Expense | 20,650 | 20,082 | 20,443 | 21,304 | 23,883 | |||||||||||||||
Gain (Loss) from Discontinued Operations (5) | 979 | (1,720 | ) | (912 | ) | (571 | ) | (126 | ) | |||||||||||
Net Income (Loss) (6) | 10,205 | (4,629 | ) | 6,703 | 1,234 | 5,781 | ||||||||||||||
Other Financial Data: | ||||||||||||||||||||
Adjusted EBITDA (7) | $ | 50,819 | $ | 37,952 | $ | 51,438 | $ | 42,622 | $ | 53,342 | ||||||||||
Depreciation and Amortization | 13,315 | 12,641 | 13,135 | 15,926 | 13,875 | |||||||||||||||
Capital Expenditures | 7,213 | 10,461 | 11,862 | 8,830 | 9,027 | |||||||||||||||
Dividend to Parent (8) | 16,053 | — | — | 2,263 | 3,153 | |||||||||||||||
Cash Flow Data: | ||||||||||||||||||||
Net Cash Provided By (Used In) Operating Activities | $ | 28,156 | $ | (4,646 | ) | $ | 27,245 | $ | 20,019 | $ | 27,482 | |||||||||
Net Cash Used In Investing Activities | (7,086 | ) | (10,023 | ) | (11,047 | ) | (5,191 | ) | (42,274 | ) | ||||||||||
Net Cash Provided By (Used In) Financing Activities | (19,895 | ) | (5,184 | ) | (1,523 | ) | (24,253 | ) | 31,240 | |||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Total Assets | $ | 299,136 | $ | 302,528 | $ | 318,610 | $ | 299,148 | $ | 319,015 | ||||||||||
Long-Term Debt | 197,805 | 197,673 | 207,536 | 207,516 | 218,666 |
(1) | The Company’s results of operations for years prior to acquisitions may not be comparable to the Company’s results of operations for subsequent years. |
(2) | The Company acquired Extrusion in May 2002. The results of the acquired business have been included in the Company’s consolidated financial statements since the date of acquisition. |
(3) | The fiscal year ended January 31, 2004 included 53 weeks. |
(4) | In the fourth quarter of fiscal 2003, Extrusion recorded a non-cash impairment charge of $2.6 million related to a supply agreement. The impairment charge was to reduce the net carrying value of the supply agreement to its fair value. |
(5) | In conjunction with the fourth quarter 2006 classification of Tandus Europe Ltd. as an asset held for sale, the Company recognized a loss of $2.3 million before tax to write down the investment to its net realizable value and incurred disposal-related charges of $0.4 million before tax. These charges resulted in an after-tax gain of $3.0 million and are included in the fiscal 2006 gain discontinued operations. |
(6) | Included in net income for fiscal 2002 is a non-cash charge of $3.2 million for the cumulative effect of a change in accounting principle related to goodwill. |
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(7) | Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-down of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. The Company utilizes Adjusted EBITDA as a benchmark for its annual budget and long range plan and as a valuation method for potential acquisitions. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies. A reconciliation of net income (loss) to Adjusted EBITDA is presented in the following table: |
Fiscal 2006 | Fiscal 2005 | Fiscal 2004 | Fiscal 2003 | Fiscal 2002 | ||||||||||||||||
Net Income (Loss) | $ | 10,205 | $ | (4,629 | ) | $ | 6,703 | $ | 1,234 | $ | 5,781 | |||||||||
Cumulative Effect of Change in Accounting Principle | — | — | — | — | 3,240 | |||||||||||||||
(Gain) Loss from Discontinued Operations | (979 | ) | 1,720 | 912 | 571 | 126 | ||||||||||||||
Intangible Asset Impairment Charge | — | — | — | 2,616 | — | |||||||||||||||
Income Tax Expense (Benefit) | 7,162 | (358 | ) | 5,961 | (2,147 | ) | 6,788 | |||||||||||||
Net Interest Expense | 20,650 | 20,082 | 20,443 | 21,304 | 23,883 | |||||||||||||||
Gain on Forgiveness of Debt | (228 | ) | — | — | — | (570 | ) | |||||||||||||
Depreciation | 10,860 | 10,021 | 10,023 | 9,696 | 8,414 | |||||||||||||||
Amortization | 2,455 | 2,620 | 3,112 | 6,230 | 5,461 | |||||||||||||||
Chroma Cash Dividends | — | — | 922 | 3,522 | 1,932 | |||||||||||||||
Equity in Earnings of Chroma | — | — | (893 | ) | (1,386 | ) | (1,733 | ) | ||||||||||||
Minority Interest in Income (Loss) of Subsidiary | — | (24 | ) | 97 | 13 | 20 | ||||||||||||||
Facility Maximization Costs | — | 8,158 | 3,986 | — | — | |||||||||||||||
Non-Recurring Costs Associated With Successful Acquisition | — | — | — | 969 | — | |||||||||||||||
Other | 694 | 362 | 172 | — | — | |||||||||||||||
Adjusted EBITDA | $ | 50,819 | $ | 37,952 | $ | 51,438 | $ | 42,622 | $ | 53,342 | ||||||||||
(8) | Dividend to parent in fiscal years 2003 and 2002 represents payments of certain expenses attributable to and paid by the Company on behalf of its parent, Tandus Group. |
Financial results previously reported were revised in the preceding tables for the classification of the Company’s wholly-owned United Kingdom subsidiary, Tandus Europe Ltd., as a discontinued operation, as discussed in Note 3 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL
The following management assessment should be read in conjunction with the consolidated financial statements and notes thereto contained herein in Item 8. With the exception of historical information, the discussions in this section contain forward-looking statements that involve certain risks and uncertainties that could cause future results to differ materially from those discussed below.
Overview
Collins & Aikman Floorcoverings, Inc. (the “Company”), a Delaware corporation, is a manufacturer of floorcovering products for the North American specified commercial carpet market. The Company’s floorcovering products include (i) six-foot roll carpet and modular carpet tile and (ii) high-style tufted and woven broadloom carpets. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands under the Tandus name 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” coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions. The Company is headquartered in Georgia, with additional manufacturing locations in Canada and China. See “Acquisitions and Dispositions” contained herein for information regarding the Company’s United Kingdom manufacturing location.
The Company is a wholly-owned subsidiary of Tandus Group, Inc. (“Tandus Group”). As a result of a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree and BACI, specifically the Oaktree Fund and the B of A Fund, respectively, control a majority of the outstanding capital stock of Tandus Group.
On February 2, 2007, the Company hired Glen A. Hussmann as its new President and Chief Executive Officer, replacing Edgar M. Bridger who resigned effective November 30, 2006.
Acquisitions and Dispositions
During the fourth quarter of fiscal 2006, the Company announced its intent to exit manufacturing in the United Kingdom. The Company entered into a definitive agreement to sell its United Kingdom subsidiary, Tandus Europe Ltd., to Interior Projects Solutions Limited. The transaction closed during the first quarter of fiscal 2007. The subsidiary is accounted for as an asset held for sale at January 27, 2007 and is reported as discontinued operations in the consolidated financial statements. See Note 3 of the “Notes to Consolidated Financial Statements” contained herein in Item 8 for further discussion relative to discontinued operations.
In August 1998, the Company acquired a 51.0% interest in Collins & Aikman Floorcoverings Asia Pte. Ltd. (“C&A Asia”), a start-up commercial carpet distribution venture in Singapore. On December 30, 2005, the Company purchased the remaining 49.0% of C&A Asia for approximately $0.3 million. Prior to that, the results had been reported on a consolidated basis with the 49.0% reflected as minority interest.
Results of Operations
As noted previously, the Company’s United Kingdom subsidiary is accounted for as an asset held for sale at January 27, 2007 and is reported as discontinued operations in each of the years for which results are presented. Accordingly, the discussions below, with the exception of net income (loss), do not include information related to the United Kingdom subsidiary unless otherwise stated.
The following table sets forth certain operating results as a percentage of net sales for the periods indicated:
Fiscal Year Ended | |||||||||
January 27, 2007 (Fiscal 2006) | January 28, 2006 (Fiscal 2005) | January 29, 2005 (Fiscal 2004) | |||||||
(Percentage of net sales) | |||||||||
Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of Goods Sold | 66.2 | % | 69.9 | % | 66.1 | % | |||
Gross Profit | 33.8 | % | 30.1 | % | 33.9 | % | |||
Selling, General and Administrative Expenses | 22.4 | % | 24.2 | % | 22.9 | % | |||
Amortization | 0.7 | % | 0.9 | % | 0.9 | % | |||
Operating Income | 10.7 | % | 5.0 | % | 10.1 | % | |||
Net Interest Expense | 5.9 | % | 6.4 | % | 6.2 | % | |||
Net Income (Loss) | 2.9 | % | -1.5 | % | 2.0 | % | |||
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Fiscal Year Ended January 27, 2007 (“fiscal 2006”)
Compared with Fiscal Year Ended January 28, 2006 (“fiscal 2005”)
Net Sales.Net sales for fiscal 2006 were $350.4 million, an increase of 10.8% from $316.2 million in fiscal 2005. Net sales of the Company’s Floorcoverings segment were $325.9 million for fiscal 2006 as compared to $289.4 million for fiscal 2005, an increase of $36.5 million or 12.6%, primarily attributable to the North American operations. Within these operations, the increase in the Floorcoverings segment’s net sales was primarily attributable to an 8.8% increase in broadloom sales combined with a 10.9% increase in sales of structure-back carpets (six foot and carpet tile). The increase in overall net sales was primarily volume driven across all of its markets coupled with increases in average selling prices. In addition, in fiscal year 2005, the Floorcoverings segment experienced lower sales largely due to complications related to the Facility Maximization, as discussed more fully herein and in Note 11 of the “Notes to Consolidated Financials Statements” contained herein in Item 8. The current year results reflect an increase in both Institutional sales (Healthcare, Education and Government) and Corporate sales, including Retail, of 9.0% and 12.8%, respectively. Net sales of the Extrusion segment were $24.5 million for fiscal 2006 as compared to $26.8 million for fiscal 2005, a decrease of $2.3 million or 8.6%. The decline in sales for the Extrusion segment was due to lower sales volume, which occurs as internal utilization of production increases.
Cost of Goods Sold. Cost of goods sold was $231.9 million, or 66.2% of sales, in fiscal 2006 as compared to $221.0 million, or 69.9% of sales, in fiscal 2005. The increase was primarily due to increased sales as wells as higher raw material costs. Included in the fiscal 2005 expenses is $6.2 million related to the Facility Maximization. (See further discussion in “Liquidity and Capital Resources” contained herein and Note 11 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.) Excluding the Facility Maximization costs, cost of goods sold for fiscal year 2005 was $214.8 million, or 67.9% of sales. Cost of sales in the prior year was also impacted by a $0.5 million write-down related to inventory that was not transferred from the Santa Ana, California facility to the Truro, Nova Scotia facility. As a percentage of sales, the decrease in cost of goods sold was primarily due to changes in product mix and manufacturing efficiencies inclusive of the benefits of the completion of the Facility Maximization. Partially offsetting these cost improvements, the Company has experienced a general increase in the prices of certain raw materials.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for fiscal 2006 were $78.5 million, an increase of 2.3% from $76.7 million in fiscal 2005. As a percentage of sales, these expenses decreased to 22.4% from 24.2% in the prior year. During fiscal 2006, the Company incurred increased professional services expense of $3.6 million primarily due to litigation charges related to the Company’s legal matters, as more fully explained in “Liquidity and Capital Resources” contained herein, and certain exit costs related to the departure of the Company’s former president and chief executive officer. In addition, the Company incurred higher commissions expense of $2.3 million related to the fiscal year’s increased sales and incurred an increased loss in foreign currency transaction of $0.3 million. Partially offsetting these expenses was a decrease in salaries, taxes and benefits of $1.7 million. Included in the fiscal 2005 expenses are Facility Maximization costs of $2.0 million and supplementary administration costs of $1.1 million related to the delayed exit from the Santa Ana, California facility.
Amortization.Intangible asset amortization decreased to $2.5 million for fiscal 2006 as compared to $2.6 million for fiscal 2005.
Gain (Loss) on Early Extinguishment and Forgiveness of Debt.During fiscal 2006, the Company recorded a gain of $0.2 million related to the forgiveness of a portion of its outstanding sinking fund bonds with the Nova Scotia government (see “Liquidity and Capital Resources” contained herein and Note 11 of the “Notes to Financial Statements” contained herein in Item 8). In addition, the Company recorded a loss of $0.4 million in fiscal 2006 due to the write-off of deferred financing fees related to the refinancing of its senior credit facility (see “Liquidity and Capital Resources” contained herein and Note 9 of the “Notes to Consolidated Financial Statements” contained herein in Item 8). During fiscal 2005, the Company purchased its own senior subordinated notes in the open market with a face value of $10.0 million for an aggregate price of $9.0 million. These notes have been classified as defeased. The Company realized a $1.0 million gain on the purchase, which was partially offset by a write-off of a portion of the deferred financing fees related to these issuances in the amount of $0.2 million.
Interest Expense. Net interest expense for fiscal years 2006 and 2005 was $20.7 million and $20.1 million, respectively, which included interest income of $0.4 million and $0.3 million, respectively.
Income Taxes. The Company incurred income tax expense of $7.2 million for fiscal 2006 as compared to a benefit of $0.4 million for fiscal 2005. During fiscal 2006 the Company reported net income from its continuing operations, compared to a net loss from continuing operations during fiscal 2005. During fiscal 2005, net losses were incurred in the Company’s foreign operations, against which no tax benefit could be recognized.
Discontinued Operations.The Company reported a loss of $4.7 million before tax and a gain of $1.0 million after tax during fiscal 2006 related to its United Kingdom subsidiary, Tandus Europe Ltd., as compared to a loss of $1.7 million, before and after tax, during fiscal 2005.
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Included in the fiscal 2006 loss is a charge of $2.3 million before tax to write down the subsidiary’s assets to their net realizable value and a charge of $0.4 million before tax to record certain disposal related expenses. These charges resulted in an after-tax gain of $3.0 million.
Net Income (Loss). The Company reported net income of $10.2 million for fiscal 2006 compared to net loss of $4.6 million for fiscal 2005. The primary contributor to the increase in fiscal 2006 was an increase in net sales, as more fully discussed above.
Adjusted EBITDA.Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-down of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt. Adjusted EBITDA for fiscal 2006 increased to $50.8 million from $38.0 million in fiscal 2005. As a percentage of sales, Adjusted EBITDA was 14.5% in fiscal 2006 compared to 12.0% in fiscal 2005. The increase in fiscal 2006 was principally due to higher sales volume in the Floorcoverings segment and other items as more fully discussed above. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.
A reconciliation of net income (loss) to Adjusted EBITDA is as follows (in thousands):
Fiscal Year Ended | ||||||||
January 27, 2007 | January 28, 2006 | |||||||
Net Income (Loss) | $ | 10,205 | $ | (4,629 | ) | |||
Income Tax Expense (Benefit) | 7,162 | (358 | ) | |||||
Net Interest Expense | 20,650 | 20,082 | ||||||
Depreciation | 10,860 | 10,021 | ||||||
Amortization | (979 | ) | 2,620 | |||||
(Gain) Loss from Discontinued Operations | 4,692 | 1,720 | ||||||
Minority Interest in Loss of Subsidiary | — | (24 | ) | |||||
Facility Maximization Costs | — | 8,158 | ||||||
Gain on Forgiveness of Debt | (228 | ) | — | |||||
Other | 694 | 362 | ||||||
Adjusted EBITDA | $ | 50,819 | $ | 37,952 | ||||
Fiscal Year Ended January 28, 2006 (“fiscal 2005”)
Compared with Fiscal Year Ended January 29, 2005 (“fiscal 2004”)
Net Sales.Net sales for fiscal 2005 were $316.2 million, a decrease of 4.7% from $331.9 million in fiscal 2004. Net sales of the Company’s Floorcoverings segment were $289.4 million for fiscal 2005 as compared to $308.7 million for fiscal 2004, a decrease of $19.3 million or 6.3%, primarily attributable to the North American operations. Within these operations, the decrease in the Floorcoverings segment’s net sales was primarily attributable to complications associated with the Facility Maximization, as discussed more fully herein and in Note 11 of the “Notes to Consolidated Financials Statements” contained herein in Item 8, which resulted in delays in delivering customer orders. These complications contributed to reduced order activity across all of the Company’s product types and end use categories, with the greatest impact on broadloom sales, which declined 17.6% in fiscal 2005, and on sales to the Corporate segment. Also contributing to the decline in net sales was federal budget pressures which impacted federal government spending. Net sales of the Extrusion segment were $26.8 million for fiscal 2005 as compared to $23.2 million for fiscal 2004, an increase of $3.6 million, or 15.5%. The increase in sales for the Extrusion segment was due to overall higher demand.
Cost of Goods Sold. Cost of goods sold was $221.0 million, or 69.9% of sales, for fiscal 2005 as compared to $219.4 million, or 66.1% of sales, in fiscal 2004. The increase was primarily due to the inclusion in the fiscal 2005 expenses of $6.2 million related to the Facility Maximization, as compared to 2004 expenses of $2.6 million. (See further discussion in “Liquidity and Capital Resources” contained herein and Note 11 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.) Excluding the Facility Maximization costs, cost of goods sold for fiscal years 2005 and 2004 were $214.8 million, or 67.9% of sales, and $216.8 million, or 65.3% of sales, respectively. Cost of sales during fiscal 2005 was also impacted by a $0.5 million write-down related to inventory that was not transferred from the Santa Ana, California facility to the Truro, Nova Scotia facility. In addition, the Company also
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experienced increases in the prices of several raw materials, including yarns, resins, and other agents and chemicals. As a percentage of sales, the increase in costs of goods sold was primarily attributable to lower overall sales volume in addition to the impact of rising raw material prices.
Selling, General and Administrative Expenses.Selling, general and administrative expenses for fiscal 2005 were $76.7 million, an increase of 0.9% from $76.0 million in fiscal 2004. As a percentage of sales, these expenses increased to 24.2% from 22.9% in the prior year. During fiscal 2005, the Company incurred $1.1 million of supplementary administrative costs related to the delayed exit from the Santa Ana, California facility, $0.9 million in severance charges related to specific staffing reductions and recorded a $0.4 million litigation settlement related to the Company’s previous ownership interest in Chroma Systems Partners due to an alleged claim by Enron Energy Services, Inc. The Company also recorded a charge of $1.1 million related to a February 10, 2006 jury verdict in a litigation matter in Texas regarding a certain carpet-buying contract. (See further discussion in Note 16 of the “Notes to Consolidated Financial Statements” contained herein in Item 8 and Legal Proceedings in Part I, Item 3.) The Company incurred Facility Maximization costs of $2.0 million during fiscal 2005 as compared to the prior year of $1.4 million. In addition, the Company experienced a decrease in the foreign currency transaction gain of $0.9 million and higher samples expense of approximately $1.0 million. These increases were partially offset by lower salaries, taxes and benefits of $2.8 million.
Amortization.Intangible asset amortization decreased to $2.6 million for fiscal 2005 as compared to $3.1 million for fiscal 2004. The decrease was due to the Company’s extrusion supply agreement being fully amortized as of April 30, 2005.
Gain on Early Extinguishment of Debt.During fiscal 2005, the Company purchased in the open market subordinated notes with a face value of $10.0 million for an aggregate price of $9.0 million. These notes have been classified as defeased. The Company realized a $1.0 million gain on the purchase, which was partially offset by a write-off of a portion of the deferred financing fees related to these issuances in the amount of $0.2 million.
Interest Expense. Net interest expense for fiscal years 2005 and 2004 was $20.1 million and $20.4 million, respectively, which included interest income of $0.3 million and $0.2 million, respectively.
Income Taxes. The Company had an income tax benefit of $0.4 million for fiscal 2005 as compared to expense of $6.0 million for fiscal 2004. During fiscal 2005, the Company experienced a net loss in its domestic operations against which a tax benefit was recorded. During fiscal 2004, the Company experienced net profitability in its domestic operations against which tax expense was recorded. During both fiscal years 2005 and 2004, net losses were incurred in the Company’s foreign operations, against which no tax benefit can be recognized. In addition, a $0.9 million valuation allowance was recorded in fiscal 2004 against certain state income tax credits related to the closure of the Company’s Santa Ana, California facility (see further discussion in Note 10 of the “Notes to Consolidated Financial Statements” contained herein in Item 8).
Discontinued Operations. The Company reported a loss of $1.7 million, before and after tax, during fiscal 2005 related to its United Kingdom subsidiary, Tandus Europe Ltd., as compared to a loss of $0.9 million, before and after tax, during fiscal 2004.
Net Income (Loss). The Company incurred a net loss of $4.6 million for fiscal 2005 compared to net income of $7.6 million for fiscal 2004. The primary contributors were a decrease in net sales coupled with higher Facility Maximization charges, as discussed above.
Adjusted EBITDA.Adjusted EBITDA for fiscal 2005 decreased to $38.0 million from $51.4 million in fiscal 2004. As a percentage of sales, Adjusted EBITDA was 12.0% in fiscal 2005 compared to 15.5% in fiscal 2004. The decrease in fiscal 2005 was principally due to lower sales volume in the Floorcoverings segment and other items as more fully discussed above. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.
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A reconciliation from net income (loss) to Adjusted EBITDA is a follows:
Fiscal Year Ended | ||||||||
January 28, 2006 | January 29, 2005 | |||||||
Net Income | $ | (4,629 | ) | $ | 6,703 | |||
Income Tax Expense (Benefit) | (358 | ) | 5,961 | |||||
Net Interest Expense | 20,082 | 20,443 | ||||||
Depreciation | 10,021 | 10,023 | ||||||
Amortization | 2,620 | 3,112 | ||||||
Loss from Discontinued Operations | 1,720 | 912 | ||||||
Chroma Cash Dividends | — | 922 | ||||||
Equity in Earnings of Chroma | — | (893 | ) | |||||
Minority Interest (Loss) in Income of Subsidiary | (24 | ) | 97 | |||||
Facility Maximization Costs | 8,158 | 3,986 | ||||||
Other Non-Cash Items | 362 | 172 | ||||||
Adjusted EBITDA | $ | 37,952 | $ | 51,438 | ||||
Liquidity and Capital Resources
Cash
The Company’s principal uses of cash have historically been for operating expenses, working capital, capital expenditures and debt repayment. The Company has financed its cash requirements through internally generated cash flows, borrowings and the offering of the senior subordinated notes.
Net cash provided by operating activities in fiscal 2006 was $28.2 million compared to net cash used in operating activities of $4.6 million in fiscal 2005. The change was primarily due to the generation of net income for the fiscal year coupled with a positive change to working capital of $17.2 million.
Net cash used in investing activities in fiscal 2006 and 2005 was $7.1 million and $10.1 million, respectively. Capital expenditures for fiscal 2006 were $7.2 million compared to $10.5 million for fiscal 2005. Included in capital expenditures for fiscal year 2005 is $2.7 million related to the Facility Maximization. The Company anticipates capital expenditures for fiscal 2007 to be approximately $6 million to $10 million.
Net cash used in financing activities in fiscal 2006 and 2005 was $19.9 million and $5.2 million, respectively. The cash used in financing for fiscal 2006 related primarily to the payment of dividends to the Company’s parent of $16.1 million. The cash used in fiscal 2005 related to repayments of long-term debt.
Debt
The Company has significant indebtedness which, as of January 27, 2007, consisted of $175.0 million aggregate principal amount of 9.75% senior subordinated notes due 2010 (the “9.75% Notes”) of which $165.0 million aggregate principal amount is outstanding, an $80.0 million senior secured revolving credit facility which had an outstanding balance of $30.9 million in borrowings (the “Revolver”), $1.2 million in purchase money and other indebtedness, and $1.1 million in sinking fund bonds under Crossley Carpet Mills, Ltd., a wholly-owned subsidiary. The sinking fund bonds are subject to forgiveness which began in fiscal 2006 given certain requirements are met. See further discussion contained herein and Notes 9 and 11 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.
The Company’s semi-annual interest payments of the 9.75% Notes are due on each February 15 and August 15 through February 15, 2010. The interest amount due on each date is $8.0 million. The 9.75% Notes mature on February 15, 2010.
On January 18, 2007, the Company entered into a senior secured revolving credit facility agreement which provides for an $80.0 million senior secured revolving credit facility (the “Revolver”) including a $20.0 million sub-limit for letters of credit. The facility is apportioned between a U.S. revolving credit facility and a Canadian revolving credit facility. All obligations of the Company are secured by a first priority, perfected security interest in, and lien upon, substantially all tangible and intangible assets of the Company, a pledge of the stock of all domestic subsidiaries, and a pledge of 65% of the stock of any first tier material foreign
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subsidiaries. The proceeds of the Revolver have been and/or will be used for, among other purposes, (i) the refinancing of the Company’s previous credit facility, (ii) ongoing working capital needs of the Company, (iii) the payment of a dividend to the Company’s sole stockholder, Tandus Group, which Tandus Group in turn dividended to its shareholders, (iv) the payment of accrued management fees owed to two principal shareholders of Tandus Group and (v) the payment of other fees and expenses.
Interest on amounts borrowed under the Revolver is payable either at the base rate, Canadian Prime Rate, LIBOR, or the Canadian BA Rate, plus an applicable margin, depending on the nature of the loan, and mandatory costs, if any. The applicable margin may range from 0% to 1.75% and will vary based on the Company’s fixed charge coverage ratio. The Revolver matures on January 18, 2012.
The Revolver is subject to certain representations, warranties, affirmative and negative covenants, and financial conditions customary for similar senior secured revolving credit facilities. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Revolver, the Company will also be subject to the cross default provisions of the indenture governing the 9.75% Notes, and vice versa. The Company was in compliance with all covenants as of January 27, 2007, and expects to remain in compliance throughout fiscal 2007, although no assurances to that effect can be given.
The Company’s ability to make scheduled payments of principal, interest, or to refinance its indebtedness, depends on its future performance, which, to a certain extent, is subject to general economic, financial, competitive, and other factors beyond its control. However, there can be no assurance that the Company’s business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or to make necessary capital expenditures. Potential acquisitions of businesses that complement existing operations are periodically evaluated. Depending on various factors, including, among others, the cash consideration required in such potential acquisitions, the Company may determine to finance any such transaction with existing sources of liquidity.
Management believes that cash generated by its operations and availability under its $80.0 million Revolver will be sufficient to fund the Company’s current commitments and planned requirements, although no assurances can be given.
On March 22, 2007, the Company entered into a commitment letter with Bank of America, N.A. (“BofA”), Wachovia Bank and certain of their affiliates (collectively, the “Lenders”), pursuant to which the Lenders have agreed to enter into a Credit Facility with the Company, the proceeds from which would be used (i) to redeem all of the Company’s 9.75% senior subordinated notes due 2010 (including the principal, accrued interest and premium thereon), (ii) to repay a portion of the Company’s Revolver, (iii) to pay transaction-related fees and expenses and (iv) for other lawful purposes, including a dividend. The commitment, which expires on June 30, 2007 unless definitive documentation for the Credit Facility is entered into prior to such date, is subject to the satisfaction of certain conditions precedent including, but not limited to, the following: (a) the accuracy and completeness of the Company’s representations to the Lenders and (b) the amendment of the Revolver to reduce the commitment thereunder to not more than $60 million at closing and to permit the Credit Facility. BofA is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group. No assurance can be given that the foregoing transactions will be consummated.
Litigation Obligations
On September 18, 1998, James Bradley Thomason (“Thomason”) filed an action in the District Court, 285th Judicial District, Bexar County, Texas (the “Court”) against Linda Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the “Gomez Defendants”), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas agencies (the “Contract”). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Company’s motion for summary judgment and as a result, all of Thomason’s claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the “Appellate Court”) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys’ fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys’ fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.
Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006, has filed its brief as Appellant, and the Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as
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entered by the Appellate Court. The Company has recorded an accrued liability, including post judgment interest of approximately $2,069,000 related to this case in its accompanying statements of financial condition.
On June 21, 2005, the Company filed in the United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the “Court”) a joint lawsuit with Shaw Industries Group, Inc. (“Shaw”) and Mohawk Industries, Inc. (“Mohawk”) against Interface, Inc. (“Interface”), regarding a patent on a particular pattern of carpet tile that Interface recently received (the “Rome Action”). The Rome Action asks the Court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interface’s suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. On December 19, 2006, the Court conducted what is known as a “MarkmanHearing” regarding interpretation of four disputed terms used in Interface’s patent. To date, the Court has not yet issued its order regarding the disputed terms and no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.
The Company is involved in litigation from time to time. When litigation arises, the Company may create a litigation accrual in order to pay for damages for which it might be liable. In some circumstances, it may settle litigation without going to trial. During fiscal 2005, the Company released a litigation accrual of $0.8 million related to a suit with Employers Mutual Insurance Companies and settled a suit for $0.4 million brought by Enron Energy Services.
From time to time the Company is also 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. Management believes 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 or results of operations.
Facility Maximization
On August 10, 2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana, California, and transfer the production to its existing Truro, Nova Scotia, Canada facility. The plan to close the facility was approved by the Board of Directors on August 9, 2004, and the transition was completed during the Company’s fourth fiscal quarter in 2005. The Company had previously expected that the consolidation of the facilities would be completed by the end of the Company’s first fiscal quarter in 2005. However, the transfer of production was slowed to accommodate the training of associates and the completion of certain manufacturing system enhancements. During the delayed transition the Company experienced production inefficiencies that resulted in delayed deliveries to its customers and additional costs.
As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of Crossley’s outstanding sinking fund bonds. The forgiveness, which commenced in fiscal 2006, is over the remaining term of the note, and is based upon maintaining a defined level of full-time equivalent employees. The debt is also non-interest bearing.
The original anticipated total expenditures and actual costs incurred for the Facility Maximization are as follows (in millions):
Anticipated Total Expenditures as of August 10, 2004 | Amounts Incurred During Fiscal Year Ended January 29, 2005 | Amounts Incurred During Fiscal Year Ended January 28, 2006 | Total Amounts Incurred | |||||||||
Severance Costs | $ | 1.8 | $ | 1.5 | $ | 0.6 | $ | 2.1 | ||||
Contractual Obligations and Professional Fees | 3.1 | 0.4 | 0.8 | 1.2 | ||||||||
Other Project Costs | 1.5 | 2.1 | 6.8 | 8.9 | ||||||||
Gross Project Expenditures | $ | 6.4 | $ | 4.0 | $ | 8.2 | $ | 12.2 | ||||
There were minimal remaining Facility Maximization costs accrued as of January 28, 2006. No costs were accumulated as of January 27, 2007.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of January 27, 2007 and January 28, 2006.
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Contractual Obligations
The following table contains a summary of the Company’s future minimum payments under contractual obligations as of January 27, 2007:
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | |||||||||||||||
Long-Term Debt | $ | 0.4 | $ | 0.4 | $ | 0.4 | $ | 165.4 | $ | 31.3 | $ | 0.3 | $ | 198.2 | |||||||
Interest Related to Debt (1) | 18.2 | 18.2 | 18.2 | 10.2 | 2.1 | 0.1 | 67.0 | ||||||||||||||
Operating Leases | 3.0 | 1.8 | 1.0 | 0.7 | 0.3 | — | 6.8 | ||||||||||||||
Total | $ | 21.6 | $ | 20.4 | $ | 19.6 | $ | 176.3 | $ | 33.7 | $ | 0.4 | $ | 272.0 | |||||||
(1) | Assumes interest rates on floating rate debt equates to the interest rates as of January 27, 2007. |
Purchase orders or contracts for the purchase of inventory and other goods and services are not included in the table above. The Company is not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. The Company’s purchase orders are based on its current distribution needs and are fulfilled by its vendors within short time horizons. There are no significant long-term agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed the Company’s expected requirements for three months.
Critical Accounting Policies
The Company’s significant accounting policies are more fully described in Note 2 of the “Notes to Consolidated Financial Statements” contained herein in Item 8. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers, and information available from outside sources, as appropriate. The Company’s significant accounting policies include:
Basis of Consolidation.The accompanying consolidated financial statements include the accounts of Collins & Aikman Floorcoverings, Inc. and its wholly-owned subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles. All significant intercompany transactions and balances have been eliminated.
Revenue Recognition. 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. Additionally, freight charged to customers is included in net sales.
A customer claims reserve and allowance for product returns is established based upon historical claims experience as a percent of gross sales as of the balance sheet date. The allowance for customer claims is recorded upon shipment of goods and is recorded as a reduction of sales. While management believes that the customer claims reserve and allowance for product returns is adequate and that 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.
Foreign Currency Translation.Effective July 31, 2005, the Company’s Canadian subsidiary adopted the U.S. dollar as its functional currency. Prior to this date, the Canadian dollar had served as the subsidiary’s functional currency. The transition to the U.S. dollar as the functional currency was primarily due to the high volume of this subsidiary’s transactions that are denominated in U.S. dollars, the high volume of intercompany transactions, and the extensive interrelationship between the Company’s U.S. operations and those of the Canadian subsidiary. The financial information of the Company’s Canadian subsidiary for the quarter ended July 30, 2005 and prior periods have been presented in U.S. dollars in accordance with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 being equal to CDN$1.2241, the Bank of Canada closing buying rate at July 30, 2005. For periods subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to translate the local currency of a foreign entity into its functional currency, the resulting translation adjustment is reported in the current period’s statement of operations.
Assets and liabilities of the U.K. and Asian subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of shareholders’ equity. Foreign currency gains (losses) are recognized in the statement of operations.
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Impairment of Goodwill and Indefinite Lived Intangible Asset. In addition to the annual impairment tests required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, the Company may periodically evaluate the carrying value of its goodwill and indefinite lived intangible asset for potential impairment. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could cause the Company to conclude that impairment indicators exist and that the goodwill and indefinite lived intangible asset associated with acquired businesses is impaired. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations.
Accounts Receivable Allowances.The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical experience and periodic evaluation of the financial condition of the Company’s customers and collectability of the Company’s accounts receivable. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to pay their debts, allowances recorded in the Company’s financial statements may not be adequate.
Inventory Reserves. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out, method. Reserves are established based on percentage markdowns applied to inventories aged for certain time periods and size of lot.
Pension Benefits. Net pension expense recorded is based on, among other things, assumptions regarding discount rate, estimated return on plan assets and salary increases. While the Company believes these assumptions are reasonable, changes in these and other factors and differences between actual and assumed changes in the present value of liabilities or assets of our plans above certain thresholds could cause net annual expense to increase or decrease significantly from year to year. The actuarial assumptions used in reporting for the Company’s defined benefit plans are reviewed periodically and compared with external benchmarks to ensure that they appropriately account for the Company’s future pension benefit obligation. The expected long-term rate of return on plan assets assumption is based on expected returns for each target asset class. Expected returns reflect a combination of historical performance analysis and the forward-looking views of the financial markets, and include input from actuaries and plan administrators.
Income Taxes.The provision for income taxes includes federal, state, local and foreign 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 assets and liabilities of changes in tax rates will be recognized as income or expense in the period that includes the enactment date. Future tax benefits are recognized to the extent that realization of those benefits is considered to be more likely than not. A valuation allowance is established for deferred tax assets for which realization is not assured.
Effects of Inflation
Petroleum-based products comprise a predominant portion of raw materials the Company uses in manufacturing. While the Company attempts to match cost increases with corresponding price increases, large increases in the cost of petroleum-based raw materials has adversely affected and could adversely affect the future financial results of the Company if it is unable to pass through such price increases in raw material costs to customers.
The impact of inflation on the Company’s operations has not been significant in recent years with the exception of petroleum-based products noted above which have risen in price. 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 if the Company is unable to pass through the cost increases to its customers.
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 sales in the education end market during the summer months while schools generally are closed and floorcovering can be installed.
Reliance on Primary Third-Party Supplier of Nylon Yarn
Invista, Inc. (“Invista”) currently supplies a majority of the Company’s requirements for nylon yarn, the primary raw material used in the Company’s floorcovering products. The unanticipated termination or interruption of the supply arrangement with Invista could have a material adverse effect on the Company because of the cost and delay associated with shifting this business to another supplier. Historically, the Company has not experienced significant interruptions in the supply of nylon yarn from Invista, although no assurances can be given that it will not experience interruption in supply in the future.
While Invista is an important vendor, it is believed that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista, there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.
The other significant raw materials used by the Company in its carpet manufacturing process include coater materials, such as vinyl resins and primary backing.
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The Company has not experienced a problem sourcing nylon, processed yarn or any other raw material used in the manufacture of carpet from suppliers and does not anticipate any difficulties in sourcing these raw materials in the future, although no assurances can be given.
At the Company’s yarn extrusion facility, the significant raw materials are nylon and polypropylene polymer and dye pigments. The chips purchased are used to manufacture the nylon and polypropylene yarn. The dye and pigments give the yarn color for solution dyed yarns.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value and revises provisions of FASB Statement No. 115 that apply to available-for-sale and trading securities. This statement is effective for fiscal years beginning after November 15, 2007. The Company is current evaluating the impact, if any, of the adoption of SFAS No. 159 on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 will not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income. In addition, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end. The provisions of SFAS No. 158 are effective for employers without publicly traded equity securities as of the end of the fiscal year ending after June 15, 2007. While the effect of the adoption of SFAS No. 158 on the Company’s financial position has not yet been determined, the adoption will have no effect on the Company’s results of operations.
In September 2006, the Securities & Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides additional guidance on determining the materiality of cumulative unadjusted misstatements in both current and future financial statements. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB No. 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company has adopted SAB No. 108 which did not result in a material impact to its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes” and defines the confidence level that an income tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more-likely-than-not” to be sustained, no benefits of the position are to be recognized. FIN 48 requires additional annual disclosures and is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company will adopt FIN 48 on January 28, 2007 and is currently evaluating the effect that the adoption will have on its consolidated financial statements, although it is anticipated that the impact will not be material.
In June 2006, the Emerging Issues Task Force released Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)”(“EITF 06-03”). EITF 06-03 concludes that this issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and the presentation of those taxes on either a gross or a net basis is an accounting policy decision that should be disclosed. In addition, EITF 06-03 states that the amounts for taxes that are reported on a gross basis should be disclosed in interim and annual financial statements. EITF 06-03 is effective for periods beginning after December 15, 2006. The adoption is not expected to have a material impact on the Company’s financial statements.
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of Statement of Financial Accounting Standards Nos. 133 (“SFAS No. 133”) and 140” (“SFAS No. 155”). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, eliminates restrictions on a qualifying special-purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are, or contain, a derivative financial instrument. The guidance is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will not have a material effect on the Company’s financial position or results of operations.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates. The Company is exposed to changes in interest rates and foreign currency.
Interest Rate Risk
The Company’s Revolver has variable interest rates. Therefore, interest rate changes generally do not affect the fair market value of such debt but do impact future earnings and cash flows, assuming other factors are held constant. Conversely, for the Company’s 9.75% fixed rate senior subordinated notes, interest rate changes do not impact future cash flows and earnings, but do impact the fair market value of such debt, assuming other factors are held constant. At January 27, 2007, the Company had variable rate debt of $30.9 million and fixed rate debt of $172.2 million, which includes approximately $0.1 million of capitalized leases. The interest rate per annum applicable to borrowings under the Revolver is equal to the base rate, Canadian prime rate, LIBOR or the Canadian BA rate, plus an applicable margin, depending on the nature of the loan, and mandatory costs, if any. The applicable margin may range from 0% to 1.75% and varies based on the Company’s fixed charge coverage rate. See Note 9 of the “Notes to Consolidated Financial Statements” contained herein in Item 8. Had the outstanding Revolver balance as of the end of the fiscal year been outstanding for the full year, the impact on the Company’s results of operations of an increase of 100 basis points in the interest rate would have been approximately $0.2 million, net of tax.
Foreign Currency Exchange Rate Risk
If on January 27, 2007, currency exchange rates were to decline by 10% against the U.S. dollar and that decline remained in place for 2007, we estimate, based on our year-end 2006 investments in financial instruments and holding everything else constant, that the effect on our fiscal 2007 results of operations would be immaterial.
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Item 8. Financial Statements and Supplemental Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholder and Board of Directors
Collins & Aikman Floorcoverings, Inc.
We have audited the accompanying consolidated balance sheets of Collins & Aikman Floorcoverings, Inc. and Subsidiaries (a Delaware corporation) as of January 27, 2007 and January 28, 2006, and the related consolidated statements of operations, stockholder’s equity and cash flows for each of the three fiscal years in the period ended January 27, 2007. 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 did not audit the financial statements of Crossley Carpet Mills Limited, a wholly-owned subsidiary, as of and for the fiscal year ended January 29, 2005, which statements reflect total assets of 9 percent of consolidated total assets as of January 29, 2005 and total revenues of 13 percent of consolidated revenues for the year then ended. Those statements were audited by other auditors, whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for Crossley Carpet Mills Limited, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Collins & Aikman Floorcoverings, Inc. and Subsidiaries as of January 27, 2007 and January 28, 2006, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 27, 2007 in conformity with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The Schedule II, as listed in the Index, is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.
/s/ GRANT THORNTON, LLP |
Atlanta, Georgia |
April 27, 2007 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Crossley Carpet Mills Limited
We have audited the consolidated statements of loss and retained earnings and cash flow (not presented separately herein) ofCrossley Carpet Mills Limited (a wholly-owned subsidiary of Collins & Aikman Floorcoverings, Inc.) for the period ended January 29, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit also 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.
In our opinion, these consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and cash flows for the period ended January 29, 2005 in accordance with Canadian generally accepted accounting principles.
/s/ Ernst & Young LLP (Canada) |
Chartered Accountants |
Halifax, Canada |
March 11, 2005 |
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
January 27, 2007 | January 28, 2006 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and Cash Equivalents | $ | 6,754 | $ | 5,545 | ||||
Accounts Receivable, net of allowances of $464 and $440 in fiscal 2006 and 2005, respectively | 46,794 | 45,179 | ||||||
Inventories | 37,870 | 38,331 | ||||||
Deferred Tax Assets | 11,504 | 4,863 | ||||||
Prepaid Expenses and Other | 687 | 3,292 | ||||||
Total Current Assets | 103,609 | 97,210 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net | 60,074 | 64,267 | ||||||
GOODWILL | 98,378 | 98,378 | ||||||
OTHER INTANGIBLE ASSETS, net | 26,195 | 28,650 | ||||||
OTHER ASSETS | 5,950 | 6,929 | ||||||
OTHER ASSETS - DISCONTINUED OPERATIONS (Note 3) | 4,930 | 7,094 | ||||||
TOTAL ASSETS | $ | 299,136 | $ | 302,528 | ||||
LIABILITIES AND STOCKHOLDER’S EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts Payable | $ | 16,832 | $ | 14,692 | ||||
Accrued Expenses | 25,787 | 24,772 | ||||||
Current Portion of Long-Term Debt | 434 | 4,648 | ||||||
Total Current Liabilities | 43,053 | 44,112 | ||||||
OTHER LIABILITIES, including post-retirement benefit obligation | 3,431 | 5,364 | ||||||
OTHER LIABILITIES - DISCONTINUED OPERATIONS (Note 3) | 2,263 | 2,487 | ||||||
DEFERRED TAX LIABILITIES | 8,519 | 4,441 | ||||||
LONG-TERM DEBT, net of current portion | 197,805 | 197,673 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 16) | ||||||||
STOCKHOLDER’S EQUITY: | ||||||||
Common Stock ($0.01 par value per share, 1,000 shares authorized, issued and outstanding in fiscal 2006 and fiscal 2005) | — | — | ||||||
Paid-in Capital | 72,648 | 72,648 | ||||||
Retained Deficit | (28,283 | ) | (22,435 | ) | ||||
Accumulated Other Comprehensive Loss: | ||||||||
Foreign Currency Translation Adjustment | (300 | ) | (553 | ) | ||||
Minimum Pension Liability Adjustment, net of tax | — | (1,209 | ) | |||||
Total Stockholder’s Equity | 44,065 | 48,451 | ||||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 299,136 | $ | 302,528 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands)
Fiscal Year Ended | ||||||||||||
January 27, (52 Weeks) | January 28, (52 Weeks) | January 29, (52 Weeks) | ||||||||||
Net Sales | $ | 350,365 | $ | 316,213 | $ | 331,946 | ||||||
Cost of Goods Sold | 231,891 | 221,039 | 219,496 | |||||||||
Selling, General & Administrative Expenses | 78,523 | 76,654 | 75,943 | |||||||||
Amortization | 2,455 | 2,620 | 3,112 | |||||||||
Operating Expenses | 312,869 | 300,313 | 298,551 | |||||||||
Operating Income | 37,496 | 15,900 | 33,395 | |||||||||
Minority Interest in (Income) Loss of Subsidiary | — | 24 | (97 | ) | ||||||||
Equity in Earnings of Affiliate | — | — | 893 | |||||||||
Gain (Loss) on Early Extinguishment/Forgiveness of Debt | (213 | ) | 795 | — | ||||||||
Net Interest Expense | 20,650 | 20,082 | 20,443 | |||||||||
Other Income (Expense) | (245 | ) | 96 | (172 | ) | |||||||
Income (Loss) from Continuing Operations Before Income Taxes | 16,388 | (3,267 | ) | 13,576 | ||||||||
Income Tax Expense (Benefit) | 7,162 | (358 | ) | 5,961 | ||||||||
Income (Loss) from Continuing Operations | 9,226 | (2,909 | ) | 7,615 | ||||||||
Gain (Loss) from Discontinued Operations, net of tax (Note 3) | 979 | (1,720 | ) | (912 | ) | |||||||
Net Income (Loss) | $ | 10,205 | $ | (4,629 | ) | $ | 6,703 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder’s Equity
(In Thousands, Except Share Amounts)
Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||
Common Stock (Shares) | Paid-in Capital | Retained Earnings (Deficit) | Foreign Currency Translation | Minimum Pension Liability | Total | ||||||||||||||||
BALANCE, January 31, 2004 | 1,000 | $ | 72,648 | $ | (24,509 | ) | $ | (493 | ) | $ | (954 | ) | $ | 46,692 | |||||||
Net income | — | — | 6,703 | — | — | 6,703 | |||||||||||||||
Change in foreign currency translation adjustment, net of tax | — | — | — | 222 | — | 222 | |||||||||||||||
Total Comprehensive Income | 6,925 | ||||||||||||||||||||
BALANCE, January 29, 2005 | 1,000 | $ | 72,648 | $ | (17,806 | ) | $ | (271 | ) | $ | (954 | ) | $ | 53,617 | |||||||
Net loss | — | — | (4,629 | ) | — | — | (4,629 | ) | |||||||||||||
Change in foreign currency translation adjustment, net of tax | — | — | — | (282 | ) | — | (282 | ) | |||||||||||||
Change in minimum pension liability adjustment, net of tax | — | — | — | — | (255 | ) | (255 | ) | |||||||||||||
Total Comprehensive Loss | (5,166 | ) | |||||||||||||||||||
BALANCE, January 28, 2006 | 1,000 | $ | 72,648 | $ | (22,435 | ) | $ | (553 | ) | $ | (1,209 | ) | $ | 48,451 | |||||||
Net income | — | — | 10,205 | — | — | 10,205 | |||||||||||||||
Change in foreign currency translation adjustment, net of tax | — | — | — | 253 | — | 253 | |||||||||||||||
Change in minimum pension liability adjustment, net of tax | — | — | — | — | 1,209 | 1,209 | |||||||||||||||
Total Comprehensive Income | 11,667 | ||||||||||||||||||||
Dividend to parent | — | — | (16,053 | ) | — | — | (16,053 | ) | |||||||||||||
BALANCE, January 27, 2007 | 1,000 | $ | 72,648 | $ | (28,283 | ) | $ | (300 | ) | $ | — | $ | 44,065 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
Fiscal Year Ended | ||||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | 10,205 | $ | (4,629 | ) | $ | 6,703 | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation and leasehold amortization | 11,173 | 10,307 | 10,470 | |||||||||
Amortization of intangible assets | 2,455 | 2,620 | 3,112 | |||||||||
Amortization and write-off of deferred financing fees | 1,194 | 1,158 | 1,259 | |||||||||
Change in deferred income tax | (1,873 | ) | (679 | ) | 3,561 | |||||||
Equity in earnings of affiliate | — | — | (893 | ) | ||||||||
Minority interest in income (loss) of subsidiary | — | (24 | ) | 97 | ||||||||
(Gain) loss on early extinguishment/forgiveness of debt | 213 | (795 | ) | — | ||||||||
Loss on disposal of fixed assets | 220 | 36 | 172 | |||||||||
Non-cash impairment charge from discontinued operations | 2,237 | — | — | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (1,437 | ) | (4,828 | ) | (5,844 | ) | ||||||
Inventories | 1,048 | (1,015 | ) | (3,515 | ) | |||||||
Accounts payable | 1,792 | (1,410 | ) | 491 | ||||||||
Accrued expenses | 1,141 | (3,080 | ) | 7,930 | ||||||||
Other, net | (212 | ) | (2,307 | ) | 3,702 | |||||||
Total adjustments | 17,951 | (17 | ) | 20,542 | ||||||||
Net cash provided by (used in) operating activities | 28,156 | (4,646 | ) | 27,245 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Proceeds from disposal of capital assets | 37 | 370 | 92 | |||||||||
Equity distribution from affiliate | — | — | 922 | |||||||||
Additions to property, plant, and equipment | (7,213 | ) | (10,461 | ) | (11,862 | ) | ||||||
Other | 90 | 68 | (199 | ) | ||||||||
Net cash used in investing activities | (7,086 | ) | (10,023 | ) | (11,047 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Proceeds from revolving credit facilities | 21,815 | 19,530 | 15,280 | |||||||||
Repayments of revolving credit facilities | (25,457 | ) | (15,888 | ) | (15,280 | ) | ||||||
Repayment of 10% senior subordinated notes | (250 | ) | — | — | ||||||||
Proceeds from issuance of long-term debt | 30,909 | 752 | 641 | |||||||||
Repayments of long-term debt | (30,813 | ) | (9,322 | ) | (1,784 | ) | ||||||
Dividends to Tandus Group, Inc. | (16,053 | ) | — | — | ||||||||
Financing costs | (46 | ) | (256 | ) | (380 | ) | ||||||
Net cash used in financing activities | (19,895 | ) | (5,184 | ) | (1,523 | ) | ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | 34 | (2 | ) | (189 | ) | |||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 1,209 | (19,855 | ) | 14,486 | ||||||||
CASH AND CASH EQUIVALENTS, Beginning of Year | 5,545 | 25,400 | 10,914 | |||||||||
CASH AND CASH EQUIVALENTS, End of Year | $ | 6,754 | $ | 5,545 | $ | 25,400 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Collins & Aikman Floorcoverings, Inc. (the “Company”), a Delaware Corporation, is a manufacturer of floorcovering products for the North American specified commercial carpet market. The Company’s floorcovering products include (i) six-foot roll carpet and modular carpet tile, and (ii) high style tufted and woven broadloom carpets. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands under the Tandus name 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. The Company is headquartered in Georgia, with additional manufacturing locations in Canada and China. In addition, the Company operated a manufacturing facility in the United Kingdom until its sale in February 2007. See Note 3 contained herein for further information.
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”), specifically OCM Principal Opportunities Fund II, L.P. (the “Oaktree Fund”) and BancAmerica Capital Investors II, L.P. (the “B of A Fund”), respectively, control a majority of the outstanding capital stock of Tandus Group.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of Collins & Aikman Floorcoverings, Inc., its subsidiaries, joint venture and its equity investment have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany items have been eliminated in consolidation.
During the fourth quarter of fiscal 2006, the Company announced its intent to exit manufacturing in the United Kingdom. The Company subsequently entered into a definitive agreement to sell its wholly-owned United Kingdom subsidiary, Tandus Europe Ltd. The financial results of Tandus Europe Ltd. are reported as discontinued operations in the consolidated financial statements for each year presented. Except where noted, the information presented in these notes to the consolidated financial statements excludes the Company’s discontinued operations. See Note 3 contained herein for further information.
Reclassifications
Certain reclassifications have been made to the prior year amounts to conform with current year classifications.
Fiscal Year
The fiscal year of the Company ends on the last Saturday of January. Fiscal years are identified according to the calendar year in which the majority of the months fall. Fiscal years 2006, 2005 and 2004 were 52-week years which ended on January 27, 2007, January 28, 2006 and January 29, 2005, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
Revenue Recognition
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 $17.1 million, $14.6 million and $15.0 million for fiscal 2006, 2005 and 2004, respectively. Freight charged to customers is included in net sales. Freight fees included in net sales were $6.2 million, $6.1 million and $5.5 million in fiscal 2006, 2005 and 2004, respectively.
A customer claims reserve and allowance for product returns is established based upon historical claims experience as a percent of gross sales as of the balance sheet date. The allowance for customer claims is recorded upon shipment of goods and is recorded as a
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
reduction of sales. While the Company believes that the customer claims reserve and allowance for product returns is adequate and that 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.
Cost of Goods Sold
Cost of goods sold includes raw materials, labor, manufacturing overhead, freight costs, depreciation and the cost of installation services provided to our customers through independent third-party contractors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include compensation and related expenses, selling and marketing expenses, travel expenses, professional services, depreciation and amortization.
Foreign Currency Translation
Effective July 31, 2005, the Company’s Canadian subsidiary adopted the U.S. dollar as its functional currency. Prior to this date, the Canadian dollar had served as the subsidiary’s functional currency. The transition to the U.S. dollar as the functional currency is primarily due to the high volume of this subsidiary’s transactions that are denominated in U.S. dollars, the high volume of intercompany transactions, and the extensive interrelationship between the Company’s U.S. operations and those of the Canadian subsidiary. The financial information of the Company’s Canadian subsidiary for the quarter ended July 30, 2005 and prior periods have been presented in U.S. dollars in accordance with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 being equal to CDN$1.2241, the Bank of Canada closing buying rate at July 30, 2005. For periods subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to translate the local currency of a foreign entity into its functional currency, the resulting translation adjustment is reported in the current period’s statement of operations.
Assets and liabilities of the U.K. and Asian subsidiaries are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated as a separate component of stockholder’s equity. Foreign currency gains (losses) are recognized in the statement of operations.
Net foreign currency gain (loss) recognized in the consolidated statements of operations was approximately $(0.3) million, $0.0 million and $0.9 million for fiscal years 2006, 2005 and 2004, respectively.
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-term maturity of cash and cash equivalents and trade accounts receivable, carrying value approximates fair value.
The carrying value of the senior secured revolving credit facility portion of the Company’s long-term debt approximates the fair value as the facility is subject to variable interest rates. As of January 27, 2007, the estimated fair value of the 9.75% Senior Subordinated Notes exceeded their carrying value by approximately $4.0 million. Fair value of the 9.75% Senior Subordinated Notes is determined by market sources. See Note 9 for further information.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and investments with an original maturity of three months or less. The Company invests its excess cash in short-term investments and has not experienced any losses on those investments. Cash held by the Company’s foreign subsidiaries totaled $3.3 million and $2.9 million as of January 27, 2007 and January 28, 2006, respectively.
Accounts Receivable and Allowances
The Company sells floorcovering products to a wide variety of manufacturers and retailers located primarily throughout the United States and generally does not require collateral. The Company’s trade accounts receivable are non-interest bearing and are recorded at the invoiced amounts. Allowances are provided for expected cash discounts, returns, claims and doubtful accounts based upon historical experience and periodic evaluations of the financial condition of the Company’s customers and collectability of the Company’s accounts receivable. These allowances are maintained at a level which management believes is sufficient to cover
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
potential credit losses. Accounts receivable balances are aged according to invoice date and applicable terms, and are written off as uncollectible only after all reasonable collection efforts have been made.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market value. Market value is determined based on replacement cost for raw materials and net realizable value for work in process and finished goods. Reserves are established based on percentage markdowns applied to inventories aged for certain time periods and size of lot.
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 three to 40 years. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements. Repairs and maintenance are charged to operations as incurred.
Long-Lived, Goodwill and Other Intangible Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the guidance in Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). 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.
Goodwill and other intangible assets with an indefinite useful life are tested for impairment annually in accordance with the guidance in Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The Company’s annual impairment testing is performed as of the end of each third fiscal quarter. An intangible asset with a finite life is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the guidance in SFAS No. 144.
Income Taxes
The provision for income taxes includes federal, state, local and foreign 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” (“SFAS No. 109”). 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 assets and liabilities of changes in tax rates will be recognized as income or expense in the period that includes the enactment date. Future tax benefits are recognized to the extent that realization of those benefits is considered to be more likely than not. A valuation allowance is established for deferred tax assets for which realization is not assured.
Stock Based Compensation
Effective January 29, 2006, the Company adopted the fair value recognition provision of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), using the prospective transition method. This method allows the application of the provisions of SFAS No. 123(R) to share-based awards granted subsequent to adoption. There were no grants of stock-based compensation during the fiscal year ended January 27, 2007. For stock-based compensation issued prior to January 29, 2006, the Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).
In August 2001, Tandus Group adopted the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan (the “2001 Plan”) which provides for the issuance of options to purchase 57,061.64 shares of Tandus Group common stock (the “Old Options”). The plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. The Old Options become exercisable over five years, expire ten years from the date of grant and vest only upon the achievement of certain earnings targets; however, accelerated vesting could occur due to a change in control. The Company accounts for the Old Options as variable options and will record expenses based upon increases and decreases in the fair market value of the common stock at the end of each reporting period. As of January 27, 2007, the Company has not recorded any stock-based compensation cost in net income (loss) as the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
targets established under the program have not been achieved and all Old Options outstanding had an exercise price equal to the market value of the underlying common stock on the date of grant. During the fourth quarter of fiscal 2006, the Company purchased a portion of the Old Options outstanding for a nominal flat fee per employee. At January 27, 2007, no shares are exercisable and the weighted average contractual life of the outstanding Old Options is 4.5 years.
The Company has historically recorded these options under the minimum value method. Upon the adoption of SFAS No. 123(R), the Company is no longer required to provide proforma disclosures.
On December 6, 2006, Tandus Group adopted the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan (the “2001 Amended Plan”) which provides for the issuance of options to purchase 500,000 shares of Tandus Group common stock (the “New Options”). The 2001 Amended Plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. No New Options had been granted as of January 27, 2007; however, New Options were granted on January 31, 2007, at which time all Old Options were cancelled. SFAS No. 123(R) will be effective for all awards granted or modified after January 29, 2006.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value and revises provisions of FASB Statement No. 115 that apply to available-for-sale and trading securities. This statement is effective for fiscal years beginning after November 15, 2007. The Company is current evaluating the impact, if any, of the adoption of SFAS No. 159 on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 will not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an Amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income. In addition, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end. The provisions of SFAS No. 158 are effective for employers without publicly traded equity securities as of the end of the fiscal year ending after June 15, 2007. While the effect of the adoption of SFAS No. 158 on the Company’s financial position has not yet been determined, the adoption will have no effect on the Company’s results of operations.
In September 2006, the Securities & Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides additional guidance on determining the materiality of cumulative unadjusted misstatements in both current and future financial statements. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The guidance in SAB No. 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The Company has adopted SAB No. 108 which did not result in a material impact to its consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes” and defines the confidence level that an income tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more-likely-than-not” to be sustained, no benefits of the position are to be recognized. FIN 48 requires additional annual disclosures and is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company will adopt FIN 48 on January 28, 2007 and is currently evaluating the effect that the adoption will have on its consolidated financial statements, although it is anticipated that the impact will not be material.
In June 2006, the Emerging Issues Task Force released Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)”(“EITF 06-03”). EITF 06-03 concludes that this issue includes any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and the presentation of those taxes on either a gross or a net basis is an accounting policy decision that should be disclosed. In addition, EITF 06-03 states that the amounts for taxes that are reported on a gross basis should be disclosed in interim and annual financial statements. EITF 06-03 is effective for periods beginning after December 15, 2006. The adoption is not expected to have a material impact on the Company’s financial statements.
In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of Statement of Financial Accounting Standards Nos. 133 (“SFAS No. 133”) and 140” (“SFAS No. 155”).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, eliminates restrictions on a qualifying special-purpose entity’s ability to hold passive derivative financial instruments that pertain to beneficial interests that are, or contain, a derivative financial instrument. The guidance is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will not have a material effect on the Company’s financial position or results of operations.
3. DISCONTINUED OPERATIONS
In December 2006, the Company announced its intent to exit manufacturing in the United Kingdom. On February 5, 2007, the Company completed the sale of its subsidiary, Tandus Europe Ltd., to Interior Projects Solutions Limited (the “Purchaser”) in exchange for a note with a face value of $4.0 million. The discounted value of the note is $2.6 million reflecting the net present value of the future anticipated cash flows at a market rate for similar instruments of 18%. The Purchaser will continue to manufacture carpet products for distribution throughout Europe and, under a separate agreement, will be the exclusive distributor of the Company’s products in several European countries provided that certain minimum performance and other requirements are satisfied.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Additionally, certain products manufactured by the Purchaser will continue to bear the Company’s C&A brand.
In conjunction with the classification of Tandus Europe Ltd. as an asset held for sale, the Company recognized a loss of $2.3 million before tax to write down the value of its net assets to the fair value to be received and recorded an additional loss of $0.4 million before tax related to the accrual of certain severance and legal expenses related to the disposition. Included in the $2.3 million loss is recognition of $0.2 million of foreign currency translation adjustment loss previously reported in Accumulated Other Comprehensive Loss. The Company recorded an income tax benefit of $5.7 million principally related to the write-off of intercompany receivables due from the subsidiary to be sold. The net impact of this activity resulted in an after-tax gain of $3.0 million.
Selected results for the United Kingdom subsidiary are as follows (in thousands):
Fiscal Year Ended | ||||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | ||||||||||
Net Sales | $ | 8,903 | $ | 8,843 | $ | 8,528 | ||||||
Loss from Operations Before Income Taxes | $ | (2,006 | ) | $ | (1,720 | ) | $ | (912 | ) | |||
Income Taxes | — | — | — | |||||||||
Loss from Operations, net of tax | (2,006 | ) | (1,720 | ) | (912 | ) | ||||||
Loss on Disposal Before Income Tax Benefit | (2,686 | ) | — | — | ||||||||
Income Tax Benefit | (5,671 | ) | — | — | ||||||||
Gain (Loss) from Discontinued Operations | $ | 979 | $ | (1,720 | ) | $ | (912 | ) | ||||
Assets and liabilities for discontinued operations as reported in the accompanying consolidated balance sheets are comprised of the following (in thousands):
January 27, 2007 | January 28, 2006 | |||||
Other Assets | ||||||
Cash and Cash Equivalents | $ | 168 | $ | 258 | ||
Accounts Receivable | 959 | 1,512 | ||||
Inventories | 1,076 | 1,662 | ||||
Prepaid Expenses and Other | 115 | 232 | ||||
Property, Plant, and Equipment, net | 2,612 | 3,430 | ||||
Other Assets - Discontinued Operations | $ | 4,930 | $ | 7,094 | ||
Other Liabilities | ||||||
Accounts Payable | $ | 1,763 | $ | 2,111 | ||
Accrued Expenses | 500 | 376 | ||||
Other Liabilities - Discontinued Operations | $ | 2,263 | $ | 2,487 | ||
4. INVENTORIES
Net inventory balances are summarized below (in thousands):
January 27, 2007 | January 28, 2006 | |||||
Raw materials | $ | 18,928 | $ | 17,427 | ||
Work in process | 7,022 | 6,296 | ||||
Finished goods | 11,920 | 14,608 | ||||
$ | 37,870 | $ | 38,331 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, are summarized below (in thousands):
Depreciable Lives | January 27, 2007 | January 28, 2006 | ||||||||
Land improvements | 15 years | $ | 2,140 | $ | 2,121 | |||||
Buildings | 35 years | 20,804 | 20,735 | |||||||
Machinery and equipment | 3-9 years | 110,169 | 106,549 | |||||||
Leasehold improvements | Lease term or 10 years | 5,148 | 4,687 | |||||||
Construction in progress | — | 937 | 1,074 | |||||||
139,198 | 135,166 | |||||||||
Less accumulated depreciation | (79,124 | ) | (70,899 | ) | ||||||
$ | 60,074 | $ | 64,267 | |||||||
Depreciation expense and leasehold amortization of property, plant and equipment was $10.9 million for fiscal 2006, $10.0 million for fiscal 2005 and $10.0 million for fiscal 2004.
6. OTHER INTANGIBLE ASSETS
The Company holds a patent that is being amortized over an eleven-year period using the straight-line method. The gross carrying amount and accumulated amortization of the patent were $27.0 million and $24.5 million, respectively, as of January 27, 2007, and $27.0 million and $22.2 million, respectively, as of January 28, 2006.
The Company has indefinite lived intangible assets for trade names with a carrying value of $23.6 million as of January 27, 2007 and January 28, 2006. Additionally, the Company has an unamortized intangible asset related to its defined benefit plans in the amount of $0.1 million as of January 27, 2007 and January 28, 2006.
Amortization expense was $2.5 million for fiscal year 2006, $2.6 million for fiscal year 2005, and $3.1 million for fiscal year 2004. Amortization expense of $2.5 million is estimated for fiscal year 2007. No amortization expense is anticipated for fiscal years thereafter.
7. ACCRUED EXPENSES
Accrued expenses are summarized below (in thousands):
January 27, 2007 | January 28, 2006 | |||||
Payroll and employee benefits | $ | 7,808 | $ | 6,495 | ||
Customer claims | 3,219 | 1,798 | ||||
Accrued interest | 7,443 | 7,796 | ||||
Accrued professional fees | 2,913 | 3,323 | ||||
Other | 4,404 | 5,360 | ||||
$ | 25,787 | $ | 24,772 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
8. EMPLOYEE BENEFIT PLANS
Defined Contribution Plan
Substantially all U.S. employees of the Company who meet eligibility requirements are covered under a defined contribution plan, which is administered by the Company. Eligible participants can contribute up to 10% of their annual compensation and receive Company matching contributions based on formulas as specified in the plan document. The Company contributed approximately $1.2 million, $1.0 million and $0.8 million in fiscal years 2006, 2005 and 2004, respectively, to the plan.
U.S. Defined Benefit Plan
The Company maintains a defined benefit program (“the U.S. Plan”) for its domestic employees, which was frozen during fiscal 2002. Accordingly, no new benefits are being accrued under the U.S. Plan. Participant accounts are credited with interest at the federally mandated rates. Company contributions are based on computations by independent actuaries, although the Company may decide to make additional contributions to the U.S. Plan beyond minimum funding requirements as is deemed appropriate by management.
The following tables provide a reconciliation of the projected benefit obligation, a reconciliation of plan assets, the funded status of the plan, and amounts recognized in the Company’s consolidated financial statements as of January 27, 2007 and January 28, 2006 using December 31 as a measurement date for all actuarial calculations of asset and liability values and significant actuarial assumptions.
Fiscal Year Ended | ||||||||
(in thousands) | January 27, 2007 | January 28, 2006 | ||||||
Change in Benefit Obligation: | ||||||||
Benefit obligation at beginning of year | $ | 4,668 | $ | 4,702 | ||||
Service cost | — | — | ||||||
Interest cost | 233 | 232 | ||||||
Change in assumptions | 14 | — | ||||||
Actuarial (gain) loss | (336 | ) | 203 | |||||
Benefits paid | (371 | ) | (476 | ) | ||||
Settlement loss | 5 | 7 | ||||||
Benefit obligation at end of year | $ | 4,213 | $ | 4,668 | ||||
Change in Plan Assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 4,339 | $ | 4,776 | ||||
Company contributions | — | — | ||||||
Actual return on plan assets | 473 | 39 | ||||||
Benefits paid | (371 | ) | (476 | ) | ||||
Fair value of plan assets at end of year | $ | 4,441 | $ | 4,339 | ||||
Funded Status of the Plan: | ||||||||
Funded status at end of year | $ | 228 | $ | (329 | ) | |||
Unamortized net actuarial loss | 1,235 | 1,943 | ||||||
Prepaid benefit cost | 1,463 | 1,614 | ||||||
Additional minimum liability | — | (1,943 | ) | |||||
(Accrued) Prepaid benefit cost after additional minimum liability | $ | 1,463 | $ | (329 | ) | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Fiscal Year Ended | ||||||||||||
(in thousands) | January 27, 2007 | January 28, 2006 | January 29, 2005 | |||||||||
Net Pension Cost Includes the Following Components: | ||||||||||||
Service cost - benefits earned during the period | $ | — | $ | — | $ | — | ||||||
Interest cost on projected benefit obligations | 233 | 232 | 274 | |||||||||
Expected return on plan assets | (321 | ) | (319 | ) | (363 | ) | ||||||
Recognized net actuarial losses | 109 | 127 | 99 | |||||||||
Settlement losses | 129 | 187 | 177 | |||||||||
Net periodic pension expense for year | $ | 150 | $ | 227 | $ | 187 | ||||||
January 27, 2007 | January 28, 2006 | |||||
Weighted-average assumptions used to determine benefit obligations: | ||||||
Discount rate | 5.75 | % | 5.50 | % | ||
Weighted-average assumptions used to determine net periodic benefit cost: | ||||||
Discount rate | 5.75 | % | 5.50 | % | ||
Expected long-term rate of return on assets | 7.75 | % | 7.75 | % |
As previously disclosed, the U.S. plan was frozen during fiscal 2002. Accordingly, there is no assumed rate of compensation increase associated with current and future plan calculations.
The accumulated benefit obligation for each of the years ended January 27, 2007 and January 28, 2006 is $4.2 million and $4.7 million, respectively.
The investment strategy for the Company’s U.S. Plan is determined by a committee composed of senior management of the Company, two members from Human Resources and one member from Finance. This committee reports to the Compensation Committee of the Board of Directors. The funds in the U.S. Plan are to be invested effectively and prudently for the exclusive benefit of U.S. Plan participants and beneficiaries. In order to accomplish this strategy, the U.S. Plan’s current asset allocation strategy contains a defined mix of both debt and equity securities, to maximize growth at a conservative risk level. The committee reviews the U.S. Plan’s asset mix on a regular basis. When the exposure in either asset category reaches either a minimum or maximum level, an asset allocation review process is initiated and the portfolio will be rebalanced backed to target allocation levels. In developing a strategic asset allocation policy, the Company examined certain factors that affect the risk tolerance of the U.S. Plan such as the demographics of employees, the actuarial and funding characteristics of the U.S. Plan and the Company’s business and financial characteristics.
The U.S. Plan’s weighted-average asset allocations at January 27, 2007 and January 28, 2006, by asset category are as follows:
Asset Category | Fiscal 2006 Target Allocation | January 27, 2007 | January 28, 2006 | ||||||
Equity Securities | 70 | % | 70 | % | 62 | % | |||
Fixed Income Debt Securities | 30 | % | 30 | % | 38 | % | |||
Total | 100 | % | 100 | % | 100 | % |
The expected return on asset assumption was developed through analysis of historical market returns, current market conditions and a comparison of expectations on potential future market returns. The assumption represents a long-term average view of the performance of the U.S. Plan; therefore, the return may or may not be achieved during any one fiscal year.
A new mortality table assumption was adopted by the Company for the measurement of the January 28, 2006 benefit obligations, moving from the 1983 GAM mortality table to the RP-2000 CH table. This change in mortality table increased pension liabilities by approximately 5%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following benefit payments are expected to be paid (in thousands):
Plan Year | Payout Projection | ||
2007 | $ | 195 | |
2008 | 236 | ||
2009 | 178 | ||
2010 | 265 | ||
2011 | 380 | ||
2012 – 2016 | 976 |
No employer contributions are expected to be required in fiscal 2007.
Canadian Defined Benefit Plan
Substantially all Canadian employees of Crossley who meet eligibility requirements can participate in a defined benefit plan (the “Canadian Plan”) administered by the Company. Canadian Plan benefits are generally based on years of service and employees’ compensation during their years of employment. The Company contributes annually an amount that is based on the recommendations of its actuary and is deductible for income tax purposes. Assets of the Canadian plan are held in a trust invested primarily in mutual funds.
The following tables provide a reconciliation of the projected benefit obligation, plan assets, the funded status of the plans and amounts recognized in the Company’s consolidated financial statements at January 27, 2007 and January 28, 2006 using December 31 as a measurement date for all actuarial calculations of asset and liability values and significant actuarial assumptions.
Fiscal Year Ended | ||||||||
(in thousands) | January 27, 2007 | January 28, 2006 | ||||||
Change in Benefit Obligation: | ||||||||
Benefit obligation at beginning of year | $ | 10,082 | $ | 7,876 | ||||
Service cost | 1,065 | 925 | ||||||
Interest cost | 517 | 480 | ||||||
Benefits paid | (599 | ) | (1,035 | ) | ||||
Foreign currency adjustment | (92 | ) | 643 | |||||
Actuarial gain | (106 | ) | — | |||||
Plan amendments | 376 | — | ||||||
Change in assumptions | — | 1,193 | ||||||
Benefit Obligation at end of year | $ | 11,243 | $ | 10,082 | ||||
Change in Plan Assets: | ||||||||
Fair value of plan assets at beginning of year | $ | 8,750 | $ | 7,301 | ||||
Company contributions | 1,164 | 882 | ||||||
Foreign currency adjustment | (79 | ) | 597 | |||||
Actual return on plan assets | 1,146 | 1,005 | ||||||
Benefits paid | (599 | ) | (1,035 | ) | ||||
Fair value of plan assets at end of year | $ | 10,382 | $ | 8,750 | ||||
Funded Status of the Plan: | ||||||||
Funded status at end of year | $ | (861 | ) | $ | (1,332 | ) | ||
Unamortized net actuarial loss | 1,106 | 1,394 | ||||||
Prepaid benefit cost | 245 | 62 | ||||||
Additional minimum liability (Intangible pension asset) | (130 | ) | (189 | ) | ||||
(Accrued) prepaid benefit cost after additional minimum liability | $ | 115 | $ | (127 | ) | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Fiscal Year Ended | ||||||||||||
(in thousands) | January 27, 2007 | January 28, 2006 | January 29, 2005 | |||||||||
Net Pension Cost Includes the Following Components: | ||||||||||||
Service cost —benefits earned during the period | $ | 1,074 | $ | 915 | $ | 609 | ||||||
Interest cost on projected benefit obligations | 521 | 475 | 432 | |||||||||
Expected return on plan assets | (632 | ) | (541 | ) | (472 | ) | ||||||
Recognized net actuarial loss | 26 | 2 | 3 | |||||||||
Net periodic pension expense for year | $ | 989 | $ | 851 | $ | 572 | ||||||
January 27, 2007 | January 28, 2006 | |||||
Weighted-average assumptions used to determine benefit obligations: | ||||||
Discount rate | 5.25 | % | 5.25 | % | ||
Rate of Compensation Increase | 4.00 | % | 4.00 | % | ||
Weighted-average assumptions used to determine net periodic benefit cost: | ||||||
Discount rate | 5.25 | % | 6.00 | % | ||
Expected long-term rate of return on assets | 7.00 | % | 7.00 | % | ||
Rate of Compensation Increase | 4.00 | % | 4.00 | % |
The accumulated benefit obligation for the years ended January 27, 2007 and January 28, 2006 is $10.1 million and $8.9 million, respectively.
The Company’s Canadian Plan weighted-average asset allocations at December 31, 2006 and December 31, 2005 by asset category are as follows:
Target Allocation | December 31, 2006 | December 31, 2005 | |||||||
Core Canadian Equity | 32.5 | % | 35.6 | % | 36.9 | % | |||
U.S. Equity | 10.0 | % | 14.4 | % | 12.2 | % | |||
Real Estate | 5.0 | % | 4.0 | % | 4.2 | % | |||
Bond | 32.5 | % | 34.0 | % | 31.4 | % | |||
Mortgage | 5.0 | % | 2.4 | % | 4.0 | % | |||
International Equity | 10.0 | % | 9.6 | % | 8.5 | % | |||
Money Market | 5.0 | % | 0.0 | % | 2.8 | % | |||
Total | 100.0 | % | 100.0 | % | 100.0 | % | |||
The investment strategy for the Company’s Canadian plan is determined by a Committee composed of senior management, with representation from the Executive, Finance and Human Resources groups. This Committee reports to the Compensation Committee of the Board of Directors. The funds in the Canadian Plan are to be invested effectively and prudently for the exclusive benefit of Canadian Plan participants and beneficiaries with a strategy to maintain a conservative growth mix. In order to accomplish this strategy, the Canadian Plan’s asset allocation strategy contains investments in mutual funds, three focused on equity securities to maximize growth, and three focused on debt instruments to maintain a minimum level of stability. The Committee reviews the Canadian Plan’s asset mix on a regular basis. When the exposure in any of the funds reaches either a minimum or maximum level, an asset allocation review process is initiated and the independent pension plan administrator will automatically rebalance the portfolio back to target allocation levels. In developing a strategic asset allocation policy for the Canadian Plan, the Company examined certain factors that affect the risk tolerance of the Canadian Plan such as the demographics of employees, the actuarial and funding characteristics of the Canadian Plan and the Company’s business and financial characteristics.
The expected return on asset assumption was developed through analysis of historical market returns, current market conditions, and a comparison of expectations on potential future market returns. The assumption represents a long-term average view of the performance of the Canadian Plan, therefore the return may or may not be achieved during any one fiscal year.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following benefit payments are expected to be paid (in thousands):
Plan Year | Payout Projection | ||
2007 | $ | 293 | |
2008 | 223 | ||
2009 | 597 | ||
2010 | 645 | ||
2011 | 816 | ||
2012 – 2016 | 8,371 |
The employer contributions expected to be paid in fiscal 2007 are $0.8 million.
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 postretirement benefit plan (the “Postretirement Plan”) currently in effect.
The following tables provide a reconciliation of the projected benefit obligation, the funded status and amounts recognized in the Company’s financial statements at January 27, 2007 and January 28, 2006 (in thousands):
Fiscal Year Ended | ||||||||
January 27, 2007 | January 28, 2006 | |||||||
Change in Benefit Obligation: | ||||||||
Benefit obligation at beginning of year | $ | 2,457 | $ | 2,400 | ||||
Service cost | 175 | 169 | ||||||
Interest cost | 127 | 122 | ||||||
Change in assumptions | — | 77 | ||||||
Actuarial gain | (96 | ) | (182 | ) | ||||
Benefits paid | (57 | ) | (52 | ) | ||||
Curtailment gain | — | (77 | ) | |||||
Benefit Obligation at end of year | $ | 2,606 | $ | 2,457 | ||||
Funded Status of the Plan: | ||||||||
Funded status at end of year | $ | (2,606 | ) | $ | (2,457 | ) | ||
Unamortized net actuarial (gain) loss | (90 | ) | 5 | |||||
Accrued benefit cost | $ | (2,696 | ) | $ | (2,452 | ) | ||
Fiscal Year Ended | ||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | ||||||||
Net Pension Cost Includes the Following Components: | ||||||||||
Service cost—benefits earned during the period | $ | 175 | $ | 169 | $ | 165 | ||||
Interest cost on projected benefit obligations | 127 | 122 | 125 | |||||||
Curtailment gain | — | (77 | ) | — | ||||||
Net periodic pension expense for year | $ | 302 | $ | 214 | $ | 290 | ||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The weighted-average discount rate used in determining the postretirement benefit obligations was 5.50% at January 27, 2007 and January 28, 2006. The weighted-average discount rate used in determining the net periodic pension expense was 5.50% for the year ended January 27, 2007 and 5.75% for the year ended January 28, 2006. The Postretirement Plan is unfunded. The Postretirement Plan does not allow for increases in employer-paid costs for participants who retired after 1998; therefore, the health care cost trend rate assumption has no material impact on the obligation of the Company.
The following benefit payments are expected to be paid (in thousands):
Plan Year | Payout Projection | ||
2007 | $ | 106 | |
2008 | 118 | ||
2009 | 130 | ||
2010 | 148 | ||
2011 | 161 | ||
2012 – 2016 | 994 |
The employer contributions expected to be paid in fiscal 2007 are $0.1 million.
9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
January 27, 2007 | January 28, 2006 | |||||
10% Senior Subordinated Notes, due 2006 | $ | — | $ | 250 | ||
9.75% Senior Subordinated Notes, due 2010 | 165,000 | 165,000 | ||||
Senior Secured Revolving Credit Facility | 30,909 | — | ||||
Senior Secured Credit Facility | — | 30,598 | ||||
Sinking Fund Bonds | 866 | 1,335 | ||||
Revolving Line of Credit | — | 3,642 | ||||
Other Debt | 1,464 | 1,496 | ||||
Total Debt | 198,239 | 202,321 | ||||
Less Current Maturities | 434 | 4,648 | ||||
$ | 197,805 | $ | 197,673 | |||
Senior Subordinated Notes
On February 20, 2002 the Company issued at par value $175.0 million of 9.75% Senior Subordinated Notes due in 2010 (the “9.75% Notes”). Interest is payable semiannually in arrears on February 15 and August 15. The 9.75% 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 9.75% Notes contains certain other restricted covenants that limit the ability of the Company among other things, to incur additional indebtedness, to pay dividends or make certain other restricted payments, and to put limitations on the incurrence of indebtedness, asset dispositions, and transactions with affiliates. The 9.75% Notes are guaranteed on a senior subordinated basis by the Company’s existing domestic subsidiaries. The indenture does not prohibit open market purchases of the 9.75% Notes.
Upon the occurrence of certain events, as set forth in the indenture, the Company is required to repurchase the 9.75% Notes at a purchase price in cash equal to 101% of the principal amount, plus accrued and unpaid interest at the date of purchase. On or after February 15, 2006, the Company can redeem all or a portion of the 9.75% Notes at the redemption prices listed below, plus accrued and unpaid interest at the date of repurchase if redeemed during the twelve month period commencing February 15 of the years set forth below.
Period | Redemption Price | ||
2007 | 102.438 | % | |
2008 and Thereafter | 100.000 | % |
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
During fiscal 2005, the Company purchased in the open market subordinated notes with a face value of $10.0 million for an aggregate price of $9.0 million. These notes have been classified as defeased. The Company realized a $1.0 million gain on the purchase, which was partially offset by a write-off of a portion of the deferred financing fees related to these issuances in the amount of $0.2 million.
As of January 27, 2007 the estimated fair value of the 9.75% Notes exceeded their carrying value by approximately $4.0 million. Fair value of the 9.75% Notes is obtained from market sources.
Senior Secured Revolving Credit Facility
On January 18, 2007, the Company entered into a senior secured revolving credit facility agreement which provides for an $80.0 million senior secured revolving credit facility (the “Revolver”) including a $20.0 million sub-limit for letters of credit. The facility is apportioned between a U.S. revolving credit facility and a Canadian revolving credit facility. All obligations of the Company are secured by a first priority, perfected security interest in, and lien upon, substantially all tangible and intangible assets of the Company, a pledge of the stock of all domestic subsidiaries, and a pledge of 65% of the stock of any first tier material foreign subsidiaries. The proceeds of the Revolver have been and/or will be used for, among other purposes, (i) the refinancing of the Company’s previous credit facility, (ii) ongoing working capital needs of the Company, (iii) the payment of a dividend to the Company’s sole stockholder, Tandus Group, which Tandus Group in turn dividended to its shareholders, (iv) the payment of accrued management fees owed to two principal shareholders of Tandus Group and (v) the payment of other fees and expenses.
Interest on amounts outstanding under the Revolver is payable either at the base rate, Canadian Prime Rate, LIBOR, or the Canadian BA Rate, plus an applicable margin, depending on the nature of the loan, and mandatory costs, if any. The applicable margin may range from 0% to 1.75% and will vary based on the Company’s fixed charge coverage ratio. The weighted average interest rate on the Revolver for fiscal 2006 was 6.89%. The Revolver matures on January 18, 2012.
The Revolver is subject to certain representations, warranties, affirmative and negative covenants, and financial conditions customary for similar senior secured revolving credit facilities. As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the revolver, the Company will also be subject to the cross default provisions of the indenture governing the 9.75% notes, and vice versa. The Company was in compliance with all covenants as of January 27, 2007, and expects to remain in compliance throughout fiscal 2007, although no assurances to that effect can be given.
As of January 27, 2007, the Revolver had $30.9 million of borrowings outstanding and $4.2 million of letters of credit outstanding leaving total availability of $44.9 million.
Senior Credit Facility
In conjunction with a recapitalization in fiscal 2001, the Company entered into the 2001 Senior Secured Credit Facility (the “Senior Credit Facility”) with a group of banks consisting of a $50.0 million term loan facility (“Tranche A Term Loan Facility”), a $156.0 million term loan facility (“Tranche B Term Loan Facility”), and a $50.0 million revolving credit facility, which included a letter-of-credit sublimit of $15.0 million.
The Tranche A Term Loan Facility was repaid in full with proceeds of the 9.75% Notes in February 2002. The Tranche B Term Loan Facility and the revolving credit portion of the 2001 Credit Facility were repaid in full with proceeds of the Revolver in January 2007.
The Senior Credit Facility’s interest was calculated at a per annum rate equal to the Company’s choice of (a) an adjusted rate based on LIBOR plus a Eurodollar margin or (b) an alternative base rate, as defined by the Senior Credit Facility, plus a base rate margin. With respect to the revolving credit facility, the Eurodollar margin and the base rate margin adjusted quarterly on a sliding scale based on the net senior leverage ratio for the immediately preceding four consecutive quarters. The weighted average interest rate of the Senior Credit Facility for the fiscal year ended January 27, 2007 was 8.22%.
In August 2004, the Senior Credit Facility was amended to provide for activities related to the Facility Maximization. As part of the provisions, among other things, Monterey was released as a subsidiary guarantor, the Company was allowed to exclude up to $10.0 million of Facility Maximization costs from the financial covenant calculations and the credit spread was reduced.
Effective October 29, 2005, the Company amended its Senior Credit Facility to modify certain financial covenants. The amendment eliminated the interest coverage ratio requirement and modified the minimum fixed charge coverage ratio (as defined) for third quarter of fiscal 2005 and all future measurement periods to be 1.0 to 1.0. The amendment also provided for the exclusion from the financial covenants calculations of additional costs related to the Company’s broadloom consolidation project, in addition to other specified charges, totaling $3.0 million.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Sinking Fund Bonds
Approximately $0.9 million of long-term debt consisting of sinking fund bonds held and issued by the Nova Scotia Business Development Corporation was outstanding as of January 27, 2007. The debt is non-interest bearing. The Company negotiated with the Nova Scotia government the forgiveness of these sinking fund bonds as part of the Facility Maximization (see Note 11 contained herein). The forgiveness commenced in fiscal 2006, will continue over the remaining term of the note, and is based upon maintaining a defined level of full-time equivalent employees at the Company’s Nova Scotia facilities. The Company recognized a gain on forgiveness of debt related to these bonds of $0.2 million during fiscal 2006.
At January 27, 2007, the scheduled annual maturities of long-term debt are as follows (in thousands):
Fiscal Year: | Amount | ||
2007 | $ | 434 | |
2008 | 425 | ||
2009 | 427 | ||
2010 | 165,429 | ||
2011 | 31,313 | ||
Thereafter | 211 | ||
$ | 198,239 | ||
Total interest paid by the Company on all indebtedness was $20.4 million, $19.3 million and $18.6 million for fiscal 2006, 2005 and 2004, respectively.
Deferred Financing Costs
Financing costs of $3.8 million and $4.1 million associated with the issuance of the Revolver, Senior Credit Facility and the 9.75% Notes are included in other assets on the accompanying balance sheets as of January 27, 2007 and January 28, 2006, respectively. The Company recorded deferred financing costs of $1.3 million during fiscal 2006 related to the Revolver. A write-off of $0.4 million was recorded in fiscal 2006 in connection with the extinguishment of the Senior Credit Facility. Financing costs are amortized on the straight-line method over the term of the respective debt agreements. Amortization expense charged to interest expense was $1.2 million in fiscal 2006, $0.7 million in fiscal 2005 and $1.7 million in fiscal 2004.
Net Interest Expense
Total net interest expense was $20.7 million, $20.1 million and $20.4 million for fiscal 2006, fiscal 2005 and fiscal 2004, respectively, which includes interest income of $0.4 million in fiscal 2006, $0.3 million in fiscal 2005 and $0.2 million in fiscal 2004.
10. INCOME TAXES
Domestic and foreign components of income (loss) from continuing operations before income taxes are summarized as follows (in thousands):
Fiscal Year Ended | ||||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | ||||||||||
Domestic | $ | 16,735 | $ | (3,229 | ) | $ | 16,548 | |||||
Foreign | (347 | ) | (38 | ) | (2,972 | ) | ||||||
$ | 16,388 | $ | (3,267 | ) | $ | 13,576 | ||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Components of the income tax provision for fiscal years 2006, 2005 and 2004 are summarized as follows (in thousands):
Fiscal Year Ended | ||||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | ||||||||||
Current: | ||||||||||||
Federal | $ | 3,839 | $ | (1,288 | ) | $ | 3,560 | |||||
State and local | 1,279 | (252 | ) | 283 | ||||||||
Foreign | (108 | ) | — | — | ||||||||
5,010 | (1,540 | ) | 3,843 | |||||||||
Deferred: | ||||||||||||
Federal | 1,843 | 140 | 3,189 | |||||||||
State and local | 309 | (75 | ) | 333 | ||||||||
Foreign | — | 1,117 | (1,404 | ) | ||||||||
2,152 | 1,182 | 2,118 | ||||||||||
Income tax expense (benefit) | $ | 7,162 | $ | (358 | ) | $ | 5,961 | |||||
The reconciliation between income taxes computed at the U.S. Federal income statutory rate of 34% and the provision for income taxes as included in the consolidated statements of operations is as follows (in thousands):
Fiscal Year Ended | ||||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | ||||||||||
Amount at U.S. Federal income tax rate | $ | 5,572 | $ | (1,111 | ) | $ | 4,616 | |||||
State and local income taxes, net of federal income taxes | 1,048 | (216 | ) | 400 | ||||||||
Nondeductible expenses | 800 | 220 | 259 | |||||||||
Reduction in tax contingencies | — | (272 | ) | — | ||||||||
Tax effect of foreign operations | 50 | 1,117 | (45 | ) | ||||||||
Tax refunds from prior year amended returns | — | (318 | ) | — | ||||||||
Rate change on prior year gross deferred items | (112 | ) | (167 | ) | (22 | ) | ||||||
Change in valuation allowance | 2 | 738 | 692 | |||||||||
Other | (198 | ) | (349 | ) | 61 | |||||||
Income tax expense (benefit) | $ | 7,162 | $ | (358 | ) | $ | 5,961 | |||||
Amounts recognized in the consolidated balance sheets consist of (in thousands):
January 27, 2007 | January 28, 2006 | |||||
Deferred tax assets - current | $ | 11,504 | $ | 4,863 | ||
Deferred tax assets - non-current | — | 690 | ||||
Deferred tax liabilities - non-current | 8,519 | 4,441 | ||||
Net deferred tax assets | $ | 2,985 | $ | 1,112 | ||
The Company had federal and state tax net operating loss carryforwards totaling $5.6 million as of January 28, 2006. Such loss carryforwards expire in accordance with provisions of applicable tax laws and have remaining lives ranging from five to twenty years. A federal net operating loss carryforward of $5.6 million is carried into the fiscal year ended January 27, 2007. Gross state net operating loss carryforwards totaling $42.7 million are carried over into the fiscal year ended January 27, 2007.
Foreign tax net operating loss carryforwards totaled $5.2 million and $8.2 million as of January 27, 2007 and January 28, 2006, respectively. Such loss carryforwards expire in accordance with provisions of applicable tax laws and have remaining lives ranging from nine years to an indefinite expiration. A valuation allowance of $3.7 million was established at January 28, 2006 for certain of these losses for which realization, in management’s assessment, is considered more likely than not to be unutilized in future years.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The Company previously generated tax credits in the state of California totaling $1.4 million, for which a full valuation allowance was established at January 28, 2006 as management has assessed that these state tax credits are likely to never be realized.
The components of the net deferred tax assets as of January 27, 2007 and January 28, 2006 were as follows (in thousands):
January 27, 2007 | January 28, 2006 | |||||||
Deferred tax assets: | ||||||||
Warranty & customer claims accruals | $ | 492 | $ | 539 | ||||
Employee benefits | — | 1,337 | ||||||
Inventory reserves | 1,113 | 1,123 | ||||||
Accrued taxes | — | 35 | ||||||
Other liabilities and reserves | 2,229 | 2,354 | ||||||
AMT credits | 104 | 680 | ||||||
Deferred compensation | 8,275 | 7,186 | ||||||
State credits | 1,385 | 943 | ||||||
Federal and state net operating loss carryforwards | 4,019 | 2,144 | ||||||
Other | 245 | — | ||||||
Foreign tax credits | 6,598 | 2,208 | ||||||
Foreign net operating loss carryforwards | 2,774 | 2,394 | ||||||
Valuation allowance | (1,713 | ) | (1,271 | ) | ||||
Total deferred tax assets | 25,521 | 19,672 | ||||||
Deferred tax liabilities: | ||||||||
Tax depreciation in excess of book | 8,421 | 7,733 | ||||||
Goodwill and intangible amortization | 13,874 | 10,827 | ||||||
Other | 241 | — | ||||||
Total deferred tax liabilities | 22,536 | 18,560 | ||||||
Net deferred tax assets | $ | 2,985 | $ | 1,112 | ||||
Payments (refunds) for income taxes by the Company were $2.4 million, $1.5 million and $(1.1) million for fiscal 2006, 2005 and 2004, respectively.
11. FACILITY MAXIMIZATION PROJECT
On August 10, 2004, the Company and its parent announced plans to consolidate its broadloom operations by closing its Santa Ana, California production facility and moving equipment and production to its manufacturing facility in Truro, Nova Scotia (the “Facility Maximization”). The Facility Maximization was approved by the Company’s Board of Directors on August 9, 2004, and was completed during fiscal year 2005. The Facility Maximization has increased utilization in the Truro, Nova Scotia facility.
During fiscal 2005 and 2004, the Company incurred costs associated with the Facility Maximization, which consisted of temporary production inefficiencies, equipment movement and installation costs, professional fees, severance and other related costs. These costs are reflected in cost of goods sold and selling, general and administrative expenses in the accompanying consolidated statements of operations.
The Facility Maximization costs incurred are reported as follows (in millions):
Fiscal Year Ended | ||||||
January 28, 2006 | January 29, 2005 | |||||
Cost of Goods Sold | $ | 6.2 | $ | 2.6 | ||
Selling, General and Administrative Expenses | 2.0 | 1.4 | ||||
Total Facility Maximization Project Costs | $ | 8.2 | $ | 4.0 | ||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The original anticipated total expenditures and actual costs incurred for the Facility Maximization are as follows (in millions):
Anticipated Total Expenditures as of August 10, 2004 | Amounts Incurred During Fiscal Year Ended January 29, 2005 | Amounts Incurred During Fiscal Year Ended January 28, 2006 | Total Amounts Incurred | |||||||||
Severance Costs | $ | 1.8 | $ | 1.5 | $ | 0.6 | $ | 2.1 | ||||
Contractual Obligations and Professional Fees | 3.1 | 0.4 | 0.8 | 1.2 | ||||||||
Other Project Costs | 1.5 | 2.1 | 6.8 | 8.9 | ||||||||
Gross Project Expenditures | $ | 6.4 | $ | 4.0 | $ | 8.2 | $ | 12.2 | ||||
Capital expenditure costs related to the project were $2.7 million and $2.0 million during fiscal 2005 and 2004, respectively.
As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of Crossley’s outstanding sinking fund bonds. See Note 9 contained herein for further discussion.
There were minimal remaining costs related to the Facility Maximization accrued as of January 28, 2006. No costs were accrued as of January 27, 2007.
12. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows (in thousands):
Fiscal Year Ended | |||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | |||||||||
Net Income (Loss) | $ | 10,205 | $ | (4,629 | ) | $ | 6,703 | ||||
Other Comprehensive Income (Loss): | |||||||||||
Foreign currency translation adjustment | 253 | (282 | ) | 222 | |||||||
Minimum pension liability adjustment | 2,015 | (424 | ) | — | |||||||
Income tax benefit (expense) | (806 | ) | 169 | — | |||||||
Total Comprehensive Income (Loss) | $ | 11,667 | $ | (5,166 | ) | $ | 6,925 | ||||
13. STOCK OPTIONS
In August 2001, Tandus Group adopted the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan (the “2001 Plan”) which provides for the issuance of options to purchase 57,061.64 shares of Tandus Group common stock (the “Old Options”). The plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. The Old Options become exercisable over five years, expire ten years from the date of grant and vest only upon the achievement of certain earnings targets; however, accelerated vesting could occur due to a change in control. The Company accounts for the Old Options as variable options and will record expenses based upon increases and decreases in the fair market value of the common stock at the end of each reporting period. As of January 27, 2007, the Company has not recorded any expense as the targets established under the program have not been achieved. During the fourth quarter of fiscal 2006, the Company purchased a portion of the Old Options outstanding for a nominal flat fee per employee. At January 27, 2007, no shares are exercisable and the weighted average contractual life of the outstanding Old Options is 4.5 years.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
The following table summarizes the activity in the plans for fiscal years 2006, 2005, and 2004:
Number of Shares | Average Exercise Price | |||||
Outstanding at January 31, 2004 | 50,357 | $ | 35.70 | |||
Granted in fiscal 2004 | — | 35.70 | ||||
Canceled in fiscal 2004 | (7,675 | ) | 35.70 | |||
Outstanding at January 29, 2005 | 42,682 | 35.70 | ||||
Granted in fiscal 2005 | — | 35.70 | ||||
Canceled in fiscal 2005 | (8,673 | ) | 35.70 | |||
Outstanding at January 28, 2006 | 34,009 | 35.70 | ||||
Granted in fiscal 2006 | — | 35.70 | ||||
Canceled in fiscal 2006 | (14,665 | ) | 35.70 | |||
Outstanding at January 27, 2007 | 19,344 | 35.70 | ||||
On December 6, 2006, Tandus Group adopted the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan (the “2001 Amended Plan”) which provides for the issuance of options to purchase 500,000 shares of Tandus Group common stock (the “New Options”). The 2001 Amended Plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus Group’s Board of Directors or its Compensation Committee. No New Options had been granted as of January 27, 2007; however, New Options were granted on January 31, 2007, at which time all Old Options were cancelled.
14. SEGMENT INFORMATION
The Company has adopted Statement of Financial Accounting Standards 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 in Note 2 contained herein. Performance of the segments is evaluated on Adjusted EBITDA, which represents earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-down of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt.
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 or polypropylene extruded yarn.
No single customer represented 10% or more of the Floorcovering segment’s sales for any year presented in the accompanying financial statements. In the Extrusion segment, the Company had two external customers in each of fiscal years 2006, 2005 and 2004 that exceeded 10% of the segment’s total net sales. For 2006, these customers represented 18.9% and 16.1%. For 2005, these
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
customers represented 22.9% and 12.8%. For 2004, these customers represented 35.4% and 14.0%. No other Extrusion segment customers represented 10% or more of sales for any year presented in the accompanying financial statements.
The tables below provide certain financial information by segment (in thousands):
Fiscal Year Ended | |||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | |||||||
Net Sales to External Customers: | |||||||||
Floorcoverings | $ | 325,892 | $ | 289,377 | $ | 308,689 | |||
Extrusion | 24,473 | 26,836 | 23,257 | ||||||
Total Sales to External Customers | $ | 350,365 | $ | 316,213 | $ | 331,946 | |||
Fiscal Year Ended | |||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | |||||||
Adjusted EBITDA: | |||||||||
Floorcoverings | $ | 44,634 | $ | 32,749 | $ | 48,353 | |||
Extrusion | 6,185 | 5,203 | 3,085 | ||||||
Total Adjusted EBITDA | $ | 50,819 | $ | 37,952 | $ | 51,438 | |||
January 27, 2007 | January 28, 2006 | |||||
Consolidated Assets: | ||||||
Floorcoverings | $ | 271,986 | $ | 269,256 | ||
Extrusion | 22,220 | 26,178 | ||||
Discontinued Operations | 4,930 | 7,094 | ||||
Total Consolidated Assets | $ | 299,136 | $ | 302,528 | ||
Included in the asset amounts above is goodwill for the Floorcoverings segment in the amount of $92.7 million as of January 27, 2007 and January 28, 2006, and for the Extrusion segment in the amount of $5.6 million as of January 27, 2007 and January 28, 2006.
A reconciliation of net income (loss) as reported in the consolidated statements of operations to Adjusted EBITDA as shown above is as follows (in thousands):
Fiscal Year Ended | ||||||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | ||||||||||
Reconciliation of Net Income (Loss) to Adjusted EBITDA: | ||||||||||||
Net income (loss) | $ | 10,205 | $ | (4,629 | ) | $ | 6,703 | |||||
Income tax expense (benefit) | 7,162 | (358 | ) | 5,961 | ||||||||
Net interest expense | 20,650 | 20,082 | 20,443 | |||||||||
Depreciation | 10,860 | 10,021 | 10,023 | |||||||||
Amortization | 2,455 | 2,620 | 3,112 | |||||||||
(Gain) Loss from discontinued operations | (979 | ) | 1,720 | 912 | ||||||||
Gain of forgiveness of debt | (228 | ) | — | — | ||||||||
Chroma cash dividends | — | — | 922 | |||||||||
Equity in earnings of Chroma | — | — | (893 | ) | ||||||||
Minority interest in income (loss) of subsidiary | — | (24 | ) | 97 | ||||||||
Facility maximization costs | — | 8,158 | 3,986 | |||||||||
Other | 694 | 362 | 172 | |||||||||
Adjusted EBITDA | $ | 50,819 | $ | 37,952 | $ | 51,438 | ||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Information relative to sales and long-lived assets for the United States and other countries is summarized in the following tables (in thousands). Sales are attributed to countries/regions based upon the plant location from which products are shipped. Long-lived assets include all assets associated with operations in the indicated geographic area excluding intercompany receivables and investments.
Fiscal Year Ended | |||||||||
January 27, 2007 | January 28, 2006 | January 29, 2005 | |||||||
Net Sales: | |||||||||
Domestic | $ | 306,848 | $ | 287,857 | $ | 299,169 | |||
Canada | 34,179 | 25,901 | 31,014 | ||||||
Other International | 9,374 | 2,455 | 1,763 | ||||||
Total | $ | 350,401 | $ | 316,213 | $ | 331,946 | |||
January 27, 2007 | January 28, 2006 | |||||
Long-lived Assets (1): | ||||||
Domestic | $ | 168,897 | $ | 173,770 | ||
Canada | 11,217 | 12,847 | ||||
Other International | 4,533 | 4,678 | ||||
Total | $ | 184,647 | $ | 191,295 | ||
(1) | Consists of the net book value of property, plant and equipment, goodwill and other intangible assets. |
15. RELATED-PARTY TRANSACTIONS
Effective January 2001, the Company entered into Professional Services Agreements with each of Oaktree Fund and B of A Fund (collectively, the “Funds”). The terms of both agreements are substantially the same. The Funds will provide management and financial consulting services to the Company from time to time. These services will include consulting on business strategy, future investments, future acquisitions and divestitures, and debt and equity financing. For these services, the Company has agreed to pay each of the Funds quarterly fees of $62,500 and to reimburse them for reasonable travel and other out-of-pocket fees and expenses incurred by them in providing services to the Company (including, but not limited to, fees and expenses incurred in attending Company-related meetings). The Company has also agreed to indemnify each of the Funds against any losses the Funds may suffer arising out of the services they provide to us in connection with these agreements, such as losses arising from third party suits. The agreements terminate on the first of (1) the date on which either of the Funds, as the case may be, owns less than 25% of the capital stock in Tandus Group, (2) the date on which Tandus Group is either sold to a party who does not currently own more than 5% of Tandus Group’s common stock or (3) substantially all the assets of Tandus Group are sold. Included in the Company’s consolidated balance sheets as of January 28, 2006 are accrued liabilities of $2.5 million related to services provided to the Company by the Funds. No amounts were accrued as of January 27, 2007.
As previously discussed, on January 18, 2007, the Company entered into a $80 million senior secured revolving credit facility. The lender in the facility is Bank of America N.A. which is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group.
One of the Company’s directors, Daniel G. MacFarlan, is currently providing operational advisory services to the Company. The initial term of his advisory services was six months, which commenced in January 2006. The amount received by Mr. MacFarlan was $350,000 for that initial term. The term was extended for an additional six months for additional compensation of $350,000. The Company has extended Mr. MacFarlan’s advisory services arrangement throughout 2007 for compensation totaling $350,000 for the year.
Prior to and during fiscal 2004, the Company and another partner each held a one-half interest in Chroma Systems Partners (“Chroma”), a general partnership, which provided carpet dyeing and finishing services to the partners and outside third parties. During fiscal 2004, the Company was charged $9.8 million for these services. Under the terms of its agreement, the Company leased a portion of its carpet manufacturing and administrative space from the partnership in addition to sharing certain executive and other costs. During fiscal 2004, the Company paid the partnership approximately $0.6 million for the specified services. In fiscal 2004, the Company successfully negotiated its exit from the Chroma partnership with a resulting charge of $0.2 million for the negotiated settlement and the early termination of its Dyeing and Finishing Agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
16. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CERTAIN RISKS
Lease Commitments
The Company is obligated under various leases for office space, machinery and equipment. At January 27, 2007 future minimum lease payments under operating leases are as follows (in thousands):
Fiscal Year | Future Minimum Lease Payments | ||
2007 | $ | 3,027 | |
2008 | 1,783 | ||
2009 | 1,037 | ||
2010 | 750 | ||
2011 | 273 | ||
Thereafter | — | ||
$ | 6,870 | ||
Rental expense under operating leases was approximately $2.9 million, $3.6 million and $3.9 million in fiscal 2006, fiscal 2005 and fiscal 2004, respectively.
Environmental
The Company is subject to federal, state, and local laws and regulations concerning the environment. At January 27, 2007, 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 financial condition or results of operations.
Litigation
On September 18, 1998, James Bradley Thomason (“Thomason”) filed an action in the District Court, 285th Judicial District, Bexar County, Texas (the “Court”) against Linda Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the “Gomez Defendants”), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas agencies (the “Contract”). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Company’s motion for summary judgment and as a result, all of Thomason’s claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the “Appellate Court”) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys’ fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys’ fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.
Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006, has filed its brief as Appellant, and the Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability, including post judgment interest of approximately $2,069,000 related to this case in its accompanying statements of financial condition.
On June 21, 2005, the Company filed in the United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the “Court”) a joint lawsuit with Shaw Industries Group, Inc. (“Shaw”) and Mohawk Industries, Inc. (“Mohawk”) against Interface, Inc. (“Interface”), regarding a patent on a particular pattern of carpet tile that Interface recently received (the “Rome Action”). The Rome Action asks the Court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interface’s suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. On December 19, 2006, the Court conducted what is known as a “MarkmanHearing” regarding interpretation of four disputed terms used in Interface’s patent. To date, the Court has not yet issued its order regarding the disputed terms and no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.
The Company is involved in litigation from time to time. When litigation arises, the Company may create a litigation accrual in order to pay for damages for which it might be liable. In some circumstances, it may settle litigation without going to trial. During fiscal 2005, the Company released a litigation accrual of $0.8 million related to a suit with Employers Mutual Insurance Companies and settled a suit for $0.4 million brought by Enron Energy Services.
From time to time the Company is also 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. Management believes 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 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 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.
Reliance on Principal Supplier
Invista, Inc. (“Invista”) currently supplies a majority of the Company’s requirements for nylon yarn, the primary raw material used in the Company’s floorcovering products. The unanticipated termination or interruption of the supply arrangement with Invista could have a material adverse effect on the Company because of the cost and delay associated with shifting this business to another supplier. Historically, the Company has not experienced significant interruptions in the supply of nylon yarn from Invista, although no assurances can be given that it will not experience interruption in supply in the future.
While Invista is an important vendor, it is believed that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista, there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.
The other significant raw materials used by the Company in its carpet manufacturing process include coater materials, such as vinyl resins and primary backing.
Concentrations of Labor
As of January 27, 2007, the Company employed 1,579 persons on a full-time or full-time equivalent basis of which approximately 352 manufacturing workers in Canada are represented by a labor union. The collective bargaining agreements, which represent this union, expire on June 30, 2009.
Workers’ Compensation
The Company is self-insured for workers’ compensation claims up to specified stop-loss limits. In the opinion of management, adequate provision has been made for all incurred claims.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
17. QUARTERLY FINANCIAL DATA(Unaudited)
The quarterly financial data below is based on the Company’s fiscal periods (in thousands):
FISCAL 2006 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||
Net Sales | $ | 78,160 | $ | 105,875 | $ | 83,126 | $ | 83,204 | ||||||
Gross Profit | 24,066 | 38,347 | 28,468 | 27,593 | ||||||||||
Net Income (Loss) | (1,614 | ) | 7,006 | 2,535 | 2,278 | |||||||||
FISCAL 2005 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||
Net Sales | $ | 66,120 | $ | 93,065 | $ | 79,331 | $ | 77,697 | ||||||
Gross Profit | 18,480 | 30,962 | 22,321 | 23,411 | ||||||||||
Net Income (Loss) | (5,783 | ) | 4,374 | (3,820 | ) | 600 |
18. OTHER ITEMS
On February 2, 2007, the Company hired Glen A. Hussmann as its new President and Chief Executive Officer, replacing Edgar M. Bridger who resigned effective November 30, 2006.
On March 22, 2007, the Company entered into a commitment letter with Bank of America, N.A. (“BofA”), Wachovia Bank and certain of their affiliates (collectively, the “Lenders”), pursuant to which the Lenders have agreed to enter into a Credit Facility with the Company, the proceeds from which would be used (i) to redeem all of the Company’s 9.75% Notes due 2010 (including the principal, accrued interest and premium thereon), (ii) to repay a portion of the Company’s Revolver, (iii) to pay transaction-related fees and expenses and (iv) for other lawful purposes, including a dividend. The commitment, which expires on June 30, 2007 unless definitive documentation for the Credit Facility is entered into prior to such date, is subject to the satisfaction of certain conditions precedent including, but not limited to, the following: (a) the accuracy and completeness of the Company’s representations to the Lenders and (b) the amendment of the Revolver to reduce the commitment thereunder to not more than $60 million at closing and to permit the Credit Facility. BofA is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group. No assurance can be given that the foregoing transactions will be consummated.
In August 1998, the Company acquired a 51.0% interest in Collins & Aikman Floorcoverings Asia Pte. Ltd. (“C&A Asia”), a commercial carpet distribution venture in Singapore. On December 30, 2005, the Company purchased the remaining 49.0% of C&A Asia for approximately $0.3 million. Prior to that, the results had been reported on a consolidated basis, with the 49.0% reflected as minority interest. Accordingly, the impact on the consolidated financial statements is immaterial.
19. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The 9.75% Notes of the Company (the “Issuer”) are guaranteed by certain of the Company’s domestic subsidiaries (the “guarantor subsidiaries”). Effective August 18, 2004, Monterey was released as a guarantor. 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, May 1, 2004, August 18, 2004 and October 29, 2005. 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 January 27, 2007 is $172.4 million. This amount represents the principal amount outstanding of the Company’s 9.75% Notes and accrued interest. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of January 28, 2006 and January 27, 2007 and for each of the three years in the period ended January 27, 2007 is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Balance Sheets
January 27, 2007
(In Thousands)
Issuer | Guarantor Subsidiaries | Eliminations | Subtotal Issuer & Guarantors | Non- Guarantor | Eliminations | Consolidated Total | |||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||||||||||
Cash and cash equivalents | $ | 3,427 | $ | 1 | $ | — | $ | 3,428 | $ | 3,326 | $ | — | $ | 6,754 | |||||||||||||
Accounts receivable, net | 147 | 39,990 | — | 40,137 | 6,657 | — | 46,794 | ||||||||||||||||||||
Inventories | 21,325 | 2,547 | — | 23,872 | 13,998 | — | 37,870 | ||||||||||||||||||||
Deferred tax assets | 6,895 | 30 | — | 6,925 | 4,579 | — | 11,504 | ||||||||||||||||||||
Prepaid expenses and other | 589 | — | — | 589 | 98 | — | 687 | ||||||||||||||||||||
Total current assets | 32,383 | 42,568 | — | 74,951 | 28,658 | — | 103,609 | ||||||||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net | 33,647 | 10,808 | — | 44,455 | 15,619 | — | 60,074 | ||||||||||||||||||||
GOODWILL | 62,386 | 5,631 | — | 68,017 | 30,361 | — | 98,378 | ||||||||||||||||||||
OTHER INTANGIBLE ASSETS, net | 26,069 | — | — | 26,069 | 126 | — | 26,195 | ||||||||||||||||||||
INVESTMENT IN SUBSIDIARIES | 126,268 | — | (52,913 | ) | 73,355 | — | (73,355 | ) | — | ||||||||||||||||||
OTHER ASSETS | 5,612 | 93 | — | 5,705 | 2,511 | (2,266 | ) | 5,950 | |||||||||||||||||||
OTHER ASSETS - DISCONTINUED OPERATIONS | — | — | — | — | 4,930 | — | 4,930 | ||||||||||||||||||||
TOTAL ASSETS | $ | 286,365 | $ | 59,100 | $ | (52,913 | ) | $ | 292,552 | $ | 82,205 | $ | (75,621 | ) | $ | 299,136 | |||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | |||||||||||||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||||||||||||
Accounts payable | $ | 11,528 | $ | 2,406 | $ | — | $ | 13,934 | $ | 2,898 | $ | — | $ | 16,832 | |||||||||||||
Accrued expenses | 20,030 | 2,211 | — | 22,241 | 3,546 | — | 25,787 | ||||||||||||||||||||
Current portion of long-term debt | — | — | — | — | 434 | — | 434 | ||||||||||||||||||||
Total current liabilities | 31,558 | 4,617 | — | 36,175 | 6,878 | — | 43,053 | ||||||||||||||||||||
INTERCOMPANY (RECEIVABLE) PAYABLE | 11,153 | 571 | — | 11,724 | (11,755 | ) | 31 | — | |||||||||||||||||||
OTHER LIABILITIES, including post-retirement obligation | 3,309 | — | — | 3,309 | 122 | — | 3,431 | ||||||||||||||||||||
OTHER LIABILITIES - DISCONTINUED OPERATIONS | — | — | — | — | 2,263 | — | 2,263 | ||||||||||||||||||||
DEFERRED TAX LIABILITIES | 9,456 | 999 | — | 10,455 | 61 | (1,997 | ) | 8,519 | |||||||||||||||||||
LONG-TERM DEBT, net of current portion | 186,524 | — | — | 186,524 | 11,281 | — | 197,805 | ||||||||||||||||||||
STOCKHOLDER’S EQUITY: | |||||||||||||||||||||||||||
Preferred stock | — | — | — | — | 133 | (133 | ) | — | |||||||||||||||||||
Common stock | — | — | — | — | 11,117 | (11,117 | ) | — | |||||||||||||||||||
Paid-in capital | 72,648 | — | — | 72,648 | 52,064 | (52,064 | ) | 72,648 | |||||||||||||||||||
Retained earnings (deficit) | (28,283 | ) | 52,913 | (52,913 | ) | (28,283 | ) | 10,384 | (10,384 | ) | (28,828 | ) | |||||||||||||||
Accumulated other comprehensive income | — | — | — | — | (343 | ) | 43 | (300 | ) | ||||||||||||||||||
Total stockholder’s equity | 44,365 | 52,913 | (52,913 | ) | 44,365 | 73,355 | (73,655 | ) | 44,065 | ||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 286,365 | $ | 59,100 | $ | (52,913 | ) | $ | 292,552 | $ | 82,205 | $ | (75,621 | ) | $ | 299,136 | |||||||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Balance Sheets
January 28, 2006
(In Thousands)
Issuer | Guarantor Subsidiaries | Eliminations | Subtotal Issuer & Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||||
ASSETS | |||||||||||||||||||||||||||
CURRENT ASSETS: | |||||||||||||||||||||||||||
Cash and cash equivalents | $ | 2,655 | $ | 1 | $ | — | $ | 2,656 | $ | 2,889 | $ | — | $ | 5,545 | |||||||||||||
Accounts receivable, net | 37 | 38,508 | — | 38,545 | 6,634 | — | 45,179 | ||||||||||||||||||||
Inventories | 20,251 | 2,906 | — | 23,157 | 15,174 | — | 38,331 | ||||||||||||||||||||
Deferred tax assets | 5,451 | 76 | — | 5,527 | — | (664 | ) | 4,863 | |||||||||||||||||||
Prepaid expenses and other | 2,573 | — | — | 2,573 | 719 | — | 3,292 | ||||||||||||||||||||
Total current assets | 30,967 | 41,491 | — | 72,458 | 25,416 | (664 | ) | 97,210 | |||||||||||||||||||
PROPERTY, PLANT AND EQUIPMENT, net | 34,124 | 12,744 | — | 46,868 | 17,399 | — | 64,267 | ||||||||||||||||||||
GOODWILL | 62,386 | 5,631 | — | 68,017 | 30,361 | — | 98,378 | ||||||||||||||||||||
OTHER INTANGIBLE ASSETS, net | 28,524 | — | — | 28,524 | 126 | — | 28,650 | ||||||||||||||||||||
INVESTMENT IN SUBSIDIARIES | 91,994 | — | (27,540 | ) | 64,454 | — | (64,454 | ) | — | ||||||||||||||||||
OTHER ASSETS | 6,471 | 93 | — | 6,564 | 3,382 | (3,017 | ) | 6,929 | |||||||||||||||||||
OTHER ASSETS - DISCONTINUED OPERATIONS | — | — | — | — | 7,094 | — | 7,094 | ||||||||||||||||||||
TOTAL ASSETS | $ | 254,466 | $ | 59,959 | $ | (27,540 | ) | $ | 286,885 | $ | 83,778 | $ | (68,135 | ) | $ | 302,528 | |||||||||||
LIABILITIES AND STOCKHOLDER’S EQUITY | |||||||||||||||||||||||||||
CURRENT LIABILITIES: | |||||||||||||||||||||||||||
Accounts payable | $ | 8,485 | $ | 2,349 | $ | — | $ | 10,834 | $ | 3,858 | $ | — | $ | 14,692 | |||||||||||||
Accrued expenses | 19,077 | 1,777 | — | 20,854 | 3,918 | — | 24,772 | ||||||||||||||||||||
Current portion of long-term debt | 571 | — | — | 571 | 4,077 | — | 4,648 | ||||||||||||||||||||
Total current liabilities | 28,133 | 4,126 | — | 32,259 | 11,853 | — | 44,112 | ||||||||||||||||||||
INTERCOMPANY (RECEIVABLE) PAYABLE | (18,513 | ) | 27,237 | — | 8,724 | (9,314 | ) | 590 | — | ||||||||||||||||||
OTHER LIABILITIES, including post-retirement obligation | 5,301 | — | — | 5,301 | 63 | — | 5,364 | ||||||||||||||||||||
OTHER LIABILITIES - DISCONTINUED OPERATIONS | (11,839 | ) | — | — | (11,839 | ) | 14,326 | — | 2,487 | ||||||||||||||||||
DEFERRED TAX LIABILITIES | 7,066 | 1,056 | — | 8,122 | — | (3,681 | ) | 4,441 | |||||||||||||||||||
LONG-TERM DEBT, net of current portion | 195,277 | — | — | 195,277 | 2,396 | — | 197,673 | ||||||||||||||||||||
STOCKHOLDER’S EQUITY: | |||||||||||||||||||||||||||
Preferred stock | — | — | — | — | 133 | (133 | ) | — | |||||||||||||||||||
Common stock | — | — | — | — | 11,117 | (11,117 | ) | — | |||||||||||||||||||
Paid-in capital | 72,648 | — | — | 72,648 | 52,064 | (52,064 | ) | 72,648 | |||||||||||||||||||
Retained earnings (deficit) | (22,435 | ) | 27,540 | (27,540 | ) | (22,435 | ) | 1,483 | (1,483 | ) | (22,435 | ) | |||||||||||||||
Accumulated other comprehensive income | (1,172 | ) | — | — | (1,172 | ) | (343 | ) | (247 | ) | (1,762 | ) | |||||||||||||||
Total stockholder’s equity | 49,041 | 27,540 | (27,540 | ) | 49,041 | 64,454 | (65,044 | ) | 48,451 | ||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 254,466 | $ | 59,959 | $ | (27,540 | ) | $ | 286,885 | $ | 83,778 | $ | (68,135 | ) | $ | 302,528 | |||||||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Statements of Operations
For the Year Ended January 27, 2007
(In Thousands)
Issuer | Guarantor Subsidiaries | Eliminations | Subtotal Issuer & Guarantors | Non-Guarantor Subsidiaries | Eliminations | Consolidated Total | |||||||||||||||||||||
Net Sales | $ | 183,918 | $ | 303,052 | $ | (160,024 | ) | $ | 326,946 | $ | 84,155 | $ | (60,736 | ) | $ | 350,365 | |||||||||||
Cost of Goods Sold | 150,649 | 228,050 | (160,024 | ) | 218,675 | 73,952 | (60,736 | ) | 231,891 | ||||||||||||||||||
Selling, General & Administrative Expenses | 34,747 | 32,782 | — | 67,529 | 10,994 | — | 78,523 | ||||||||||||||||||||
Amortization | 2,455 | — | — | 2,455 | — | — | 2,455 | ||||||||||||||||||||
Operating Expenses | 187,851 | 260,832 | (160,024 | ) | 288,659 | 84,946 | (60,736 | ) | 312,869 | ||||||||||||||||||
Operating Income (Loss) | (3,933 | ) | 42,220 | — | 38,287 | (791 | ) | — | 37,496 | ||||||||||||||||||
Equity in Earnings of Subsidiaries | 35,255 | — | (25,373 | ) | 9,882 | — | (9,882 | ) | — | ||||||||||||||||||
Other Income (Expense) | 2 | — | — | 2 | (247 | ) | — | (245 | ) | ||||||||||||||||||
Gain (Loss) on Early Extinguishment/Forgiveness of Debt | (438 | ) | — | — | (438 | ) | 225 | — | (213 | ) | |||||||||||||||||
Net Interest Expense | 20,495 | — | — | 20,495 | 155 | — | 20,650 | ||||||||||||||||||||
Income (Loss) from Continuing Operations Before Income Taxes | 10,391 | 42,220 | (25,373 | ) | 27,238 | (968 | ) | (9,882 | ) | 16,388 | |||||||||||||||||
Income Tax Expense (Benefit) | (9,887 | ) | 16,847 | — | 6,960 | 202 | — | 7,162 | |||||||||||||||||||
Income (Loss) from Continuing Operations | 20,278 | 25,373 | (25,373 | ) | 20,278 | (1,170 | ) | (9,882 | ) | 9,226 | |||||||||||||||||
Loss from Discontinued Operations, net of tax | (10,073 | ) | — | — | (10,073 | ) | 10,071 | 981 | 979 | ||||||||||||||||||
Net Income (Loss) | $ | 10,205 | $ | 25,373 | $ | (25,373 | ) | $ | 10,205 | $ | 8,901 | $ | (8,901 | ) | $ | 10,205 | |||||||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Statements of Operations
For the Year Ended January 28, 2006
(In Thousands)
Issuer | Guarantor Subsidiaries | Eliminations | Subtotal Issuer & Guarantors | Non- Guarantor | Eliminations | Consolidated Total | ||||||||||||||||||||
Net Sales | $ | 147,729 | $ | 277,782 | $ | (128,158 | ) | $ | 297,353 | $ | 72,258 | $ | (53,398 | ) | $ | 316,213 | ||||||||||
Cost of Goods Sold | 138,335 | 199,841 | (128,158 | ) | 210,018 | 64,419 | (53,398 | ) | 221,039 | |||||||||||||||||
Selling, General & Administrative Expenses | 31,379 | 32,544 | — | 63,923 | 12,731 | — | 76,654 | |||||||||||||||||||
Amortization | 2,456 | 164 | — | 2,620 | — | — | 2,620 | |||||||||||||||||||
Operating Expenses | 172,170 | 232,549 | (128,158 | ) | 276,561 | 77,150 | (53,398 | ) | 300,313 | |||||||||||||||||
Operating Income (Loss) | (24,441 | ) | 45,233 | — | 20,792 | (4,892 | ) | — | 15,900 | |||||||||||||||||
Minority Interest in Loss of Subsidiary | — | — | — | — | 24 | — | 24 | |||||||||||||||||||
Equity in Earnings of Subsidiaries | 22,086 | — | — | 22,086 | — | (22,086 | ) | — | ||||||||||||||||||
Other Income (Expense) | 60 | — | — | 60 | 36 | — | 96 | |||||||||||||||||||
Gain on Early Extinguishment of Debt | 795 | — | — | 795 | — | — | 795 | |||||||||||||||||||
Net Interest Expense | 19,951 | — | — | 19,951 | 131 | — | 20,082 | |||||||||||||||||||
Income (Loss) from Continuing Operations Before Income Taxes | (21,451 | ) | 45,233 | — | 23,782 | (4,963 | ) | (22,086 | ) | (3,267 | ) | |||||||||||||||
Income Tax Expense (Benefit) | (16,822 | ) | 16,944 | — | 122 | (480 | ) | — | (358 | ) | ||||||||||||||||
Income (Loss) from Continuing Operations | (4,629 | ) | 28,289 | — | 23,660 | (4,483 | ) | (22,086 | ) | (2,909 | ) | |||||||||||||||
Loss from Discontinued Operations, net of tax | — | — | — | — | (1,720 | ) | — | (1,720 | ) | |||||||||||||||||
Net Income (Loss) | $ | (4,629 | ) | $ | 28,289 | $ | — | $ | 23,660 | $ | (6,203 | ) | $ | (22,086 | ) | $ | (4,629 | ) | ||||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Statements of Operations
For the Year Ended January 27, 2005
(In Thousands)
Issuer | Guarantor Subsidiaries | Eliminations | Subtotal Issuer & Guarantors | Non- Guarantor | Eliminations | Consolidated Total | ||||||||||||||||||||
Net Sales | $ | 228,156 | $ | 29,160 | $ | — | $ | 257,316 | $ | 119,710 | $ | (45,080 | ) | $ | 331,946 | |||||||||||
Cost of Goods Sold | 142,685 | 28,146 | — | 170,831 | 93,745 | (45,080 | ) | 219,496 | ||||||||||||||||||
Selling, General & Administrative Expenses | 48,609 | — | — | 48,609 | 27,334 | — | 75,943 | |||||||||||||||||||
Amortization | 2,456 | 656 | — | 3,112 | — | — | 3,112 | |||||||||||||||||||
Operating Expenses | 193,750 | 28,802 | — | 222,552 | 121,079 | (45,080 | ) | 298,551 | ||||||||||||||||||
Operating Income (Loss) | 34,406 | 358 | — | 34,764 | (1,369 | ) | — | 33,395 | ||||||||||||||||||
Minority Interest in Income of Subsidiary | — | — | — | — | (97 | ) | — | (97 | ) | |||||||||||||||||
Equity in Earnings of Affiliate | — | — | — | — | 893 | — | 893 | |||||||||||||||||||
Equity in Loss of Subsidiaries | 1,918 | — | — | 1,918 | — | (1,918 | ) | — | ||||||||||||||||||
Other Expense | — | (133 | ) | — | (133 | ) | (39 | ) | — | (172 | ) | |||||||||||||||
Net Interest Expense | 20,387 | — | — | 20,387 | 56 | — | 20,443 | |||||||||||||||||||
Income (Loss) from Continuing Operations Before Income Taxes | 12,101 | 225 | — | 12,326 | (668 | ) | 1,918 | 13,576 | ||||||||||||||||||
Income Tax Expense | 5,398 | 93 | — | 5,491 | 470 | — | 5,961 | |||||||||||||||||||
Income (Loss) from Continuing Operations | 6,703 | 132 | — | 6,835 | (1,138 | ) | 1,918 | 7,615 | ||||||||||||||||||
Loss from Discontinued Operations, net of tax | — | — | — | — | (912 | ) | — | (912 | ) | |||||||||||||||||
Net Income (Loss) | $ | 6,703 | $ | 132 | $ | — | $ | 6,835 | $ | (2,050 | ) | $ | 1,918 | $ | 6,703 | |||||||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Statements of Cash Flows
For the Year Ended January 27, 2007
(In Thousands)
Issuer | Guarantor Subsidiaries | Non- Guarantor | Consolidated Total | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | $ | 31,838 | $ | 228 | $ | (3,910 | ) | $ | 28,156 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Proceeds from disposal of property, plant and equipment | 36 | — | 1 | 37 | ||||||||||||
Additions to property, plant and equipment | (5,679 | ) | (228 | ) | (1,306 | ) | (7,213 | ) | ||||||||
Other | — | — | 90 | 90 | ||||||||||||
Net cash used in investing activities | (5,643 | ) | (228 | ) | (1,215 | ) | (7,086 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from revolving credit facilities | 20,000 | — | 1,815 | 21,815 | ||||||||||||
Repayments of revolving credit facilities | (20,000 | ) | — | (5,457 | ) | (25,457 | ) | |||||||||
Repayment of 10% senior subordinated notes | (250 | ) | — | — | (250 | ) | ||||||||||
Proceeds from issuance of long-term debt | 21,524 | — | 9,385 | 30,909 | ||||||||||||
Repayments of long-term debt | (30,598 | ) | — | (215 | ) | (30,813 | ) | |||||||||
Divends to Tandus Group, Inc. | (16,053 | ) | — | (16,053 | ) | |||||||||||
Financing costs | (46 | ) | — | — | (46 | ) | ||||||||||
Net cash provided by (used in) financing activities | (25,423 | ) | — | 5,528 | (19,895 | ) | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 34 | 34 | ||||||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 772 | — | 437 | 1,209 | ||||||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 2,655 | 1 | 2,889 | 5,545 | ||||||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 3,427 | $ | 1 | $ | 3,326 | $ | 6,754 | ||||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Statements of Cash Flows
For the Year Ended January 28, 2006
(In Thousands)
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidated Total | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | $ | (3,883 | ) | $ | 83 | $ | (846 | ) | $ | (4,646 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Proceeds from disposal of property, plant and equipment | 193 | — | 177 | 370 | ||||||||||||
Additions to property, plant and equipment | (7,206 | ) | (82 | ) | (3,173 | ) | (10,461 | ) | ||||||||
Other | — | — | 68 | 68 | ||||||||||||
Net cash used in investing activities | (7,013 | ) | (82 | ) | (2,928 | ) | (10,023 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from revolving credit facilities | 15,000 | — | 4,530 | 19,530 | ||||||||||||
Repayments of revolving credit facilities | (15,000 | ) | — | (888 | ) | (15,888 | ) | |||||||||
Proceeds from issuance of long-term debt | — | — | 752 | 752 | ||||||||||||
Repayments of long-term debt | (9,303 | ) | — | (19 | ) | (9,322 | ) | |||||||||
Financing costs | (256 | ) | — | — | (256 | ) | ||||||||||
Net cash (used in) provided by financing activities | (9,559 | ) | — | 4,375 | (5,184 | ) | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | (2 | ) | (2 | ) | ||||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | (20,455 | ) | 1 | 599 | (19,855 | ) | ||||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 23,110 | — | 2,290 | 25,400 | ||||||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 2,655 | $ | 1 | $ | 2,889 | $ | 5,545 | ||||||||
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
Guarantor Financial Statements
Condensed Consolidating Statements of Cash Flows
For the Year Ended January 29, 2005
(In Thousands)
Issuer | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Consolidated Total | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | $ | 19,904 | $ | 98 | $ | 7,243 | $ | 27,245 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Proceeds from disposal of property, plant & equipment | — | 92 | — | 92 | ||||||||||||
Equity distribution from affiliate | — | — | 922 | 922 | ||||||||||||
Additions to property, plant, and equipment | (3,081 | ) | (190 | ) | (8,591 | ) | (11,862 | ) | ||||||||
Other | — | — | (199 | ) | (199 | ) | ||||||||||
Net cash (used in) provided by investing activities | (3,081 | ) | (98 | ) | (7,868 | ) | (11,047 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Proceeds from revolving credit facilities | 15,280 | — | — | 15,280 | ||||||||||||
Repayments of revolving credit facilities | (15,280 | ) | — | — | (15,280 | ) | ||||||||||
Repayments of long-term debt | — | — | 641 | 641 | ||||||||||||
Dividends to parent | — | — | (1,784 | ) | (1,784 | ) | ||||||||||
Financing costs | (380 | ) | — | — | (380 | ) | ||||||||||
Net cash used in financing activities | (380 | ) | — | (1,143 | ) | (1,523 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | (189 | ) | (189 | ) | ||||||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS | 16,443 | — | (1,957 | ) | 14,486 | |||||||||||
CASH AND CASH EQUIVALENTS, beginning of period | 6,667 | — | 4,247 | 10,914 | ||||||||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 23,110 | $ | — | $ | 2,290 | $ | 25,400 | ||||||||
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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of January 27, 2007, the Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officers, of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on this evaluation, the Company’s principal executive officers concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. The principal executive officers also concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. The Company is in the process of further reviewing and documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Company’s systems evolve with its business. There were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected or that are reasonably likely to materially affect the Company’s internal controls over financial reporting, except as noted below.
During the disclosure controls and procedures and internal controls evaluations performed under the supervision and with the participation of the Company’s management as of the end of the fiscal year ended January 28, 2006, it was concluded that the Company’s disclosure controls and procedures were not effective due to a material weakness in the area of income tax accounting and that a significant change had occurred in the internal controls over income tax reporting and disclosure. No other material weaknesses or significant changes were noted during the evaluation. Management believes there were no material misstatements in the consolidated financial statements and the Company’s independent registered public accountants issued and unqualified opinion on the consolidated balance sheets as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, changes in stockholder’s equity and cash flows for each of the years in the three year period ended January 28, 2006.
During the first quarter of fiscal 2006, the Company addressed the material weakness in the area of income tax accounting as it pertains to the Company’s disclosure controls and procedures and internal controls over financial reporting. The Company has retained the services of certain outside providers to assist in the preparation, documentation and review of the Company’s income tax provision and related taxation disclosures and believes that the material weakness has been remediated.
The Company’s management has confidence in the Company’s internal controls and procedures. Nevertheless, management, including the principal executive officers, does not expect that the disclosure procedures and controls or internal controls over financial reporting will prevent all errors or intentional fraud. An internal control system, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
None.
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Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names and ages for each of the directors of Tandus Group, Inc. and each of the Company’s directors and executive officers and the positions they hold:
NAME | TITLE | |||
Glen A. Hussmann | 47 | President and Chief Executive Officer of the Company | ||
Ralph H. Grogan | 49 | Senior Vice President of the Company | ||
Leslie (Lee) H. Schilling | 66 | Senior Vice President of Marketing of the Company | ||
Leonard F. Ferro | 47 | Vice President, Secretary, Treasurer & CFO of the Company and Director of Tandus Group, Inc. | ||
Jeffrey M. Raabe | 45 | Senior Vice President of Sales of the Company | ||
Henry L. Millsaps, Jr. | 51 | Vice President of Human Resources of the Company | ||
James T. Harley | 48 | Vice President of Manufacturing of the Company | ||
Richard J. Goldstein | 41 | Chairman of the Board of Directors of Tandus Group, Inc. and Director of the Company | ||
Stephen M. Burns | 45 | Director of Tandus Group, Inc. | ||
Caleb S. Kramer | 37 | Director of Tandus Group, Inc. | ||
Jeffrey M. Mann | 42 | Director of Tandus Group, Inc. and Director of the Company | ||
Jason A. Mehring | 35 | Director of Tandus Group, Inc. | ||
Daniel G. MacFarlan | 56 | Director of Tandus Group, Inc. |
Set forth is a brief description of the business experience of each of our directors and executive officers.
Glen A. Hussmann has served as President and Chief Executive Officer of the Company since February 2007. From March 2002, he had served as the President, Chief Executive Officer and Chairman of the Board of Reeves Brothers, Inc., a specialty material company that sells coated fabric products for a variety of industries.
Ralph H. Grogan has served as Senior Vice President of the Company since February 2005. He joined the Company as President of Monterey Carpets in December 2002. Prior to that time, Mr. Grogan was with Burlington Industries, Inc. for 22 years. While with Burlington Industries, Inc., he served most recently as President of Burlington House Floor Accent Division from 1999 to 2002 and as Vice President and General Manager of Lees Carpet from 1994 until 1999.
Leslie (Lee) H. Schilling has served as Senior Vice President of Marketing of the Company since June 2004. Prior to that time, he served as Vice President of Marketing and Sales from July 1987 to June 1994. From January 1985 to July 1987, Mr. Schilling served as National Sales Manager.
Leonard F. Ferrohas served as Vice President, Secretary, Treasurer and Chief Financial Officer of the Company since June 2004 and as a director of Tandus Group, Inc. (“Tandus Group”) since August 2005. Mr. Ferro was employed by Galey & Lord, Inc. in various financial capacities from September 1998 to June 2004, most recently as Chief Financial Officer, Secretary and Treasurer. Mr. Ferro was employed by Collins & Aikman Corporation, a former owner of Tandus’ Collins & Aikman Floorcoverings, Inc. from February 1994 to September 1998, most recently as Corporate Controller. He is a CPA and practiced in public accounting for 13 years.
Jeffrey M. Raabe has served as Senior Vice President of Sales of the Company since February 2005. Prior to that time, he served as Vice President of Sales and he has also served as the Southeast Direct Sales Manager and Director of North American Sales of the Company from October 1990 to February 1996. Mr. Raabe joined the Company in January 1989 as a Contract Specialist in Atlanta, Georgia.
Henry L. Millsaps, Jr. has served as Vice President of Human Resources of the Company since April 1995. Mr. Millsaps joined the Company in 1980 and served as Human Resource Director from March 1988 until April 1995.
James T. Harley has served as Vice President of Manufacturing for the Company since January 2006. He joined the Company as Vice President of Manufacturing for Monterey Carpets in March of 2000. Prior to that time, Mr. Harley was President of Chroma Systems from 1998 to 2000. Mr. Harley was employed by Bentley Mills from 1983 to 1998, most recently as General Manager.
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Richard J. Goldstein has been a director of Tandus Group and a director of the Company since May 2005 and was named Chairman in November 2005. He has been a Managing Director and, before that, a Senior Vice President and Vice President of Oaktree Capital Management, LLC (“Oaktree”) since 1995. Oaktree is the investment manager for OCM Principal Opportunities Fund II, L.P., Tandus Group’s largest shareholder.
Stephen M. Burns has been a director of Tandus Group since November 1996. He has been a Vice President of Quad-C Management, Inc. since 1992. Prior to joining Quad-C Management, Mr. Burns was Vice President of Paribas North American and Paribas.
Caleb S. Kramer has been a director of Tandus Group since January 2001. He has been a Managing Director, and before that a Senior Vice President, of Oaktree since May 2000. Prior thereto, Mr. Kramer co-founded Seneca Capital Partners, LLC, a private equity investment firm. From 1994 to 1996, Mr. Kramer was employed by Archon Capital Partners, an investment firm.
Jeffrey M. Mann has been a director of Tandus Group and a director of the Company since August 2005. He has been a Managing Director of Silver Oak Services Partners since 2006 and was previously a Managing Director of Banc of America Capital Investors (“BACI”), which he joined in 1993. Prior to joining BACI, he worked as a Certified Public Accountant for Arthur Andersen & Co.
Jason A. Mehring has been a director of Tandus Group since January 2001. He has been a Managing Director of BlackRock Kelso Capital since 2005, and was previously a Principal with BACI, which he joined in 1994.
Daniel G. MacFarlan has been a director of Tandus Group since November 2005. Since 2002 he has been a consultant to Oaktree and provides services to its portfolio companies. Prior to his involvement with Oaktree, Mr. MacFarlan was employed by VF Corporation in various capacities since 1978, most recently as Chairman of VF Intimate Apparel and Luggage, Knitwear, Children’s Playwear and its Retail operations. Mr. MacFarlan also serves on the board of CFG Furniture. See “Director Compensation” contained herein in Item 11 for additional information.
Term
Our directors serve a term of one year and until their successors are duly elected and qualified. Our officers serve at the pleasure of the Board of Directors.
Committees of the Board of Directors of Tandus Group
Tandus Group’s Board of Directors (“the board”) currently has three standing committees. The Executive Committee possesses certain of the powers and authority of the board with respect to the management and direction of business and affairs. This committee is composed of Mr. Goldstein, who is the chairman, and Messrs. MacFarlan and Mehring. The Compensation Committee is responsible for supervising executive compensation policies, administering employee incentive plans, reviewing officer salaries, approving changes in executive employee benefits and making recommendations regarding other forms of remuneration as deemed appropriate. This committee is composed of Mr. MacFarlan, who is the chairman, and Messrs. Goldstein and Mehring. The Audit Committee reviews the annual audit reports, reviews the fees paid to external auditors and recommends independent public accountants to the board. This committee is charged with the responsibility of reporting its audit findings and recommendations to the board, as necessary. The Audit Committee is composed of Mr. Mann, who is the chairman, and Mr. Goldstein. The board has determined that Mr. Mann is an audit committee financial expert and that Mr. Mann is independent as such term is used in Item 7(d)3(iv) of Schedule 14A under the Exchange Act using the definition of independence under the rules of NASDAQ. Mr. Goldstein is not considered to be independent under this definition.
Committees of the Board of Directors of the Company
The Company’s Board of Directors does not have any standing committees. The committees of the Board of Directors of Tandus Group serve as the committees of the Board of Directors of the Company.
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Code of Ethics
The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer, controller, and persons performing similar functions. The Code of Ethics is available on the Company’s investor relations website at www.tandus.com. The Company intends to post amendments to this Code of Ethics and waivers to the extent applicable at this location of this website. In addition, the Company will provide a copy of the Code of Ethics without charge to any person submitting a written request for the same to Investor Relations, 311 Smith Industrial Boulevard, Dalton, Georgia 30721.
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; thus, the Company’s stockholders are not required to comply with Section 16(a) of the Exchange Act.
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Item 11. Executive Compensation
Compensation Discussion and Analysis
Overview of Compensation Programs
The Compensation Committee is appointed by the Board of Directors to approve and evaluate all compensation programs, policies and plans of the Company, as they affect the executive officers. The Compensation Committee consists of three outside, non-employee directors, one of whom is considered to be independent under the rules of NASDAQ.
Throughout this section, the Company’s Chief Executive Officer, Chief Financial Officer and other individuals included in the Summary Compensation Table are referred to as the “Named Executive Officers” (NEOs). The Compensation Committee is directly responsible for the evaluation of the performance of the Chief Executive Officer (CEO) and the associated adjustments to the elements of compensation, discussed below. The CEO does not participate in any process related to the establishment of his own pay. In determining each element of compensation for the other NEOs, the Compensation Committee receives a performance assessment and compensation recommendation from the CEO and also exercises its judgment based on the board’s interactions with the NEOs.
Compensation Philosophy
The Compensation Committee’s current philosophy is that the predominate portion of an executive’s compensation should be based directly upon the value of incentive compensation in the form of cash bonuses. The Compensation Committee believes that providing executives with the opportunity to obtain cash bonuses, while maintaining base salaries at competitive levels, will enable the Company to attract and retain executives with the outstanding management abilities and entrepreneurial spirit who are essential to the Company’s success.
Furthermore, the Compensation Committee believes that this approach to compensation, as well as the opportunity to receive cash bonuses based on the Company’s financial performance, motivates executives to perform to their fullest potential.
The Company’s compensation policies are designed to align the financial interests of its management with those of its shareholders, and to take into account the operating environment and expectations for continued growth and enhanced profitability. Compensation for each executive officer generally consists of a base salary and the opportunity to receive an annual bonus.
Elements of Compensation and Benchmarking
The elements of compensation for the Company’s executive officers are: (1) an annual base salary; (2) an annual incentive, paid in cash; (3) long-term incentive awards granted under the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan; (4) a benefits package and (5) certain perquisites.
The Company provides a competitive salary and benefits package that management and the Compensation Committee believe is consistent with market practice for the industry and allows the Company to attract and retain executives and employees. The annual incentive provides a focus on short-term performance while the long-term incentive is designed to encourage the achievement of corporate goals and growth of stockholder value over the longer term. The perquisites that the Company provides are the result of negotiation with respect to employment, providing conveniences to the executive that allow the executive to focus more time on the Company’s business, and business needs.
The Compensation Committee performs local benchmarking and analysis with regards to executive compensation for competitive purposes, occasionally engages outside compensation consulting firms.
Base Salary
At least annually, the Compensation Committee reviews salary recommendations for the Company’s executives and then approves such recommendations, with any modifications it considers appropriate. The annual salary recommendations for the executives are made under the ultimate direction of the Chief Executive Officer, based on total compensation packages
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for comparable companies in our industry, as well as evaluations of the individual executive’s past and expected future performance.
For fiscal 2006, after considering business and performance indicators, the Compensation Committee did not approve an increase to the annual base salary of Mr. Bridger, the Company’s former President and CEO. In addition, the Compensation Committee did not approve any increases to the base salaries for the remaining NEOs.
For fiscal 2007, the Compensation Committee approved a base salary of $350,000 for the Company’s current Chief Executive Officer, Glen A. Hussmann. For the remaining NEOs, the Compensation Committee approved the following base salaries for 2007: Mr. Schilling $212,000; Mr. Grogan $284,000; Mr. Raabe $200,000; Mr. Ferro $250,000; and Mr. Harley $218,000.
Annual Incentive Compensation
The Management Incentive Compensation Plan (“MICP”) is the primary plan the Company uses for annual incentive compensation.
The Compensation Committee sets annual incentive targets as a percentage of each NEOs base salary. The target is generally established based on the executive officer’s position and the responsibilities that accompany that position. For 2006, the annual incentive targets (as a percentage of base salary) for the NEOs were 40% for Messrs. Schilling, Ferro, Raabe, and Harley, and 50% for Mr. Grogan. The annual incentive target for the Company’s chief executive officer is 100% of base salary.
Each year, the Compensation Committee establishes the EBITDA threshold that must be achieved as a condition to any payouts under the MICP. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, cumulative effect of change in accounting principle, Chroma cash dividends, non-cash charges or expenses (other than the write-off of current assets), loss from discontinued operations, minority interest in income (loss) of subsidiary, costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, equity in earnings of Chroma and gain on forgiveness of debt. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Payment of awards under the MICP is based upon the achievement of the EBITDA threshold for the applicable year.
The Company exceeded its EBITDA threshold for fiscal 2006. In measuring the EBITDA threshold for fiscal 2006, the Compensation Committee excluded the negative effects of several unusual items, including, among other things, the effect of the sale of the Company’s United Kingdom subsidiary, expenses incurred with the legal matters discussed elsewhere in this Annual Report on Form 10-K, and expenses related to the Company’s search for and hiring of a new chief executive officer.
Long-Term Incentive Compensation
2001 Tandus Group, Inc. Executive and Management Stock Option Plan
Tandus Group initially adopted the 2001 Tandus Group, Inc. Executive and Management Stock Option Plan in August 2001. All options granted at that time were tied on a performance-based vesting schedule based on internal rate of return or cumulative EBITDA. The targets in the vesting schedule were never met and, the Company came to realize, never would be met. As a result, it created a new equity incentive plan that would provide long-term incentives to management. The new incentive structure was adopted by the board of directors of Tandus Group in the fourth quarter of fiscal 2006 as the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan (the “2001 Amended Plan”). A portion of the options granted under the original plan were repurchased in the fourth quarter of fiscal 2006 for a nominal flat fee per employee. The options that remained outstanding at the end of fiscal 2006 were replaced with new options in February 2007 that were issued under the 2001 Amended Plan.
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2001 Amended Plan
Under Tandus Group’s 2001 Amended Plan, adopted December 6, 2006, Tandus Group may issue non-qualified options to eligible employees, directors, officers, consultants and advisors of the Company, any of its subsidiaries or Tandus Group. Five hundred thousand shares of common stock of Tandus Group are reserved for issuance under the plan. Options granted under this plan expire ten years from their grant date. Twenty percent of the shares underlying the options vest, for so long as the recipient is employed by any Tandus Group subsidiary, upon each anniversary of the grant date thereof. If an option holder’s employment is terminated for cause, all of the unvested portion of such holder’s options shall terminate on the date the employment ends. If an option holder’s employment is terminated in any other circumstances, the portion of such holder’s options that have not vested as of the termination date shall expire on the earlier of the scheduled expiration date or 45 days following the termination date (except in the event of termination due to death or disability, in which case any unvested options shall expire six months after the termination date).
If an option holder’s employment is terminated by the company without cause, because of death or disability or because of resignation, then Tandus Group may elect to repurchase all or any portion of (a) the shares underlying such holder’s unexercised options at a price equal to the fair market value of such shares minus the exercise price thereof, or (b) the shares previously issued upon exercise of such options at the fair market value of such shares. If an option holder’s employment is terminated by the company with cause, Tandus Group may elect to repurchase all or any portion of the shares underlying the holder’s unexercised options or the shares previously issued upon exercise of such options at the lesser of the fair market value of the shares and the exercise price thereof. Tandus Group’s repurchase rights shall terminate upon an initial public offering of Tandus Group common stock.
Upon the occurrence of an “Approved Sale” of Tandus Group, all shares underlying the options not vested as of the date of the Approved Sale shall vest on that date, so long as the holder of the options has been continuously employed by the company to that date. An Approved Sale is a sale approved by the Oaktree Fund and B of A Fund of all, or substantially all, of Tandus Group’s assets to a third party who is not a major shareholder of Tandus Group, or a sale of Tandus Group stock of such an amount to a third party who is not a major shareholder of Tandus Group stock to allow that third party to choose a majority of the members of the board of directors of Tandus Group.
The 2001 Amended Plan may be amended by action of the board of directors of Tandus Group, subject to certain exceptions.
Benefits and Retirement
The Company provides a benefits package for its employees and their dependents, portions of which are paid by the employee. Benefits include, among other things, life insurance, health insurance, dental insurance, vision insurance, income protection insurance, 401(k) participation and matching, dependent and healthcare reimbursement accounts, tuition reimbursement, vacation time and holidays. The Company maintains a defined benefit plan for its domestic employees, which was frozen in 2002.
Perquisites and Other Personal Benefits
The Company provides NEOs with certain perquisites and other personal benefits that it and the Compensation Committee believe are reasonable and consistent with its overall compensation program. The perquisites and personal benefits allow the Company to compete more effectively for executive talent. These perquisites are not a significant portion of each NEOs total compensation package. A detailed table of our perquisites is included as a footnote to the Summary Compensation Table.
Accounting and Tax Treatment
A complete discussion of the assumptions made in the valuation of stock-based compensation and the financial impact can be found in Notes 1 and 15 of the “Notes to Consolidated Financial Statements” contained herein in Item 8.
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally limits amounts that can be deducted for compensation paid to certain executives to $1.0 million unless certain requirements are met. No executive officer receives compensation in excess of $1.0 million and therefore all compensation amounts are deductible at present. The Compensation Committee will continue to monitor the applicability of Section 162(m) to our compensation program.
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Executive Compensation
The following table sets forth certain information concerning compensation of the Company’s NEOs during the fiscal years presented.
Summary Compensation Table
Name and Principal Position | Year | Salary | Bonus | All Other Compensation | Total | |||||||||||
Edgar M. Bridger | 2006 | $ | 380,000 | $ | 222,870 | $ | 23,374 | (2) | $ | 403,374 | ||||||
President and Chief Executive Officer* | 2005 | $ | 380,000 | $ | — | $ | 23,130 | (2) | $ | 403,130 | ||||||
2004 | $ | 360,000 | $ | 442,440 | $ | 22,180 | (2) | $ | 824,620 | |||||||
Leslie (Lee) H. Schilling | 2006 | $ | 208,000 | $ | 97,594 | $ | 22,443 | (2) | $ | 328,037 | ||||||
Senior Vice President of Marketing | 2005 | $ | 208,000 | $ | — | $ | 16,045 | (2) | $ | 224,045 | ||||||
2004 | $ | 198,750 | $ | 199,640 | $ | 15,969 | (2) | $ | 414,359 | |||||||
Ralph H. Grogan | 2006 | $ | 275,600 | $ | 186,639 | (1) | $ | 25,056 | (2) | $ | 487,295 | |||||
Senior Vice President | 2005 | $ | 275,600 | $ | — | $ | 20,176 | (2) | $ | 295,776 | ||||||
2004 | $ | 265,000 | $ | — | $ | 13,323 | (2) | $ | 278,323 | |||||||
Jeffrey M. Raabe | 2006 | $ | 195,000 | $ | 91,494 | $ | 20,686 | (2) | $ | 307,180 | ||||||
Senior Vice President of Sales | 2005 | $ | 195,000 | $ | — | $ | 17,791 | (2) | $ | 212,791 | ||||||
2004 | $ | 182,833 | $ | 180,909 | $ | 17,568 | (2) | $ | 381,310 | |||||||
Leonard F. Ferro | 2006 | $ | 230,000 | $ | 132,916 | (1) | $ | 24,187 | (2) | $ | 387,103 | |||||
Vice President and Chief Financial Officer | 2005 | $ | 230,000 | $ | — | $ | 47,772 | (2) | $ | 277,772 | ||||||
2004 | $ | 119,268 | $ | 226,472 | $ | 64,596 | (2) | $ | 410,336 | |||||||
James T. Harley | 2006 | $ | 210,100 | $ | 98,579 | $ | 49,886 | (2) | $ | 358,565 | ||||||
Vice President of Manufacturing | 2005 | $ | 207,736 | $ | 100,000 | $ | 7,127 | (2) | $ | 314,863 | ||||||
2004 | $ | — | $ | — | $ | — | (2) | $ | — |
* | Mr. Bridger resigned from his position with the Company effective November 30, 2006. |
(1) | These amounts include compensation payments of $25,000 for each NEO for assumption of additional responsibilities in the period of time during which the Company had no named chief executive officer. |
(2) | “All Other Compensation” amounts are detailed in the following table: |
Name and Principal Position | Year | Life Insurance | 401(K) Employer Matching Contributions | Car Allowances | Long-term Care Insurance | Accidental Death & Dismemberment Insurance | Reimbursement of Relocation Expenses | |||||||||||||
Edgar M. Bridger | 2006 | $ | 1,560 | $ | 9,900 | $ | 10,657 | $ | 887 | $ | 360 | $ | — | |||||||
President and Chief Executive Officer | 2005 | $ | 1,560 | $ | 7,000 | $ | 13,323 | $ | 887 | $ | 360 | $ | — | |||||||
2004 | $ | 1,560 | $ | 6,050 | $ | 13,323 | $ | 887 | $ | 360 | $ | — | ||||||||
Leslie (Lee) H. Schilling | 2006 | $ | 973 | $ | 6,760 | $ | 12,940 | $ | 1,545 | $ | 225 | $ | — | |||||||
Senior Vice President of Marketing | 2005 | $ | 967 | $ | — | $ | 13,323 | $ | 1,532 | $ | 223 | $ | — | |||||||
2004 | $ | 905 | $ | — | $ | 13,323 | $ | 1,532 | $ | 209 | $ | — | ||||||||
Ralph H. Grogan (d) | 2006 | $ | 1,505 | $ | 9,900 | $ | 12,647 | $ | 657 | $ | 347 | $ | — | |||||||
Senior Vice President | 2005 | $ | 1,301 | $ | 5,276 | $ | 11,103 | $ | 657 | $ | 300 | $ | 1,539 | |||||||
2004 | $ | — | $ | — | $ | 13,323 | $ | — | $ | — | $ | — | ||||||||
Jeffrey M. Raabe | 2006 | $ | 761 | $ | 5,850 | $ | 13,269 | $ | 630 | $ | 176 | $ | — | |||||||
Senior Vice President of Sales | 2005 | $ | 758 | $ | 2,911 | $ | 13,323 | $ | 624 | $ | 175 | $ | — | |||||||
2004 | $ | 713 | $ | 2,743 | $ | 13,323 | $ | 624 | $ | 165 | $ | — | ||||||||
Leonard F. Ferro (c) | 2006 | $ | 1,076 | $ | 9,900 | $ | 12,612 | $ | 351 | $ | 248 | $ | — | |||||||
Vice President and Chief Financial Officer | 2005 | $ | 1,045 | $ | 6,738 | $ | 13,323 | $ | — | $ | 241 | $ | 26,425 | |||||||
2004 | $ | 328 | $ | 2,363 | $ | 7,570 | $ | — | $ | 76 | $ | 54,259 | ||||||||
James T. Harley (e) | 2006 | $ | 983 | $ | 9,900 | $ | 14,583 | $ | 432 | $ | 227 | $ | 23,761 | |||||||
Vice President of Manufacturing | 2005 | $ | 151 | $ | 6,940 | $ | — | $ | — | $ | 36 | $ | — | |||||||
2004 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — |
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Outstanding Equity Awards at Fiscal Year-End
Outstanding equity awards held by the Company’s NEOs as of January 27, 2007 are as follows:
Option Awards | |||||||
Name | Plan Awards: (#) | Option Exercise ($) | Option Expiration Date | ||||
Leslie (Lee) H. Schilling | 2,853.08 | $ | 35.70 | July 2011 | |||
Ralph H. Grogan | 3,423.70 | $ | 35.70 | July 2011 | |||
Jeffrey M. Raabe | 3,423.70 | $ | 35.70 | July 2011 | |||
James T. Harley | 684.74 | $ | 35.70 | July 2011 |
None of the options listed in the table above are exercisable and none will become exercisable given the performance vesting targets for the options. As a result, the Company replaced these options after the end of fiscal 2006 with options under the 2001 Amended and Restated Plan described herein.
No options were granted to or exercised by the NEOs in fiscal 2006 and there is no market for Tandus Group’s common stock.
Pension Benefits
As indicated previously, during fiscal 2002, the Company elected to freeze the Pension Account Plan (the “Pension Plan”). Pursuant to this action, no new employees subsequent to that time would be eligible for participation in the Pension Plan. During the time the Pension Plan was open, provided certain eligibility requirements were met, at the end of each calendar month pay credits were added to each participant’s account. The percentage of compensation was based on the participant’s length of credited service and compensation (as defined in the Pension Plan) during that month. For participants aged 50 or older, the percentage of compensation was based on either credited service or age, whichever resulted in a higher percentage.
The following chart sets forth how pay credits were determined under the Company’s Pension Plan:
Eligibility Requirements | Percentage of Compensation Used to Determine Pay Credits | |||||||||
Years of Credit Service | or | Age | Up to 1/3 of the S.S. Wage Base | Over 1/3 of the S.S. Wage Base | ||||||
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 | % |
Participants made no contributions to the Pension Plan. Employer contributions were 100% vested after five years of service or at age 65, whichever was earlier, and might have vested under certain other circumstances as set forth in the Plan. The estimated annual benefits payable upon retirement at normal retirement age under the Pension Plan for Messrs. Schilling, Grogan, Raabe, Ferro and Harley are $7,493, $0, $16,144, $0 and $0, respectively. Participants in the Pension Plan have the option, however, of receiving the value of their vested account in a lump sum following termination of employment.
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Employment Agreements
Glen A. Hussmann
The Company has an employment agreement with its President and Chief Executive Officer, Glen A. Hussmann, effective February 19, 2007.
As part of the agreement, Mr. Hussmann’s annual base salary is $350,000 or such higher rate as the Board of the Company may determine from time to time. Mr. Hussmann shall also be entitled to (i) participate in the Company’s employee benefit programs for which senior executives of the Company are generally eligible, (ii) four weeks of paid vacation annually, (iii) reimbursement for reasonable business expenses incurred by him, (iv) an annual bonus based upon the Company’s achievement of certain financial targets for each year, as established by the Board of the Company, with a targeted annual bonus equal to 100% of Mr. Hussmann’s base salary for each year, (v) reimbursement of either $1,225 per month for automobile expenses including insurance or an annual guaranteed bonus of $14,700 (such bonus in addition to his regular annual bonus), and (vi) certain relocation expenses.
The initial term of the Agreement shall terminate on February 18, 2010 and automatically renew for one-year periods therefrom, unless (i) either party elects not to renew the employment period at least 60 days prior to the final date of any term or (ii) Mr. Hussmann or the Company otherwise terminates Mr. Hussmann’s employment. Should Mr. Hussmann be terminated by the Company without “cause”, he will be entitled to continued base salary and participation in employee benefit programs for six months from termination, subject to his delivery of a release and certain other conditions.
The Agreement contains covenants regarding nondisclosure of confidential information (during the employment period and thereafter) and ownership of intellectual property. Mr. Hussmann has also agreed to certain non-competition, non-solicitation, non-hire and non-disparagement covenants during the employment period and for one year thereafter.
Edgar M. Bridger
The Company also entered into an employment and separation agreement with Mr. Bridger, its former President and CEO on August 31, 2006. In that agreement, the parties agreed that Mr. Bridger’s salary would be $380,000 per year and that he would be entitled to receive customary benefits. Mr. Bridger is entitled to severance payments equal to $380,000 per year until July 2008.
Mr. Bridger is obligated to a four year non-compete provision and cannot work for a company that sells the types of carpeting that the Company sells for four years after the termination of his employment. In addition, he agreed to not hire or solicit the Company’s employees for 12 months after the termination of his employment and to not disparage the Company. Tandus Group will repurchase half of Mr. Bridger’s Tandus Group stock for the aggregate purchase price of $2.5 million in two equal transactions in May 2007 and July 2008. In the event that Mr. Bridger breaches any of his post-employment covenants, he will be required to repay the purchase price he received for his stock. In addition, he agreed to not sell any of the remainder of his Tandus Group stock until after the non-compete period has ended. As part of this agreement, Mr. Bridger agreed to release the Company from all potential claims against it.
Director Compensation
None of Tandus Group’s or the Company’s directors are entitled to receive any fees for serving as directors. They are, however, reimbursed for out-of-pocket expenses related to their service as directors.
One of the Company’s directors, Daniel G. MacFarlan, is currently providing operational advisory services to the Company. The initial term of his advisory services was six months, which commenced in January 2006. The amount received by Mr. MacFarlan was $350,000 for that initial term. The term was extended for an additional six months for additional compensation of $350,000. The Company has extended Mr. MacFarlan’s advisory services arrangement throughout 2007 for compensation totaling $350,000 for the year.
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Compensation Committee Interlocks and Insider Participation
No member of the Company’s Board of Directors serves as a member of the Board of Directors or Compensation Committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors. Members of the Compensation Committee are Mr. MacFarlan (Chairman) and Messrs. Goldstein and Mehring.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis contained herein with management of the Company and, based on the review and discussion, has recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 27, 2007.
Submitted by the Compensation Committee |
Daniel G. MacFarlan (Chairman) |
Richard J. Goldstein |
Jason A. Mehring |
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of January 27, 2007, with respect to compensation plans under which Tandus Group equity securities are authorized for issuance.
Equity Compensation Plan Information | |||||||
Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans excluding securities already issued | ||||
Equity compensation plans approved by shareholders (1) | 500,000 | $ | n/a | 500,000 | |||
Equity compensation plans not approved by shareholders | — | — | — | ||||
Total | 500,000 | $ | n/a | 500,000 | |||
(1) | Consists of 500,000 shares subject to awards granted under the 2001 Tandus Group, Inc. Amended and Restated Management Stock Option Plan. |
Beneficial Ownership
All of the Company’s outstanding capital stock is owned by Tandus Group. The table below sets forth certain information regarding the beneficial ownership of Tandus Group’s common stock as of April 9, 2007 by (i) each person known to beneficially own more than 5% of any class of Tandus Group’s common stock, (ii) each of the directors of Tandus Group and each of the Company’s directors and named executed officers and (iii) all of the directors of Tandus Group and all of the Company’s directors and named executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC, which generally attributes beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.
Name | Number of Shares of Common Stock | Percentage of Common Stock | |||
Principal Stockholders: | |||||
OCM Principal Opportunities Fund II, L.P. (1) 333 South Grand Avenue 28th Floor Los Angeles, CA 90071 | 1,120,448 | 34.94 | % | ||
BancAmerica Capital Investors II, L.P. (2) 231 South LaSalle Street Chicago, IL 60697 | 910,364 | 28.39 | % | ||
Norwest Equity Partners VII, LP (3) 3600 IDS Center 80 South 8th Street Minneapolis, MN 55402 | 280,112 | 8.74 | % | ||
Quad-C Management, Inc. (4) 230 East High Street Charlottesville, VA 22902 | 264,743 | 8.26 | % | ||
Abu Dhabi Investment Authority (5) P. O. Box 7106 Comiche Street Abu Dhabi, United Arab Emirates | 210,084 | 6.55 | % |
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Directors and Executive Officers (6) | |||||
Ralph H. Grogan | — | — | |||
Leslie (Lee) H. Schilling | 24,509 | * | |||
Leonard F. Ferro | — | — | |||
Jeffrey M. Raabe | 21,008 | * | |||
Henry L. Millsaps, Jr. | 16,806 | * | |||
James T. Harley | 2,100 | * | |||
Richard J. Goldstein (7) | — | — | |||
Stephen M. Burns (8) | 838 | * | |||
Caleb S. Kramer (9) | — | — | |||
Jeffrey M. Mann (10) | — | — | |||
Jason A. Mehring (11) | — | — | |||
Daniel G. MacFarlan | — | — | |||
All directors and officers as a group (12 people) | 65,261 | 2.03 | % |
* | Less than one percent |
(1) | Oaktree Capital Management, LLC, (“Oaktree”) as the sole general partner of the OCM Principal Opportunities Fund II, L.P. (the “Oaktree Fund”), may be deemed to beneficially own the shares held of record by the Oaktree Fund. |
(2) | BancAmerica Capital Management II, L.P., as the general partner of BancAmerica Capital Investors II, L.P. (the “B of A Fund”), may be deemed to beneficially own the shares held of record by the B of A Fund. BACM II GP, LLC, as the general partner of BancAmerica Capital Management II, L.P., may also be deemed to beneficially own the shares held of record by the B of A Fund. |
(3) | Itasca LBO Partners VII, LLP, as the general partner of Norwest Equity Partners VII, LP, may be deemed to beneficially own the shares held by Norwest Equity Partners VII, LP. |
(4) | Includes 10,624 shares of common stock owned by Quad-C Partners II, L.P. (“Quad-C II”), 20,129 shares of common stock owned by Quad-C Partners III, L.P. (“Quad-C III”), 128,327 shares of common stock owned by Quad-C Partners IV, LP (“Quad-C IV”), 53,763 shares of common stock owned by QCP Investors, LLC (“QCP Investors”) and 2,152 shares of common stock owned by QCP Investors II LLC (“QCP Investors II”). Quad-C III, L.L.C. as the general partner of Quad-C II; Quad-C II, L.L.C. as the general partner of Quad-C III, L.L.C.; and Quad-C IV, L.L.C. as the general partner of Quad-C IV, may be deemed to beneficially own shares held of record by the entity of which it is the general partner. Terry Daniels, as the managing member of each of these general partners, and as the managing member of each of QCP Investors and QCP Investors II, may also be deemed to beneficially own the shares held of record by each of these entities. Also includes 49,748 shares of common stock owned of record by Paribas Principal, Inc., which Quad-C Management, Inc. has the power to vote pursuant to a proxy. |
(5) | The Abu Dhabi Investment Authority is an instrumentality of the government of the Emirate of Abu Dhabi and is wholly owned and controlled by that government. |
(6) | The address of each director and executive officer is c/o Collins & Aikman Floorcoverings, Inc., 311 Smith Industrial Boulevard, Dalton, Georgia 30722. |
(7) | Mr. Goldstein is a Managing Director of Oaktree. Mr. Goldstein disclaims beneficial ownership of all shares beneficially owned by the Oaktree Fund, except for those shares in which he has a pecuniary interest. |
(8) | Mr. Burns is a Vice-President of Quad-C Management, Inc. Mr. Burns disclaims beneficial ownership of all shares owned by Quad-C Management, Inc. except for those shares in which he has a pecuniary interest. |
(9) | Mr. Kramer is a Managing Director of Oaktree. Mr. Kramer disclaims beneficial ownership of all shares beneficially owned by the Oaktree Fund, except for those shares in which he has a pecuniary interest. |
(10) | Mr. Mann is a Managing Director of Silver Oak Services Partners and was formerly a Managing Director of BACI. |
(11) | Mr. Mehring is a Managing Director of BlackRock Kelso Capital and was formerly a Principal with BACI. Mr. Mehring disclaims beneficial ownership of all shares beneficially owned by BACI, except those shares in which he has a pecuniary interest. |
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Item 13. Certain Relationships and Related Transactions, and Director Independence
Since January 2001, investment funds managed by Oaktree and BACI, specifically the Oaktree Fund and the B of A Fund, respectively, control a majority of the outstanding capital stock of Tandus Group. Effective January 2001, the Company entered into Professional Services Agreements with each of Oaktree Fund and B of A Fund (collectively, the “Funds”). The terms of both agreements are substantially the same. The Funds will provide management and financial consulting services to the Company from time to time. These services will include consulting on business strategy, future investments, future acquisitions and divestitures, and debt and equity financing. For these services, the Company has agreed to pay each of the Funds quarterly fees of $62,500 and to reimburse them for reasonable travel and other out-of-pocket fees and expenses incurred by them in providing services to the Company (including, but not limited to, fees and expenses incurred in attending Company-related meetings). The Company has also agreed to indemnify each of the Funds against any losses they may suffer arising out of the services they provide to the Company in connection with these agreements, such as losses arising from third party suits. The agreements terminate on the first of (1) the date on which the applicable Fund, as the case may be, owns less than 25% of the capital stock in Tandus Group, (2) the date on which Tandus Group is either sold to a party who does not currently own more than 5% of Tandus Group’s common stock or (3) substantially all the assets of Tandus Group are sold. Accrued liabilities of $2.5 million related to services provided to the Company by the Funds are included in the Company’s consolidated statement of financial condition as of January 28, 2006. No amount was accrued as of January 27, 2007.
As previously discussed, on January 18, 2007, the Company entered into a $80 million senior secured revolving credit facility. The lender in the facility is Bank of America N.A. which is an affiliate of the B of A Fund, the second largest shareholder of Tandus Group.
Messrs. Burns, Mann and Mehring serve on the Company’s Board of Directors and are deemed independent according to the standards of the Nasdaq Marketplace Rules. Messrs. MacFarlan, Goldstein and Kramer serve on the Company’s Board of Directors and are not independent according to those standards. Messrs. MacFarlan and Goldstein serve on the Company’s Compensation Committee. Mr. Goldstein also serves on the Company’s Audit Committee. Messrs Goldstein, Kramer and MacFarlan are affiliated with Oaktree. Messrs. Mann and Mehring were affiliated with BACI until 2006 and 2005, respectively.
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Audit Committee Report
The Audit Committee is currently comprised of two members, one of which is an “independent director” as that term is used in item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. Each of the members of the Audit Committee is financially literate and Jeffrey Mann qualifies as an “audit committee financial expert” under federal securities laws. The Audit Committee’s purposes are to assist the Board in overseeing: (a) the quality and integrity of the Company’s financial statements; (b) the qualifications and independence of the Company’s independent auditors; and (c) the performance of the Company’s internal audit function and independent registered public accounting firm.
In carrying out its responsibilities, the Audit Committee has:
• | reviewed and discussed the audited financial statements with management; |
• | discussed with the independent registered public accounting firm the matters required to be discussed with audit committees by Statement on Auditing Standards No. 61; and |
• | received the written disclosures and the letter from the Company’s independent registered public accounting firm required by Independence Standards Board Standard No. 1 and has discussed with the independent registered public accounting firm their independence. |
Based on the review and discussions noted above and the Company’s independent registered public accounting firm’s report to the Audit Committee, the Audit Committee has recommended to the Board that its audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended January 27, 2007.
This report is not to be deemed incorporated by reference by any general statement that incorporates by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, and it is not to be otherwise deemed filed under either such Act.
Submitted by the Audit Committee |
Jeffrey M. Mann (Chairman) |
Richard J. Goldstein |
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Item 14. Principal Accountant Fees and Services
Aggregate fees for professional services rendered by Grant Thornton LLP, the Company’s independent registered public accounting firm are as follows:
Fiscal Year Ended | ||||||
January 27, 2007 | January 28, 2006 | |||||
Audit Fees (1) | $ | 459,300 | $ | 454,300 | ||
Audit-Related Fees | — | 29,000 | ||||
Tax Fees | 96,845 | 89,469 | ||||
All Other Fees | 41,850 | 76,166 | ||||
Total | $ | 597,995 | $ | 648,935 | ||
(1) | The amount related to the fiscal year ended January 28, 2006 has been increased $144,300 to reflect additional fees billed subsequent to year-end for audit services related to that fiscal year. |
Audit Fees. This category includes the aggregate fees billed for professional services rendered for the audits of the Company’s consolidated financial statements for fiscal years ended January 27, 2007 and January 28, 2006, for the reviews of the financial statements included in the quarterly reports on Form 10-Q during fiscal 2006 and fiscal 2005, and for services that are normally provided by Grant Thornton LLP in connection with statutory and regulatory filings or engagements for the relevant fiscal years.
Audit-Related Fees. This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by Grant Thornton LLP, that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported under “Audit Fees,” as noted above. These services generally consist of fees for audits of employee benefit plans and accounting consultation.
Tax Fees. This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by Grant Thornton LLP for tax compliance, planning and advice.
All Other Fees. This category includes the aggregate fees billed in each of the last two fiscal years for products and services provided by Grant Thornton LLP that are not reported under “Audit Fees,” “Audit-Related Fees” or “Tax Fees,” as noted above.
The Audit Committee reviews and pre-approves audit and non-audit services performed by Grant Thornton LLP, the Company’s independent registered public accounting firm, as well as the fees charged for such services. Pre-approval is generally provided for up to one year, is detailed as to the particular service or category of service and is subject to a specific budget. The Audit Committee may also preapprove particular services on a case-by-case basis. The Chairman of the Audit Committee has authority to pre-approve such services, and his decisions are then presented to the full Audit Committee at its next scheduled meeting.
The Audit Committee has considered and determined that the fees charged for services other than “Audit Fees” discussed above are compatible with maintaining independence by Grant Thornton LLP. Since January 26, 2003, 100% of the audit and non-audit services provided by our independent auditors have been pre-approved by the Audit Committee in accordance with the Audit Committee Charter.
Independent Registered Public Accounting Firm
Upon the recommendation of the Audit Committee, the Board has appointed Grant Thornton LLP as the independent registered public accounting firm to audit the Company’s consolidated financial statements for the fiscal year ending January 27, 2007.
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ITEM 15. Exhibits and Financial Statement Schedules
(a) | (1) FINANCIAL STATEMENTS: |
See “Item 8. Financial Statements and Supplementary Data”
(2) FINANCIAL STATEMENT SCHEDULES:
See Schedule II - Valuation and Qualifying Accounts at the end of this report.
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.
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(3) EXHIBITS:
Exhibit No. | Description | |
3.1 | Certificate of Incorporation of Collins & Aikman Floorcoverings, Inc., as amended to date (Incorporated by reference from Exhibit 3.1 to the Company’s Registration Statement on Form S-4 filed on April 7, 1997 (File No. 333-24699)). | |
3.2 | By-Laws of Collins & Aikman Floorcoverings, Inc. (Incorporated by reference from Exhibit 3.2 to the Company’s Registration Statement on Form S-4 filed on April 7, 1997 (File No. 333-24699)). | |
4.1 | Indenture, dated February 15, 2002, among Collins & Aikman Floorcoverings, Inc., Monterey Carpets, Inc., Monterey Color Systems, Inc. and The Bank of New York, as Trustee, for 9-3/4% Senior Subordinated Notes Due 2010 (Incorporated by reference from Exhibit 4.1 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
4.2 | Registration Rights Agreement, dated as of February 20, 2002, among Collins & Aikman Floorcoverings, Inc., Monterey Carpets, Inc., Monterey Color Systems, Inc., Credit Suisse First Boston Corporation, Banc of America Securities, LLC, BNP Paribas Securities Corp., First Union Securities, Inc. and Fleet Securities, Inc. (Incorporated by reference from Exhibit 4.2 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.1 | Credit Agreement, dated January 25, 2001, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the lenders named therein and Credit Suisse First Boston Corporation, as Administrative Agent, BNP Paribas, as Syndication Agent and Fleet Capital Corporation, as Documentation Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.2 | Amendment No. 1 to Credit Agreement, dated February 11, 2002, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse First Boston, as Administrative Agent (Incorporated by reference from Exhibit 10.2 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.3 | Amendment No. 2 to Credit Agreement, dated May 1, 2004, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse First Boston, as Administrative Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on June 15, 2004). | |
10.4 | Amendment No. 3 to Credit Agreement, dated August 18, 2004, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse First Boston, as Administrative Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Report on Form 8-K filed on August 24, 2004) . | |
10.5 | Security Agreement, dated January 25, 2001, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Subsidiary Guarantors named therein and Credit Suisse First Boston, as Collateral Agent (Incorporated by reference from Exhibit 10.3 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.6 | Pledge Agreement, dated January 25, 2001, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Subsidiary Guarantors named therein and Credit Suisse First Boston, as Collateral Agent (Incorporated by reference from Exhibit 10.4 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.7 | Investor Rights Agreement, dated January 25, 2001, by and among OCM Principal Opportunities Fund II, L.P., BancAmerica Capital Investors II, L.P., the rollover participants named therein, the co-investors named therein, the executives named therein and the stockholders named therein (Incorporated by reference from Exhibit 10.5 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.8 | Professional Services Agreement, dated as of January 25, 2001, by and between Collins & Aikman Floorcoverings, Inc. and OCM Principal Opportunities Fund II, L.P. (Incorporated by reference from Exhibit 10.6 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.9 | Professional Services Agreement, dated as of January 25, 2001, by and between Collins & Aikman Floorcoverings, Inc. and BA SBIC Sub, Inc. (Incorporated by reference from Exhibit 10.7 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). |
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10.10 | Trade name License Agreement, dated as of February 6, 1997, by and between Collins & Aikman Floor Coverings Group, Inc., CAF Holdings, Inc. and Collins & Aikman Floorcoverings, Inc. (Incorporated by reference from Exhibit 10.2 to the Registration Statement on Form S-4 filed on June 4, 1997 (File No. 333-24699)). | |
10.11 | Asset Purchase Agreement, dated as of May 1, 2002, by and among CAF Extrusion, Inc., Collins & Aikman Floorcoverings, Inc., Candlewick Yarns, Inc., Bretlin, Inc. and Dixie Group, Inc. (Incorporated by reference from Exhibit 10.9 to the Company’s Registration Statement on Form S-4 filed on May 14, 2002 (File No. 333-88212)). | |
10.12 | Debt Restructuring Agreement, dated December 23, 1998, by and among Crossley Carpet Mills Limited, Montreal Trust Company of Canada and W.L. Single. (Incorporated by reference from Exhibit 10.10 to the Company’s Form 10-K for the year ending January 25, 2003). | |
10.13 | 2001 Tandus Group, Inc. Executive and Management Stock Option Plan. (Incorporated by reference from Exhibit 10.11 to the Company’s Form 10-K for the year ending January 25, 2003).* | |
10.14 | 2001 Tandus Group, Inc. Management Stock Purchase Plan. (Incorporated by reference from Exhibit 10.12 to the Company’s Form 10-K for the year ending January 25, 2003).* | |
10.15 | Chroma Transition Agreement dated November 8, 2004, by and among Collins & Aikman Floorcoverings, Inc., Monterey Carpets, Inc., Monterey Color Systems, Inc., Chroma Technologies, Inc., The Dixie Group, Inc. and Chroma Systems Partners. (Incorporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on December 13, 2004). | |
10.16 | Amendment No. 4 to Credit Agreement, dated October 29, 2005, by and among Collins & Aikman Floorcoverings, Inc., Tandus Group, Inc., the Lenders (as defined therein) and Credit Suisse, as Administrative Agent. (Incorporated by reference from Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q filed on December 13, 2005). | |
10.17 | Tandus Group, Inc. Employment and Separation Agreement, between Tandus Group, Inc., Collins & Aikman Floorcoverings, Inc., and Edgar M. Bridger. (Incoporated by reference from Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on September 12, 2006).* | |
10.18 | Loan and Security Agreement, dated January 18, 2007, by and among Collins & Aikman Floorcoverings, Inc. and subsidiaries (as defined therein), the Lenders (as defined therein) and Bank of America, N.A., as Administrative Agent (Incorporated by reference from Exhibit 10.1 to the Company’s Report on Form 8-K filed on January 24, 2007). | |
10.19 | Tandus Group, Inc. Employment Agreement, dated February 2, 2007 between Tandus Group, Inc., Collins & Aikman Floorcoverings, Inc., and Glen A. Hussmann.* | |
10.20 | Share Purchase Agreement, dated February 5, 2007, between Collins & Aikman Floorcoverings, Inc. and Interior Projects Solutions Limited. | |
14.1 | Code of Ethics for Principal Officers. (Incorporated by reference from Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended January 25, 2003). | |
21.1 | List of Subsidiaries. | |
24.1 | Powers of Attorney (included on Signatures page). | |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.1 | Audit Committee Charter. (Incorporated by reference from Exhibit 99.1 to the Company’s Annual report on Form 10K filed on May 19, 2004). |
* | Management contract or compensatory plan or agreement. |
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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 30, 2007.
COLLINS & AIKMAN FLOORCOVERINGS, INC. | ||
By: | /s/ Glen A. Hussmann | |
Glen A. Hussmann | ||
(President and Chief Executive Officer) | ||
By: | /s/ Leonard F. Ferro | |
Leonard F. Ferro | ||
Chief Financial Officer | ||
(Principal Financial & Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each of the directors of the Registrant whose signature appears below hereby appoints Glen A. Hussmann and Leonard F. Ferro, and each of them severally, as his attorney-in-fact to sign in his name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission any and all amendments to this report on Form 10-K, making such changes in this report on Form 10-K as appropriate, and generally to do all such things in their behalf in their capacities as directors and/or officers to enable the Registrant to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission.
Name | Title | Date | ||
/s/ Glen A. Hussmann | President and Chief Executive Officer | April 30, 2007 | ||
Glen A. Hussmann | ||||
/s/ Jeffrey M. Mann | Director | April 30, 2007 | ||
Jeffrey M. Mann | ||||
/s/ Richard J. Goldstein | Director | April 30, 2007 | ||
Richard J. Goldstein |
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Securities Exchange Act of 1934 (“the Act”) by Registrant Which Have Not Registered Securities Pursuant to Section 12 of the Act.
No annual report or proxy material has been sent to security holders.
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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES
Schedule II – Valuation and Qualifying Accounts
For the Years ended January 27, 2007, January 28, 2006 and January 29, 2005
(In Thousands)
DESCRIPTION | Balance at Beginning of Period | Charged to Costs & Expenses | Additions | Charged to Other Accounts (a) | Deductions (b) | Balance at End of Period | |||||||||||||||
Year ended January 27, 2007 | |||||||||||||||||||||
Allowance for doubtful accounts | $ | 440 | $ | 83 | $ | — | $ | — | $ | (59 | ) | $ | 464 | ||||||||
Year ended January 28, 2006 | |||||||||||||||||||||
Allowance for doubtful accounts | $ | 644 | $ | (26 | ) | $ | — | $ | — | $ | (178 | ) | $ | 440 | |||||||
Year ended January 29, 2005 | |||||||||||||||||||||
Allowance for doubtful accounts | $ | 790 | $ | 15 | $ | — | $ | (44 | ) | $ | (117 | ) | $ | 644 |
Notes: | (a) | Represents reclassifications and collections of accounts previously written off. | ||
(b) | Represents write-off accounts to be uncollectible, less recovery of amounts previously written off. |