(b) immediately before and after giving effect to such Fundamental Transaction and treating any Indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such Fundamental Transaction as having been Incurred by the Company or such Subsidiary at the time of the Fundamental Transaction, no Default or Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such Fundamental Transaction (other than a Fundamental Transaction solely involving (i) the Company and a Restricted Subsidiary of the Company or (ii) the Company and C&A) and treating any Indebtedness which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, the Company (including any successor entity to the Company) could Incur at least $1.00 of additional Indebtedness pursuant to the provisions of the first paragraph of the covenant under "—Limitation on Indebtedness" above;
(d) each Subsidiary Guarantor (unless it is the other party to the transactions above, in which case clause (a) shall apply) shall have by supplemental indenture confirmed that its Subsidiary Guarantee shall apply to such Person's obligations in respect of the Indenture and the Notes and its obligations under the registration rights agreement shall continue to be in effect; and
(e) the Company shall have delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture.
Subject to the fourth paragraph of the covenant under "—Certain Covenants—Guarantees—Subsidiary Guarantees," a Guarantor may not (i) consolidate with or merge into any other Person or (ii) directly or indirectly, transfer, sell, lease or otherwise dispose of such Guarantor's assets substantially as an entirety to any Person, unless:
(a) in a transaction in which the Guarantor does not survive or in which the Guarantor sells or otherwise disposes of its assets substantially as an entirety, the successor entity to the Guarantor is organized under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by a supplemental indenture executed and delivered to the Trustee in form satisfactory to the Trustee, all of the Guarantor's obligations under the Indenture;
(b) immediately before and after giving effect to such transaction and treating any Indebtedness which becomes an obligation of the Guarantor at the time of the transaction as having been Incurred by the Guarantor at the time of the transaction, no Default or Event of Default shall have occurred and be continuing; and
(c) the Guarantor shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture.
In the event of any transaction described in and complying with the conditions listed in the immediately preceding paragraphs in which the Company or a Guarantor is not the continuing corporation, the successor Person formed or remaining will succeed to, and be substituted for, and may exercise every right and power of, the Company or such Guarantor, as the case may be, and the Company or such Guarantor, as the case may be, will be released and discharged from all obligations and covenants under the Indenture.
In addition to the definitions set forth elsewhere in this prospectus, the following is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided.
"Affiliate" of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such specified Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any transfer, conveyance, sale, lease or other disposition (including a consolidation or merger or other sale of a Restricted Subsidiary with, into or to another Person in a transaction in which such Restricted Subsidiary ceases to be a Restricted Subsidiary, but excluding Receivables Sales and a disposition by a Restricted Subsidiary to the Company or another Restricted Subsidiary or by the Company to a Restricted Subsidiary) of:
(a) shares of Capital Stock (other than directors' qualifying shares) or other ownership interests of a Restricted Subsidiary,
(b) substantially all of the assets of the Company or any of its Restricted Subsidiaries representing a division or line of business, or
(c) other assets or rights of the Company or any of its Restricted Subsidiaries outside of the ordinary course of business,
provided in each case that the aggregate consideration for such transfer, conveyance, sale, lease or other disposition or any related series of such transactions is equal to $25.0 million or more; provided, however, that (a) for purposes of the covenant described under "—Certain Covenants—Limitation on Asset Dispositions," the term "Asset Disposition" shall exclude any disposition permitted by the covenant described under the heading "Certain Covenants—Limitation on Restricted Payments" and (b) the term "Asset Disposition" shall exclude transactions permitted under "—Certain Covenants—Mergers, Consolidations and Certain Sales of Assets" above.
Notwithstanding the preceding, the following items shall not be deemed to be Asset Dispositions:
(1) the sale of Cash Equivalents in the ordinary course of business;
(2) a disposition of inventory in the ordinary course of business;
(3) the surrender or waiver of contract rights or the settlement, release or surrender of contract, tort or other claims of any kind;
(4) the grant in the ordinary course of business of licenses of patents, trademarks and similar intellectual property;
(5) the sale or disposition of any Restricted Investment or Permitted Investment of the type described in clauses (10), (11) or (12) of the definition thereof;
(6) a disposition of obsolete or worn out equipment or equipment that is no longer useful in the conduct of the business of the Company and its Restricted Subsidiaries and that is disposed of in each case in the ordinary course of business; and
(7) Receivables Sales in connection with a Receivables Financing.
"Bank Credit Facilities" means those certain senior credit facilities, by and among the Company, the Company's Canadian Subsidiaries, JPMorgan Chase Bank, as administrative agent and collateral agent, J. P. Morgan Bank Canada, as Canadian administrative agent and collateral agent, Credit Suisse First Boston, as syndication agent, Deutsche Bank Trust Company Americas (f/k/a Deutsche Banc Alex. Brown Inc.) and Merrill Lynch Capital Corporation, as co-documentation agents and the other lenders party thereto, including any related notes, guarantees, collateral documents, letters of credit, instruments and agreements executed in connection therewith (and any appendices, exhibits or schedules to any of the foregoing), and in each case as amended, modified, supplemented, restated, renewed, refunded, replaced, restructured, repaid or refinanced from time to time (whether with the original agents and lenders or other agents and lenders or otherwise, and whether provided under the original credit facilities and/or other credit facilities or otherwise).
"Becker Entities" means Charles E. Becker (or any of his immediate family members, related family trusts, heirs and descendents), Becker Group LLC and any other Affiliate of Charles E. Becker.
111
"Brazilian Credit Facility" means one or more credit facilities entered into by Plascar Industria e Comerico Ltda and its Subsidiaries, together with any credit support provided by the Company or any other Restricted Subsidiary, providing for availability in an aggregate amount not to exceed $35.0 million at any time outstanding.
"Business Day" means a day other than a Saturday, Sunday or other day on which commercial banking institutions are authorized or required by law to close in New York.
"Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other Indebtedness arrangements conveying the right to use) real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with GAAP. The stated maturity of such obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. The principal amount of such obligation shall be the capitalized amount thereof that would appear on the face of a balance sheet of such Person in accordance with GAAP.
"Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) the equity, including Preferred Stock and partnership interests, whether general or limited, of such Person.
"Cash Equivalents" means, at any time:
(1) any evidence of Indebtedness issued or directly and fully guaranteed or insured by the United States of America, the United Kingdom, Canada, France, Germany, Italy or Japan, or, in the case of an Asset Disposition in Brazil or an Investment of cash flow from the operations of the Company and its Subsidiaries in Brazil, Brazil, or any agency or instrumentality thereof (provided that the full faith and credit of such country is pledged in support thereof),
(2) certificates of deposit, money market deposit accounts and acceptances with a maturity of 180 days or less from the date of acquisition of any financial institution that is a member of the Federal Reserve System or organized under the laws of the United Kingdom, Canada, France, Germany, Italy or Japan or, in the case of an Asset Disposition in Brazil or an Investment of cash flow from the operations of the Company and its Subsidiaries in Brazil, Brazil, having combined capital and surplus and undivided profits of not less than $250.0 million,
(3) commercial paper with a maturity of 365 days or less from the date of acquisition issued by a corporation organized under the laws of any state of the United States of America or the District of Columbia or any foreign country recognized by the United States of America whose debt rating, at the time as of which such investment is made, is at least "A-1" by Standard & Poor's Corporation or at least "P-1" by Moody's Investors Service, Inc. or rated at least an equivalent rating category of another nationally recognized securities rating agency,
(4) repurchase agreements and reverse repurchase agreements having a term of not more than 30 days for underlying securities of the types described in clause (1) above entered into with a financial institution meeting the qualifications described in clause (2) above,
(5) any security, maturing not more than 365 days after the date of acquisition, backed by standby or direct pay letters of credit issued by a bank meeting the qualifications described in clause (2) above and
(6) any security, maturing not more than 365 days after the date of acquisition, issued or fully guaranteed by any state, commonwealth, or territory of the United States of America, or by any political subdivision thereof, and rated at least "A" by Standard & Poor's Corporation or at least "A" by Moody's Investors Service, Inc. or rated at least an equivalent rating category of another nationally recognized securities rating agency.
"Common Stock" of any Person means Capital Stock of such Person that does not rank prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Assets" of any Person as of any date of determination means the total assets of such Person as reflected on the most recently prepared balance sheet of such Person, determined on a consolidated basis in accordance with GAAP.
112
"Consolidated Cash Flow Available for Fixed Charges" for any period means the Consolidated Net Income for such period increased by the sum of:
(1) Consolidated Interest Expense for such period, plus
(2) Consolidated Income Tax Expense for such period, plus
(3) the consolidated depreciation and amortization expense included in the income statement of the Company and its Subsidiaries for such period, plus
(4) all other expenses reducing Consolidated Net Income for such period that do not represent cash disbursements for such period (excluding any expense to the extent it represents an accrual of or reserve for cash disbursements for any subsequent period prior to the Stated Maturity of the Notes) less, to the extent included in the calculation of Consolidated Net Income, items of income increasing Consolidated Net Income for such period that do not represent cash receipts for such period (excluding any item to the extent it represents an accrual for cash receipts reasonably expected to be received prior to the Stated Maturity of the Notes) in each case for such period;
provided, however, that the provision for taxes based on the income or profits of, the consolidated depreciation and amortization expense and such items of expense or income attributable to, a Restricted Subsidiary shall be added to or subtracted from Consolidated Net Income to compute Consolidated Cash Flow Available for Fixed Charges only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income; provided, further, however, that the contribution to Consolidated Cash Flow Available for Fixed Charges of a Restricted Subsidiary which is restricted in its ability to pay dividends to the Company for any period shall not exceed the amount that would have been permitted to be distributed to the Company by such Restricted Subsidiary as a dividend or other distribution during such period.
"Consolidated Coverage Ratio" as of any date of determination means the ratio of (1) Consolidated Cash Flow Available for Fixed Charges for the period of the most recently completed four consecutive fiscal quarters for which quarterly or annual financial statements are available to (2) Consolidated Interest Expense for such period; provided, however, that:
(a) if the Company or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding (other than Indebtedness to finance seasonal fluctuations in working capital needs Incurred under a revolving credit (or similar arrangement) to the extent of the commitment thereunder in effect on the last day of such period unless any portion of such Indebtedness is projected in the reasonable judgment of senior management of the Company to remain outstanding for a period in excess of 12 months from the date of Incurrence of such Indebtedness) or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, Consolidated Cash Flow Available for Fixed Charges and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to (i) such Indebtedness as if such Indebtedness had been Incurred on the first day of such period and (ii) the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period,
(b) if since the beginning of such period any Indebtedness of the Company or any Restricted Subsidiary has been repaid, repurchased, defeased or otherwise discharged (other than Indebtedness under a revolving credit or similar arrangement unless such revolving credit Indebtedness has been permanently repaid and has not been replaced), Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis as if such Indebtedness had been repaid, repurchased, defeased or otherwise discharged on the first day of such period,
(c) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition") or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Asset Disposition, the Consolidated Cash Flow Available for Fixed Charges for such period shall be reduced by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if positive) attributable to the assets which are the subject
113
of such Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition") for such period or increased by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if negative) attributable thereto for such period, and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition") for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale),
(d) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of assets, including any Investment in a Restricted Subsidiary or any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of a line of business, Consolidated Cash Flow Available for Fixed Charges and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period, and
(e) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition"), Investment or acquisition of assets that would have required an adjustment pursuant to clause (c) or (d) above if made by the Company or a Restricted Subsidiary during such period, Consolidated Cash Flow Available for Fixed Charges and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition"), Investment or acquisition occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an acquisition or disposition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred or repaid in connection therewith, the pro forma calculations will be determined in good faith by a responsible financial or accounting officer of the Company and such calculations may include such pro forma adjustments for non-recurring items that the Company considers reasonable in order to reflect the ongoing impact of any such transaction on the Company's results of operations. If the Indebtedness to be Incurred bears a floating rate of interest, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate, Currency or Commodity Price Agreement applicable to such Indebtedness if such Interest Rate, Currency or Commodity Price Agreement has a remaining term in excess of 12 months).
"Consolidated Income Tax Expense" for any period means the consolidated provision for income taxes of the Company and the Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means for any period the consolidated interest expense included in a consolidated income statement (without deduction of interest income) of the Company and the Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with GAAP, including without limitation or duplication (or, to the extent not so included, with the addition of):
(1) the amortization of debt discounts;
(2) to the extent included in the calculation of net income under GAAP, any payments or fees with respect to letters of credit, bankers' acceptances or similar facilities;
114
(3) to the extent included in the calculation of net income under GAAP, net costs with respect to interest rate swap or similar agreements or, to the extent related to non-U.S. dollar denominated Indebtedness, foreign currency hedge, exchange or similar agreements;
(4) Preferred Dividends in respect of all Preferred Stock of Restricted Subsidiaries and Redeemable Stock of the Company held by Persons other than the Company or a Wholly Owned Subsidiary whether or not declared or paid;
(5) interest on Indebtedness guaranteed by the Company and the Restricted Subsidiaries and actually paid by the Company or the Restricted Subsidiaries;
(6) capitalized interest;
(7) the portion of any rental obligation attributable to Capital Lease Obligations allocable to interest expense; and
(8) the loss on Receivables Sales, and excluding, to the extent included in such consolidated interest expense, interest expense of any Person acquired by the Company or a Subsidiary of the Company in a pooling-of-interests transaction for any period prior to the date of such transaction.
Notwithstanding the foregoing, (i) the Consolidated Interest Expense with respect to any Restricted Subsidiary, not all the net income of which was included in calculating Consolidated Net Income by reason of the fact that such Restricted Subsidiary was not a Wholly Owned Subsidiary, will be included only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and (ii) "Consolidated Interest Expense" will not include amortization of financing fees and expenses.
"Consolidated Leverage Ratio" means as of any date of determination the ratio of (1) the aggregate principal amount of the consolidated Indebtedness of the Company and the Restricted Subsidiaries as of the date of Incurrence, to (2) Consolidated Cash Flow Available for Fixed Charges for the period of the most recently completed four consecutive fiscal quarters for which quarterly or annual financial statements are available; provided, however, that, without duplication:
(a) if since the beginning of such four fiscal quarter period the Company or any Restricted Subsidiary shall have made any Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition"), the Consolidated Cash Flow Available for Fixed Charges for such period shall be reduced by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if positive) attributable to the assets which are the subject of such Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition") for such period or increased by an amount equal to the Consolidated Cash Flow Available for Fixed Charges (if negative) attributable thereto for such period,
(b) if since the beginning of such four fiscal quarter period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of assets, including any Investment in a Restricted Subsidiary or any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of a line of business, Consolidated Cash Flow Available for Fixed Charges for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period, and
(c) if since the beginning of such four quarter period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition"), Investment or acquisition of assets that would have required an adjustment pursuant to clause (c) or (d) above if made by the Company or a Restricted Subsidiary during such period, Consolidated Cash Flow Available for Fixed Charges for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition (including, for these purposes, a disposition of the type described in clause (5) of the definition of "Asset Disposition"), Investment or acquisition occurred on the first day of such period.
115
For purposes of this definition, whenever pro forma effect is to be given to an acquisition or disposition of assets, the amount of income or earnings relating thereto, or any Incurrence or repayment of Indebtedness or Investment, the pro forma calculations will be determined in good faith by a responsible financial or accounting officer of the Company and such calculations may include such pro forma adjustments for non-recurring items that the Company considers reasonable in order to reflect the ongoing impact of any such transaction on the Company's results of operations.
"Consolidated Net Income" for any period means the consolidated net income (or loss) of the Company and its Subsidiaries before payment of dividends in respect of any Capital Stock of the Company for such period determined on a consolidated basis in accordance with GAAP; provided that there will be excluded therefrom:
(1) the net income (or loss) of any Person acquired by the Company or a Subsidiary of the Company in a pooling-of-interests transaction for any period prior to the date of such transaction,
(2) the net income (or loss) of any Person that is not a Restricted Subsidiary except to the extent of the amount of dividends or other distributions actually paid to the Company or a Restricted Subsidiary by such Person during such period (subject, in the case of a dividend or distribution to a Restricted Subsidiary, to the limitations contained in clause (3) below),
(3) any net income of any Restricted Subsidiary to the extent such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income,
(4) gains or losses on Asset Dispositions by the Company or its Subsidiaries,
(5) all extraordinary gains and extraordinary losses,
(6) the cumulative effect of changes in accounting principles,
(7) non-cash gains or losses resulting from fluctuations in currency exchange rates, and
(8) the tax effect of any of the items described in clauses (1) through (7) above.
"Default" means any event which is, or after notice or passage of time or both would be, an Event of Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Bank Credit Facilities and all Permitted Interest Rate, Currency or Commodity Price Agreements Obligations with respect thereto; and
(2) after payment in full of all obligations under the Bank Credit Facilities, any other Senior Debt permitted under the Indenture the principal amount of which is $25.0 million or more and that has been designated by the Company as "Designated Senior Debt."
"Domestic Subsidiary" means a Restricted Subsidiary other than a Foreign Subsidiary.
"Earn-Out Amount" has the meaning provided in the Purchase Agreement.
"Equity Offering" means a primary sale of Common Stock of the Company or, to the extent the net cash proceeds thereof are paid to the Company as a capital contribution, Common Stock or Preferred Stock (other than Redeemable Stock) of C&A, for cash to a Person or Persons other than a Subsidiary of the Company.
"Existing 10¾% Notes" means the Company's 10¾% Senior Notes due 2011.
"Foreign Subsidiary" means a Restricted Subsidiary that is organized under the laws of any country other than the United States and substantially all the assets of which are located outside the United States.
"GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time.
"Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any other Person and any obligation, contingent or otherwise, of such
116
Person (1) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (2) entered into for purposes of assuring in any other manner the obligee of such Indebtedness of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" will not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning.
"Heartland" means Heartland Industrial Partners, L.P., a Delaware limited partnership, and its successors.
"Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Indebtedness or other obligation (including by acquisition of Subsidiaries if such Indebtedness directly or indirectly becomes an obligation of such Person) or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or other obligation on the balance sheet of such Person (and "Incurrence," "Incurred," and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in GAAP (or the application of GAAP or any reclassification or change in accounting treatment required under GAAP as a result of the application of any new testing or a change in circumstances) that results in an obligation of such Person that exists at such time becoming Indebtedness will not be deemed an Incurrence of such Indebtedness.
"Indebtedness" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent:
(1) the principal of and premium, if any, in respect of any indebtedness of such Person for money borrowed,
(2) the principal of and premium, if any, with respect to obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations Incurred in connection with the acquisition of property, assets or businesses,
(3) the principal component of all obligations of such Person in respect of letters of credit, bankers' acceptances or other similar instruments (including reimbursement obligations with respect thereto) (other than obligations with respect to letters of credit securing obligations (other than obligations described in (1), (2), and (5)) entered into in the ordinary course of business of such Person to the extent that such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit),
(4) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services; provided that the Company's obligations under the Purchase Agreement with respect to the satisfaction of the Earn-Out Amount shall not be deemed Indebtedness; provided, further, that any Indebtedness Incurred to pay or otherwise discharge such obligations shall constitute Indebtedness,
(5) every Capital Lease Obligation of such Person,
(6) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Redeemable Stock (in the case of the Company) or, with respect to any Restricted Subsidiary, any Preferred Stock (but excluding, in each case, any accrued dividends) but only to the extent such obligations arise on or prior to the Stated Maturity of the Notes, and excluding in any event, the Textron Preferred Stock,
(7) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; provided, however, that the amount of such Indebtedness shall be the lesser of (a) the fair market value of such asset at such date of determination and (b) the amount of such Indebtedness of such other Persons,
117
(8) every obligation under Interest Rate, Currency or Commodity Price Agreements of such Person, and
(9) every obligation of the type referred to in clauses (1) through (8) of another Person the payment of which, in any case, such Person has Guaranteed or is responsible or liable, directly or indirectly, as obligor, Guarantor or otherwise.
"Interest Rate, Currency or Commodity Price Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including caps, floors, collars and similar agreements) relating to, or the value of which is dependent upon, interest rates, currency exchange rates or commodity prices or indices (excluding contracts for the purchase or sale of goods in the ordinary course of business).
"Investment" by any Person means any direct or indirect loan, advance or other extension of credit (including by way of Guarantee) or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Indebtedness issued by, any other Person, including any payment on a Guarantee of any such obligation of such other Person, but does not include trade accounts receivable in the ordinary course of business.
For purposes of the provisions described under "—Unrestricted Subsidiary" and "—Certain Covenants—Limitation on Restricted Payments" and the definition of "Permitted Investments," (1) with respect to a Restricted Subsidiary that is designated as an Unrestricted Subsidiary, "Investment" will include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time that such Subsidiary is designated an Unrestricted Subsidiary and with respect to a Person that is designated as an Unrestricted Subsidiary simultaneously with its becoming a Subsidiary of the Company, "Investment" will mean the Investment made by the Company and the Restricted Subsidiaries to acquire such Subsidiary; provided, however, that in either case upon a redesignation of such Subsidiary as a Restricted Subsidiary, or upon the acquisition of the Capital Stock of a Person such that such Person becomes a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary or such other Person in an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation or in such Person immediately prior to such acquisition less (b) the portion (proportionate to the Company's interest in such Subsidiary after such redesignation or acquisition) of the fair market value of the net assets of such Subsidiary at the time that such Subsidiary is so redesignated a Restricted Subsidiary or of such Person immediately following such acquisition; and (2) any property transferred to or from an Unrestricted Subsidiary will be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors.
"Issue Date" means August 26, 2004.
"Joan Entities" means Elkin McCallum, Joan Fabrics Corporation, Western Avenue Dyers L.P., Tyng Textiles LLC and any other Affiliate of Elkin McCallum (or any of his immediate family members, related family trusts, heirs and descendants).
"Lien" means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing).
"Make-Whole Premium" with respect to a Note means an amount equal to the excess of (a) the present value of the remaining interest (exclusive of accrued interest being paid in connection with the applicable redemption) and principal payments due on such Note to its final maturity date, computed using a discount rate equal to the Treasury Rate on such date plus 0.50%, over (b) the outstanding principal amount of such Note.
"Net Available Proceeds" from any Asset Disposition by any Person means cash or Cash Equivalents received (including by way of sale or discounting of a note, installment receivable or other receivable, but
118
excluding any other consideration received in the form of assumption by the acquiror of Indebtedness or other obligations relating to such properties or assets) therefrom by such Person, net of:
(1) all legal, accounting, financial advisory, title and recording tax expenses, commissions and other fees and expenses Incurred and all federal, state, provincial, foreign and local taxes required to be accrued as a liability as a consequence of such Asset Disposition,
(2) all payments made by such Person or its Subsidiaries on any Indebtedness which is secured by such assets in accordance with the terms of any Lien upon or with respect to such assets or which must by the terms of such Lien, or in order to obtain a necessary consent to such Asset Disposition or by applicable law, be repaid out of the proceeds from such Asset Disposition,
(3) all distributions and other payments made to minority interest holders in Subsidiaries of such Person or joint ventures as a result of such Asset Disposition,
(4) appropriate amounts to be provided by such Person or any Subsidiary thereof, as the case may be, as a reserve in accordance with GAAP against any liabilities associated with such assets and retained by such Person or any Subsidiary thereof, as the case may be, after such Asset Disposition, in each case as determined by the Board of Directors as evidenced by a resolution of the Board filed with the Trustee; provided, however, that any reduction in such reserve within 12 months following the consummation of such Asset Disposition will be treated for all purposes of the Indenture and the Notes as a new Asset Disposition at the time of such reduction with Net Available Proceeds equal to the amount of such reduction and
(5) any amount needed to effect a reduction of the amount outstanding under a Permitted Receivables Financing Facility as a result of such Asset Disposition.
"Obligor" shall mean, with respect to any Receivable, the party obligated to make payments with respect to such Receivable, including any guarantor thereof.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company by first class mail, postage prepaid, to each holder of Notes at its address appearing in the security register on the date of the Offer offering to purchase up to the principal amount of Notes specified in such Offer at the purchase price specified in such Offer (as determined pursuant to the Indenture). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the "Expiration Date") of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date (the "Purchase Date") for purchase of Notes within five Business Days after the Expiration Date. The Company shall notify the Trustee at least 15 Business Days (or such shorter period as is acceptable to the Trustee) prior to the mailing of the Offer of the Company's obligation to make an Offer to Purchase, and the Offer shall be mailed by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. The Offer shall contain information concerning the business of the Company and its Subsidiaries which the Company in good faith believes will enable such holders of Notes to make an informed decision with respect to the Offer to Purchase, which at a minimum will include:
(1) the most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the documents required to be filed with the Trustee pursuant to the Indenture (which requirements may be satisfied by delivery of such documents together with the Offer),
(2) a description of material developments, if any, in the Company's business subsequent to the date of the latest of such financial statements referred to in clause (i) (including a description of the events requiring the Company to make the Offer to Purchase),
(3) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events requiring the Company to make the Offer to Purchase, and
(4) any other information required by applicable law to be included therein.
The Offer shall contain all instructions and materials necessary to enable holders of the Notes to tender their Notes pursuant to the Offer to Purchase. The Offer shall also state:
(a) the section of the Indenture pursuant to which the Offer to Purchase is being made;
119
(b) the Expiration Date and the Purchase Date;
(c) the aggregate principal amount of such outstanding Notes offered to be purchased by the Company pursuant to the Offer to Purchase (including, if less than 100%, the manner by which such has been determined pursuant to the section of the Indenture requiring the Offer to Purchase) (the "Purchase Amount");
(d) the purchase price to be paid by the Company for each $1,000 aggregate principal amount of Notes accepted for payment (as specified pursuant to the Indenture) (the "Purchase Price");
(e) that the holder of Notes may tender all or any portion of Notes registered in the name of such holder and that any portion of a Note tendered must be tendered in an integral multiple of $1,000 principal amount;
(f) the place where Notes are to be surrendered for tender pursuant to the Offer to Purchase;
(g) that interest on any Note not tendered or tendered but not purchased by the Company pursuant to the Offer to Purchase will continue to accrue;
(h) that on the Purchase Date the Purchase Price will become due and payable upon each Note being accepted for payment pursuant to the Offer to Purchase and that interest thereon will cease to accrue on and after the Purchase Date;
(i) that each holder of Notes electing to tender its Notes pursuant to the Offer to Purchase will be required to surrender its Notes at the place or places specified in the Offer prior to the close of business on the Expiration Date (such Notes being, if the Company or the Trustee so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the holder thereof or his attorney duly authorized in writing);
(j) that holders of Notes will be entitled to withdraw all or any portion of Notes tendered if the Company (or the Paying Agent) receives, not later than the close of business on the Expiration Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the principal amount of the Notes the holder tendered, the certificate numbers of the Notes the holder tendered and a statement that such holder of Notes is withdrawing all or a portion of his tender;
(k) that (i) if Notes in an aggregate principal amount less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Company will purchase all such Notes and (ii) if Notes in an aggregate principal amount in excess of the Purchase Amount are tendered and not withdrawn pursuant to the Offer to Purchase, the Company will purchase Notes having an aggregate principal amount equal to the Purchase Amount on a pro rata basis (with such adjustments as may be deemed appropriate so that only Notes in denominations of $1,000 or integral multiples thereof shall be purchased); and
(l) that in the case of any holder of Notes whose Notes are purchased only in part, the Company will execute, and the Trustee shall authenticate and deliver to the holder without service charge, a new Note, of any authorized denomination as requested by such holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Notes so tendered.
Any Offer to Purchase will be governed by and effected in accordance with the Offer for such Offer to Purchase.
"Overdraft Facilities" means local lines of credit of the Company's Foreign Subsidiaries, together with any credit support provided by the Company or any Restricted Subsidiary, providing for availability in an aggregate amount not to exceed $50.0 million at any time outstanding.
"Permitted Acquired Investment" means any Investment by any Person (the "Subject Person") in another Person made prior to the time
(1) the Subject Person became a Restricted Subsidiary,
(2) the Subject Person merged into or consolidated with a Restricted Subsidiary, or
(3) another Restricted Subsidiary merged into or was consolidated with the Subject Person (in a transaction in which the Subject Person became a Restricted Subsidiary),
120
provided that such Investment was not made in anticipation of any such transaction and was outstanding prior to such transaction; provided, further, that the book value of such Investments (excluding all Permitted Investments (other than those referred to in clause (13) of the definition thereof)) do not exceed 5% of the Consolidated Assets of the Subject Person immediately prior to the Subject Person becoming a Restricted Subsidiary.
"Permitted Interest Rate, Currency or Commodity Price Agreement" of any Person means any Interest Rate, Currency or Commodity Price Agreement entered into with one or more financial institutions that is designed to protect such Person (1) against fluctuations in interest rates or currency exchange rates with respect to Indebtedness of the Company and its Restricted Subsidiaries and which will have a notional amount no greater than the principal payments due with respect to the Indebtedness being hedged thereby, or (2) in the case of currency or commodity protection agreements, against currency exchange rate or commodity price fluctuations in the ordinary course of the Company's and the Restricted Subsidiaries' respective businesses relating to then existing financial obligations or then existing or sold production and, in the case of both (1) and (2), not for purposes of speculation.
"Permitted Investments" means:
(1) Investments in Cash Equivalents,
(2) Investments in existence on the Issue Date,
(3) Investments in any Restricted Subsidiary by the Company or any Restricted Subsidiary, including any Investment made to acquire such Restricted Subsidiary,
(4) Investments in the Company by any Restricted Subsidiary,
(5) sales of goods or services on trade credit terms consistent with the Company's and its Subsidiaries' past practices or otherwise consistent with trade credit terms in common use in the industry and recorded as accounts receivable on the balance sheet of the Person making such sale,
(6) loans or advances to employees for purposes of purchasing Common Stock of C&A in an aggregate amount outstanding at any one time not to exceed $5.0 million and other loans and advances to employees of the Company in the ordinary course of business and on terms consistent with the Company's practices in effect prior to the Issue Date, including travel, moving and other like advances,
(7) loans or advances to vendors or contractors of the Company in the ordinary course of a Related Business,
(8) lease, utility and other similar deposits in the ordinary course of business,
(9) stock, obligations or securities received in the ordinary course of business in settlement of debts owing to the Company or a Subsidiary thereof as a result of foreclosure, perfection, enforcement of any Lien or in a bankruptcy proceeding,
(10) Investments in Unrestricted Subsidiaries, partnerships or joint ventures involving the Company or its Restricted Subsidiaries, primarily engaged in a Related Business, if the amount of such Investment (after taking into account the amount of all other Investments made pursuant to this clause (10), less any return of capital realized or any repayment of principal received on such Permitted Investments, or any release or other cancellation of any Guarantee constituting such Permitted Investment, which has not at such time been reinvested in Permitted Investments made pursuant to this clause (10)), does not exceed 1.5% of the Company's Consolidated Assets,
(11) Investments in Persons to the extent any such Investment represents the non-cash consideration otherwise permitted to be received by the Company or its Restricted Subsidiaries in connection with an Asset Disposition,
(12) any Investment included in clauses (3)(b), (5), (9) and (16) of the definition of "Permitted Indebtedness,"
(13) Permitted Acquired Investments, and
(14) Investments constituting "Permitted Investments" as defined in the Bank Credit Facilities on the Issue Date.
121
"Permitted Junior Securities" means:
(1) Capital Stock in the Company or any Guarantor; or
(2) debt securities that are subordinated to all Senior Debt and any debt securities issued in exchange for Senior Debt to substantially the same extent as, or to a greater extent than, the Notes and the Guarantees related thereto are subordinated to Senior Debt.
"Permitted Liens" means:
(1) Liens existing on the Issue Date;
(2) Liens existing on property or assets at the time of acquisition by the Company or a Restricted Subsidiary which secure Indebtedness that is not incurred in contemplation of such property or assets being so acquired, provided that such Liens do not extend to other property or assets of the Company or any Restricted Subsidiary;
(3) Liens securing Indebtedness of the type described in clauses (8), (9) and (15) of the "Limitation on Indebtedness" covenant;
(4) Liens securing the Bank Credit Facilities, provided that such Liens shall not secure more than an aggregate of $700.0 million of Indebtedness thereunder (plus, without duplication, such amount of Indebtedness which may otherwise be subject to a Lien pursuant to clause (10) below), Liens securing the Brazilian Credit Facility, the Overdraft Facilities, Liens securing Indebtedness Incurred by Foreign Subsidiaries and Permitted Interest Rate, Currency or Commodity Price Agreements;
(5) Liens replacing any of the items set forth in clauses (1) through (4) above, provided that (A) the principal amount of the Indebtedness secured by such Liens shall not be increased (except premiums or other payments paid in connection with a concurrent Refinancing of such Indebtedness and the expenses Incurred in connection therewith), (B) the principal amount of the Indebtedness secured by such Liens, determined as of the date of Incurrence, has a Weighted Average Life to Maturity at least equal to the remaining Weighted Average Life to Maturity of the Indebtedness being Refinanced or repaid, (c) the maturity of the Indebtedness secured by such Liens is not earlier than that of the Indebtedness to be Refinanced, (D) such Liens have the same or a lower ranking and priority as the Liens being replaced, and (E) such Liens shall be limited to the property or assets encumbered by the Lien so replaced;
(6) Liens encumbering cash proceeds (or securities purchased therewith) from Indebtedness permitted to be Incurred pursuant to the "Limitation on Indebtedness" covenant which are set aside at the time of such Incurrence in order to secure an escrow arrangement pursuant to which such cash proceeds (or securities purchased therewith) are contemplated to ultimately be released to the Company or a Restricted Subsidiary or returned to the lenders of such Indebtedness, provided that such Liens are automatically released concurrently with the release of such cash proceeds (or securities purchased therewith) from such escrow arrangement;
(7) Liens (including extensions, renewals and replacements thereof) upon property or assets created for the purpose of securing Indebtedness Incurred to finance or Refinance the cost (including the cost of construction) of such property or assets, provided that (A) the principal amount of the Indebtedness secured by such Lien does not exceed 100% of the cost of such property or assets, (B) such Lien does not extend to or cover any property or assets other than the property or assets being financed or Refinanced by such Indebtedness and any improvements thereon, and (c) the Incurrence of such Indebtedness is permitted by the "Limitation on Indebtedness" covenant;
(8) Liens in favor of the Company or a Restricted Subsidiary;
(9) Liens securing Indebtedness of Foreign Subsidiaries permitted to be Incurred under the "Limitation on Indebtedness" covenant;
(10) Liens (other than Liens securing Subordinated Indebtedness) which, when the Indebtedness relating to those Liens is added to all other then outstanding Indebtedness of the Company and its Restricted Subsidiaries secured by Liens and not listed in clauses (1) through (9) above or (11) through (26) below, does not exceed 5% of the Consolidated Assets of the Company;
122
(11) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business;
(12) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings;
(13) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent for a period of more than 60 days or being contested in good faith;
(14) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security or similar obligations, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money);
(15) judgment Liens not accompanied by an Event of Default of the type described in clause (8) under "Events of Default" arising from such judgment;
(16) easements, rights-of-way, zoning restrictions, minor defects or irregularities in title and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of business of the Company or any of its Restricted Subsidiaries;
(17) any interest or title of a lessor under any lease, whether or not characterized as capital or operating; provided that such Liens do not extend to any property or assets which is not leased property subject to such lease;
(18) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;
(19) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof;
(20) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Company or any of the Restricted Subsidiaries, including rights of offset and set-off;
(21) leases or subleases granted to others not interfering in any material respect with the business of the Company or the Restricted Subsidiaries;
(22) Liens upon Receivables pursuant to one or more receivables financing facilities to the extent that the Indebtedness thereunder could be Incurred pursuant to clause (1)(c) of second paragraph of the "Limitation on Indebtedness" covenant;
(23) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of custom duties in connection with importation of goods;
(24) Liens encumbering initial deposits and margin deposits, and other Liens incurred in the ordinary course of business and that are within the general parameters customary in the industry;
(25) Liens arising from filing Uniform Commercial Code financing statements regarding leases; and
(26) Liens to secure Senior Debt of the Company or any Guarantor or Indebtedness of any Restricted Subsidiary that is not a Guarantor.
"Permitted Receivables Financing Facility" means the receivables financing facility established pursuant to the Amended and Restated Receivables Sales Agreement to be entered into, as amended from time to time, among the Company, as master servicer, the Sellers parties thereto and Carcorp, Inc. (or any successor thereto or replacement thereof) and one or more receivables financing facilities pursuant to which the Company or any of its Subsidiaries sells, transfers, assigns or pledges its Receivables
123
to a special purpose entity or a trust and in connection therewith such entity or trust Incurs Indebtedness secured by such Receivables or otherwise finances Receivables with customary limited repurchase obligations for breaches of certain representations, warranties or covenants or limited recourse based upon the collectibility of the Receivables sold.
"Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, limited liability company, government or any agency or political subdivision hereof or any other entity.
"Preferred Dividends" for any Person means for any period the quotient determined by dividing the amount of dividends and distributions paid or accrued (whether or not declared) on Preferred Stock of such Person during such period calculated in accordance with GAAP, by 1 minus the actual combined Federal, state, local and foreign income tax rate of the Company on a consolidated basis (expressed as a decimal) for such period.
"Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person.
"Purchase Agreement" means the Purchase Agreement dated August 7, 2001 among Textron, Inc., C&A and the Company, as amended and restated to the Issue Date.
"Receivables" means receivables, chattel paper, instruments, documents or intangibles evidencing or relating to the right to payment of money. "Receivables" shall include the indebtedness and payment obligations of any Person to the Company or a Subsidiary arising from a sale of merchandise or services by the Company or such Subsidiary in the ordinary course of its business, including any right to payment for goods sold or for services rendered, and including the right to payment of any interest, finance charges, returned check or late charges and other obligations of such Person with respect thereto. Receivables shall also include (a) all of the Company's or such Subsidiary's interest in the merchandise (including returned merchandise), if any, relating to the sale which gave rise to such Receivable, (b) all other security interests or Liens and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to the contract related to such Receivable or otherwise, together with all financing statements signed by an Obligor describing any collateral securing such Receivable, and (c) all guarantees, insurance, letters of credit and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the contract related to such Receivable or otherwise.
"Receivables Financing" means (1) the sale or other disposition of Receivables arising in the ordinary course of business or (2) the sale or other disposition of Receivables that arise in the ordinary course of business to a Receivables Subsidiary followed by, or in connection with, a financing transaction in connection with such sale or disposition of such Receivables.
"Receivables Sale" of any Person means any sale, transfer, assignment or pledge of Receivables by such Person (pursuant to a Permitted Receivables Financing Facility, a purchase facility or otherwise), other than (1) in connection with a disposition of the business operations of such Person relating thereto or (2) a disposition of defaulted Receivables for purpose of collection and not as a financing arrangement.
"Receivables Subsidiary" means an Unrestricted Subsidiary of the Company or any other corporation, trust or entity that is exclusively engaged in Receivables Financing, and activities reasonably related thereto.
"Redeemable Stock" of any Person means any Capital Stock of such Person that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or otherwise (including upon the occurrence of an event) (i) matures or (ii) is required to be redeemed (pursuant to any sinking fund obligation or otherwise) or (iii) is convertible into or exchangeable for Indebtedness or Redeemable Stock or is redeemable at the option of the holder thereof, in each case in whole or in part, at any time prior to 91 days after the final Stated Maturity of the Notes. Notwithstanding the preceding sentence, (1) any Capital Stock that would constitute Redeemable Stock solely because the holders of the Capital Stock have the right to require the Company to repurchase such Capital Stock upon the
124
occurrence of a change of control or asset sale shall not constitute Redeemable Stock if the terms of such Capital Stock provide that the Company may not repurchase or redeem any such Capital Stock if prohibited by the terms of the Indenture and (2) Capital Stock in respect of which the Company may have an obligation of the type referred to in clause (vi) of the second paragraph of the "Limitation on Restricted Payments and Restricted Investments" and Textron Preferred Stock shall not constitute Redeemable Stock.
"Refinancing" means, with respect to any Indebtedness, a renewal, extension, refinancing, replacement, amendment, restatement or refunding of such Indebtedness, and shall include any successive Refinancing of any of the foregoing.
"Related Business" means the businesses of the Company and the Restricted Subsidiaries on the Issue Date and any business related, ancillary or complementary to any of the businesses of the Company and the Restricted Subsidiaries on the date of the Indenture, as determined conclusively and in good faith by the Company's Board of Directors.
"Restricted Investment" means any Investment other than a Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary.
"Senior Debt" means:
 | |
| (1) | all Indebtedness of the Company or any Guarantor outstanding under the Bank Credit Facilities and all Permitted Interest Rate, Currency or Commodity Price Agreements; |
| |
| (2) | any other Indebtedness of the Company or any Guarantor permitted to be incurred under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the Notes or any Subsidiary Guarantee; and |
| |
| (3) | all obligations with respect to the items listed in the preceding clauses (1) and (2). |
Notwithstanding anything to the contrary in the preceding, Senior Debt will not include:
| |
| (1) | any liability for federal, state, local or other taxes owed or owing by the Company; |
| |
| (2) | any intercompany Indebtedness of the Company or any of its Subsidiaries to the Company or any of its Affiliates; |
| |
| (3) | any trade payables; |
| |
| (4) | the portion of any Indebtedness that is incurred in violation of the Indenture; provided that such Indebtedness shall be deemed not to have been incurred in violation of the Indenture for purposes of this clause (4) if such Indebtedness consists of Indebtedness under the Bank Credit Facilities and holders of such Indebtedness or their agent or representative (i) had no actual knowledge at the time of the incurrence that the incurrence of such Indebtedness violated the Indenture and (ii) shall have received an officers' certificate to the effect that the incurrence of such Indebtedness does not violate the provisions of the Indenture; or |
| |
| (5) | Indebtedness which is classified as non-recourse in accordance with GAAP or any unsecured claim arising in respect thereof by reason of the application of section 1111(b)(1) of the bankruptcy code. |
"Significant Subsidiary" means any Restricted Subsidiary that would be a "significant subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision.
"Stockholders Agreements" means the Stockholders Agreement, dated July 3, 2001, by and among Heartland Industrial Partners, L.P. and the other Heartland entities named therein, the Becker Stockholders named therein, Joan Stockholders named therein and C&A, as amended, and the Stockholders Agreement, dated February 23, 2001, by and among C&A, Heartland Industrial Partners I,
125
L.P. and the other Investor Stockholders listed on Schedule I thereto, Blackstone Capital Company II, L.L.C., Blackstone Family Investment Partnership I, L.P., Blackstone Advisory Directors Partnership L.P., Blackstone Capital Partners L.P., and Wasserstein/C&A Holdings L.L.C., as amended.
"Subordinated Indebtedness" means Indebtedness as to which the payment of principal (and premium, if any) and interest and other payment obligations is subordinate by its terms to the prior payment in full of the Notes or the Guarantees of the Company or a Guarantor, as applicable.
"Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interest (including partnership interest) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the Notes by a Subsidiary Guarantor pursuant to the terms of the Indenture, and, collectively, all the Guarantees of the Notes. Each such Subsidiary Guarantee will be in the form prescribed by the Indenture.
"TAC-Trim Acquisition" means the acquisition by the Company of the Bison Subsidiaries (as defined in the Purchase Agreement) pursuant to the Purchase Agreement and the related transactions.
"Textron Entities" means Textron Inc. and its controlled Affiliates.
"Textron Preferred Stock" shall mean collectively, (1) the Company's Series A1 Redeemable Preferred Stock, Series A2 Redeemable Preferred Stock, Series B1 Redeemable Preferred Stock, Series B2 Redeemable Preferred Stock, Series C1 Redeemable Preferred Stock, Series C2 Redeemable Preferred Stock, (2) any substantially similar redeemable Preferred Stock of C&A issued in lieu of or in exchange for Preferred Stock of the type described in the preceding clause (1) pursuant to the terms of the Purchase Agreement or the Textron Preferred Stock as in effect on the Issue Date and (3) any Series D Redeemable Preferred Stock issued in satisfaction of the Earn-Out Amount, in each case as amended, supplemented or replaced (through exchange or otherwise) by a new preferred stock of the Company or C&A through the Issue Date or thereafter in a manner that is not adverse to holders of Notes in any material respect.
"Treasury Rate" for any date, means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled and published in the most recent Federal Reserve Statistical Release H.15(519) that has become publicly available at least two business days prior to the date the redemption is effected pursuant to a Note Redemption (the "Redemption Date") (or, if such Statistical Release is no longer published, any publicly available source of similar market data) most nearly equal to the period from the Redemption Date to August 15, 2012; provided, however, that if the period from the Redemption Date to August 15, 2012 is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given except that if the period from the Redemption Date to August 15, 2012 is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used.
"Unrestricted Subsidiary" means any Subsidiary designated as such by the Board of Directors as set forth under "—Unrestricted Subsidiaries" and any Subsidiary of an Unrestricted Subsidiary.
"U.S. Government Obligation" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option.
"Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency; provided that the Textron Preferred Stock shall not be deemed to be Voting Stock for any purpose.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness or Redeemable Stock, as the case may be at any date, the number of years obtained by dividing (i) the sum of the products
126
obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount or liquidation preference, as applicable, of such Indebtedness or Redeemable Stock, as the case may be.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of C&A or the Company, as such, shall have any liability for any obligations of the Company under the Notes, the Indenture or the Subsidiary Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy.
Concerning the Trustee
BNY Midwest Trust Company is the Trustee under the Indenture and has been appointed by the Company as registrar and paying agent with regard to the Notes.
Governing Law
The Indenture provides that it and the Notes are governed by, and construed in accordance with, the laws of the State of New York.
Events of Default
The following are Events of Default under the Indenture:
(1) failure to pay principal of (or premium, if any, on) any Note when due;
(2) failure to pay any interest or additional interest (as required by the registration rights agreement) on any Note when due, continued for 30 days;
(3) default in the payment of principal and interest on Notes required to be purchased pursuant to an Offer to Purchase as described under "—Certain Covenants—Change of Control" when due and payable;
(4) failure to perform or comply with the provisions described under "Mergers, Consolidations and Certain Sales of Assets" by the Company or any Guarantor;
(5) failure to perform or comply with any other covenant or agreement of the Company under the Indenture or the Notes continued for 60 days after written notice to the Company by the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Notes;
(6) default under the terms of any instrument or instruments evidencing or securing Indebtedness for money borrowed by the Company or any Significant Subsidiary having an outstanding principal amount of $20 million individually or in the aggregate which default results in the acceleration of the payment of such Indebtedness or constitutes the failure to pay such Indebtedness when due at final maturity after the lapse of any applicable grace period;
(7) the Parent Guarantee of the Notes or any Subsidiary Guarantee of the Notes shall for any reason cease to be, or shall be asserted in writing by the Parent Guarantor, the Company or the Subsidiary Guarantor not to be, in full force and effect and enforceable in accordance with its terms;
(8) the rendering of a final judgment or judgments (not subject to appeal) against the Company or any Significant Subsidiary in an amount in excess of $20 million (calculated net of any insurance
127
available to pay such judgment) which remains undischarged or unstayed for a period of 60 days after the date on which the right to appeal has expired; and
(9) certain events of bankruptcy, insolvency or reorganization affecting the Company, any Significant Subsidiary or any group of Restricted Subsidiaries that, taken together (as of the latest audited consolidated financial statement for the Company and the Restricted Subsidiaries) would constitute a Significant Subsidiary of the Company.
Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders of Notes, unless such holders of the Notes shall have offered to the Trustee reasonable indemnity. Subject to such provisions for the indemnification of Trustee, the holders of a majority in aggregate principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee.
If an Event of Default (other than an Event of Default described in clause (9) above with respect to the Company) shall occur and be continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of the outstanding Notes may accelerate the maturity of all Notes; provided, however, that after such acceleration, but before a judgment or decree based on acceleration, the holders of a majority in aggregate principal amount of outstanding Notes may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the non-payment of accelerated principal, have been cured or waived as provided in the Indenture; provided that, if there are any amounts outstanding under the Bank Credit Facilities, it shall become immediately due and payable upon the first to occur of an acceleration under the Bank Credit Facilities or five business days after receipt by us and the administrative agent under the Bank Credit Facilities of such acceleration (but only if such Event of Default is then continuing). In the event of a declaration of acceleration of the Notes because an Event of Default described in clause (6) under "Events of Default" has occurred and is continuing, the declaration of acceleration of the Notes shall be automatically annulled if the event of default or payment default triggering such Event of Default pursuant to clause (6) shall be remedied or cured by the Company or a Restricted Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto and if (a) the annulment of the acceleration of the Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing Events of Default, except nonpayment of principal, premium or interest on the Notes that became due solely because of the acceleration of the Notes, have been cured or waived. If an Event of Default specified in clause (9) above occurs with respect to the Company, the outstanding Notes will ipso facto become immediately due and payable without any declaration or other act on the part of the Trustee or any holder of Notes. For information as to waiver of defaults, see "—Modification and Waiver."
No holder of any Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such holder shall have previously given to the Trustee written notice of a continuing Event of Default and unless also the holders of at least 25% in aggregate principal amount of the outstanding Notes shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and such Trustee shall not have received from the holders of a majority in aggregate principal amount of the outstanding Notes a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, such limitations do not apply to a suit instituted by a holder of a Note for enforcement of payment of the principal of and premium, if any, or interest on such Note on or after the respective due dates and grace period expressed in such Note and the Indenture.
The Company will be required to furnish to the Trustee annually a statement as to the performance by the Company of certain of its obligations under the Indenture and as to any default in such performance.
Modification and Waiver
Modifications and amendments of the Indenture may be made by the Company and the Trustee with the consent of the holders of a majority in aggregate principal amount of outstanding Notes; provided, however, that no such modification or amendment may, without the consent of the holder of each Note affected thereby,
128
(1) change the Stated Maturity of the principal of, or any installment of interest on, such Note,
(2) reduce the principal amount of, or the premium or interest on, such Note,
(3) change the place or currency of payment of principal of, or premium or interest on, such Note,
(4) modify or change any provision of the Indenture or the related definitions affecting the ranking of such Note or any Guarantee thereof in any manner adverse in any material respect to the holder of such Note,
(5) reduce the premium payable upon the redemption or repurchase of any Note,
(6) reduce the time before which such Note may be redeemed,
(7) impair the right to institute suit for the enforcement of any payment on or with respect to such Note,
(8) reduce the above-stated percentage of outstanding Notes necessary to modify or amend the Indenture,
(9) reduce the percentage of outstanding Notes necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults,
(10) modify any provisions of the Indenture relating to the modification and amendment of the Indenture or the waiver of past defaults or covenants, except as otherwise specified, or
(11) following the mailing of any Offer to Purchase, modify any Offer to Purchase required under "—Certain Covenants—Limitation on Asset Dispositions" and "—Certain Covenants—Change of Control" in a manner materially adverse to the holder of such Note.
Without the consent of any holder, the Company and the Trustee may amend the Indenture to:
(a) cure any ambiguity, omission, defect or inconsistency;
(b) provide for the assumption by a successor corporation or other Person of the obligations of the Company or any Guarantor under the Indenture;
(c) add Guarantees with respect to the Notes or release a Subsidiary Guarantor; provided, however, that any such release is in accordance with the provisions of the Indenture;
(d) secure the Notes;
(e) add to the covenants of the Company for the benefit of the holders of Notes or surrender any right or power conferred upon the Company;
(f) comply with any requirement of the SEC in connection with the qualification of the Indenture under the Trust Indenture Act;
(g) provide for the acceptance of appointment under the Indenture of a successor Trustee and to add or change provisions of the Indenture as shall be necessary to provide for or facilitate the administration of the trusts by more than one Trustee; or
(h) make any other change that does not adversely affect the rights of any holder of Notes.
The holders of a majority in aggregate principal amount of the Notes, on behalf of all holders of the Notes, may waive compliance by the Company with certain restrictive provisions of the Indenture. Subject to certain rights of the Trustee, as provided in the Indenture, the holders of a majority in aggregate principal amount of outstanding Notes, on behalf of all holders of Notes, may waive any past default under the Indenture, except a default in the payment of principal, premium or interest or a default arising from failure to purchase any Note validly tendered pursuant to an Offer to Purchase.
Defeasance and Discharge
The Company at any time may terminate all its obligations under the Notes and the related obligations under the Indenture ("legal defeasance"), except for certain obligations, including those
129
respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. If the Company exercises its legal defeasance option, the Guarantees with respect to Notes in effect at such time will terminate.
The Company at any time may terminate its obligations with respect to the Notes under the covenants described under "Certain Covenants," the operation of the "Events of Default" above other than Events of Default contained in clauses (1), (2) and (9) (with respect to the Company only) and the limitations contained in clause (c) of the first paragraph under "Mergers, Consolidations, and Certain Sales of Assets" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (3), (4), (5), (6), (8) or (9) (with respect only to Significant Subsidiaries), under "Events of Default" above.
In order to exercise either defeasance option, the Company must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or, U.S. Government Obligations for the payment of principal, premium (if any) and interest on the Notes to redemption or maturity, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an opinion of counsel to the effect that holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such opinion of counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law).
The Company may satisfy and discharge all obligations under the Indenture by delivering to the Trustee for cancellation all outstanding Notes or depositing with the Trustee, after the outstanding Notes have become due and payable or are called for redemption in accordance with the Indenture, cash sufficient to pay at Stated Maturity or the Redemption Date all of the outstanding Notes and paying all other sums payable under the Indenture with respect to the Notes.
130
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax consequences associated with the exchange of original notes for exchange notes pursuant to this exchange offer and the beneficial ownership and disposition of the exchange notes so acquired. Except where otherwise noted, it deals only with beneficial owners that hold their notes as capital assets. This summary does not deal with special classes of holders such as dealers in securities, tax-exempt entities, partnerships or other pass-through entities, banks, financial institutions, life insurance companies, certain expatriates, persons holding the notes as part of a straddle or hedging or conversion transaction or U.S. holders (as defined below) whose functional currency is not the U.S. dollar. Moreover, this summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations, rulings and judicial decisions thereunder as now in effect, and such authorities may be repealed, revoked or modified (possibly on a retroactive basis) so as to result in federal income tax consequences different from those discussed below.
As used herein, a "U.S. holder" is a beneficial owner of original notes or exchange notes that for U.S. federal income tax purposes is:
| |
| • | a citizen or resident of the U.S., |
| |
| • | a corporation (or an entity treated as a corporation) which is organized under the laws of the U.S. or any political subdivision thereof, |
| |
| • | an estate, the income of which is subject to U.S. federal income tax without regard to its source, or |
| |
| • | a trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or if the trust has made a valid election to be treated as a United States person. |
A Non-U.S. holder is a beneficial owner that is for U.S. federal income tax purposes either a nonresident alien or a corporation, estate or trust that is not a U.S. holder.
If a partnership holds original notes or exchange notes, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding original notes, you should consult your tax advisors.
Exchange of Notes
The exchange of original notes for exchange notes in the exchange offer will not constitute a taxable event to U.S. holders. Consequently, no gain or loss will be recognized by a U.S. holder upon receipt of an exchange note. The holding period and tax basis of an exchange note will be the same as the holding period and tax basis, immediately before the exchange, of the outstanding note so exchanged.
U.S. Holders
The following is a summary of the material U.S. federal tax consequences that will apply to you if you are a U.S. holder of exchange notes. Material consequences to Non-U.S. holders of exchange notes are described under "Non-U.S. holders" below.
Interest
Stated interest on an exchange note will generally be taxable to a U.S. holder as ordinary income at the time it is paid or accrued, depending on the U.S. holder's method of accounting for U.S. federal income tax purposes.
Original Issue Discount
The original notes were issued with original issue discount (OID) for U.S. federal income tax purposes in the amount equal to the excess of (i) the stated redemption price at maturity of the outstanding note over (ii) its issue price. Accordingly, U.S. holders of original notes and exchange notes
131
will be required to include OID in gross income as ordinary income as it accrues under a constant yield method in advance of the receipt of the cash payments attributable to such income, regardless of such U.S. holder's regular method of accounting. In general, the amount of OID included in income by the holder of an exchange note is the sum of the daily portions of OID for each day during the taxable year (or portion of the taxable year) on which such holder held such note or the outstanding note exchanged therefor, including the purchase date and excluding the disposition date. The "daily portion" is determined by allocating the OID for an accrual period equally to each day in that accrual period. The "accrual period" for a note may be of any length and may vary in length over the term of the note, provided that each accrual period is no longer than one year and each scheduled payment of principal or interest occurs either on the first or the final day of an accrual period.
The amount of OID for a period is generally equal to the excess of (i) the product of the note's adjusted issue price at the beginning of such accrual period and its yield to maturity over (ii) the qualified stated interest allocable to such accrual period. The "adjusted issue price" of a note at the beginning of any accrual period is the sum of the issue price of the note plus the amount of OID allocable to all prior accrual periods minus the amount of any prior payments on the note (other than payments of qualified stated interest). Under these rules, a U.S. holder generally will have to include in income increasingly greater amounts of OID in successive accrual periods. The "yield to maturity" of a note is the discount rate that, when used in computing the present value all payments to be made on a note, produces an amount equal to the issue price of the note.
U.S. holders may elect to treat all interest on any note as OID and calculate the amount includible in gross income under the constant yield method described above. The election must be made for the taxable year in which the U.S. holder acquired the note and may not be revoked without the consent of the IRS. U.S. holders should consult with their own tax advisors about this election.
Market Discount
If a U.S. holder acquired an outstanding note at a cost that was less than its adjusted issue price, the amount of such difference is treated as a "market discount" for federal income tax purposes, unless such difference is less than a specified de minimis amount. Any market discount on an outstanding note will carry over to an exchange note.
Under the market discount rules of the Code, a U.S. holder is required to treat any payments of principal on a note, and any gain on the sale, exchange, retirement or other taxable disposition of any note, as ordinary income to the extent of the accrued market discount that has not previously been included in income. In general, the amount of market discount that has accrued is determined on a ratable basis. A U.S. holder may, however, make an irrevocable election to determine the amount of accrued market discount on an constant yield basis.
A U.S. holder that acquired an outstanding note with market discount may not be allowed to deduct immediately a portion of the interest expense on any indebtedness incurred or continued to purchase or to carry the outstanding note or exchange note. A U.S. holder may elect to include market discount in income currently as it accrues, in which case the interest deferral rule set forth in the preceding sentence will not apply. This election will apply to all debt instruments acquired by the U.S. holder on or after the first day of the first taxable year to which the election applies and is irrevocable without the consent of the IRS. A U.S. holder's tax basis in a note will be increased by the amount of market discount included in the holder's income under the election.
Acquisition Premium
If a U.S. holder purchased an outstanding note at an "acquisition premium," the amount of the original issue discount that the U.S. holder includes in gross income is reduced to reflect the acquisition premium. An outstanding note will have been purchased at an acquisition premium if its adjusted basis, immediately after its purchase was (i) less than or equal to the sum of all amounts payable on the outstanding note after the purchase date (other than qualified stated interest) and (ii) greater than the outstanding note's adjusted issue price.
132
Sale, Exchange and Retirement of Notes
Upon a sale, exchange (other than the exchange of original notes for exchange notes) or retirement of an exchange note, a U.S. holder generally will recognize gain or loss equal to the difference between the amount received upon the sale, exchange or retirement (less any amount attributable to accrued interest which will be taxable as ordinary income, if not previously taken into income) and the holder's adjusted tax basis in the exchange note at that time. A U.S. holder's adjusted tax basis in an exchange note will generally be the cost of the outstanding note exchanged therefor increased by any OID and market discount included in gross income with respect to the note.
Gain or loss realized on the sale, exchange or retirement of an exchange note will generally be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange or retirement the exchange note has been held for more than one year (including the holding period for the outstanding note). Under current law, long-term capital gains of certain non-corporate holders are generally taxed at lower rates than items of ordinary income. The use of capital losses is subject to limitations.
Non-U.S. Holders
The following is a summary of the material U.S. federal income tax consequences that will apply to you if you are a Non-U.S. holder of exchange notes. This summary does not present a detailed description of the U.S. federal income tax consequences to you in light of your particular circumstances. In addition, it does not deal with Non-U.S. holders subject to special treatment under U.S. federal tax laws (including if you are a controlled foreign corporation, a passive foreign investment company, a foreign personal holding company, a corporation that accumulates earnings to avoid U.S. federal income tax, or, in certain circumstances, a United States expatriate).
Under present U.S. federal income tax law and subject to the discussion of information reporting and backup withholding below, payments of interest (which for the purposes of this discussion includes OID) on the notes to or on behalf of any Non-U.S. holder who is not engaged in a trade or business within the U.S. with which interest on the notes is effectively connected will not be subject to U.S. federal income or withholding tax; provided that
| |
| • | such beneficial owner does not actually or constructively own ten percent or more of the total combined voting power of all classes of our voting stock within the meaning of the Code and applicable U.S. Treasury regulations, |
| |
| • | such beneficial owner is not a controlled foreign corporation for U.S. federal income tax purposes (generally, a foreign corporation controlled by U.S. shareholders) that is related to us through stock ownership, and |
| |
| • | certain certification requirements are met. |
If a Non-U.S. holder does not qualify for the foregoing exemption, interest payments to the Non-U.S. holder generally will be subject to a 30% withholding tax (unless reduced or eliminated by an applicable income tax treaty and certain certification requirements are met).
Any capital gain realized upon a sale, exchange or retirement of an exchange note by or on behalf of a Non-U.S. holder ordinarily will not be subject to a U.S. federal withholding or income tax unless (i) such gain is effectively connected with a U.S. trade or business of the holder or (ii) in the case of an individual, such beneficial owner is present in the U.S. for 183 days or more during the taxable year of the sale, exchange or retirement and certain other requirements are met. As noted above, an exchange of an outstanding note for an exchange note pursuant to the exchange offer will not constitute a taxable exchange.
If interest and other payments received by a Non-U.S. holder with respect to the notes (including proceeds from the disposition of the notes) are effectively connected with the conduct by the Non-U.S. holder of a trade or business within the U.S., such Non-U.S. holder will generally not be subject to withholding tax (provided certain certification requirements are met), but instead will generally be subject to the rules described above for a U.S. holder (subject to any modification provided under an applicable income tax treaty). Such Non-U.S. holder may also be subject to the "branch profits tax" if such Non-U.S. holder is a corporation.
133
Information Reporting and Backup Withholding
In general, information reporting requirement will apply to payments of principal, premium, if any, and interest (including OID) on an exchange note and the proceeds of the sale of an exchange note with respect to U.S. holders. Backup withholding at a current rate of 28% will apply to such payments if a U.S. holder fails to provide a taxpayer identification number or to certify that such U.S. holder is not subject to backup withholding, or otherwise to comply with the applicable requirements of the backup withholding rules. Certain U.S. holders (including, among others, corporations) are not subject to the backup withholding and reporting requirements.
We must report annually to the IRS and to each Non-U.S. holder on Form 1042-S the amount of interest paid on an exchange note, regardless of whether withholding was required, and any tax withheld with respect to the interest. Under the provisions of an income tax treaty and other applicable agreements, copies of these information returns may be made available to the tax authorities of the country in which the Non-U.S. holder resides.
Backup withholding generally will not apply to payments of interest (including OID) made by us or our paying agent to a Non-U.S. holder of an exchange note who provides the requisite certification (on an IRS form W-8BEN or other applicable form) or otherwise establishes that it qualifies for an exemption from backup withholding. Payments of principal, premium or the proceeds of a disposition of the exchange notes by or through a U.S. office of a broker generally will be subject to backup withholding and information reporting unless the Non-U.S. holder certifies that it is a Non-U.S. holder under penalties of perjury or otherwise establishes that it qualifies for an exemption. Payments of principal, premium or the proceeds of a disposition of the exchange notes by or through a foreign office of a U.S. broker or foreign broker with certain relationships to the United States generally will be subject to information reporting, but not backup withholding, unless such broker has documentary evidence in its records that the holder is a Non-U.S. holder and certain other conditions are met, or the exemption is otherwise established.
Backup withholding is not an additional tax; any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is timely furnished to the IRS.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF U.S. FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND TAX SITUATION. EACH HOLDER SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO SUCH HOLDER OF THE OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS OR SUBSEQUENT VERSIONS THEREOF.
Certain ERISA Considerations
The following is a summary of certain considerations associated with the purchase of the notes and exchange notes by employee benefit plans that are subject to Title I of the U.S. Employee Retirement Income Security Act of 1974, as amended ("ERISA"), plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code or provisions under any federal, state, local non-U.S. or other laws or regulations that are similar to such provisions of the Code or ERISA (collectively, "Similar Laws"), and entities whose underlying assets are considered to include "plan assets" of such plans, accounts and arrangements (each, a "Plan").
In considering an investment in the notes of a portion of the assets of any Plan, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law relating to a fiduciary's duties to the Plan including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans subject to Title I of ERISA or Section 4975 of the Code from engaging in specified transactions involving plan assets with persons or entities who are "parties in interest," within the meaning of ERISA, or "disqualified persons," within the
134
meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of the Plan that engages in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code. The acquisition and/or holding of notes by a Plan with respect to which we or the initial purchasers are considered a party in interest or disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption. In this regard, the U.S. Department of Labor has issued prohibited transaction class exemptions ("PTCEs") that may apply to the acquisition and holding of the notes. These class exemptions include, without limitation, PTCE 84-14, respecting transactions determined by independent qualified professional asset managers, PTCE 90-1, respecting insurance company pooled separate accounts, PTCE 91-38, respecting bank collective investment funds, PTCE 95-60, respecting life insurance company general accounts and PTCE 96-23, respecting transactions determined by in-house asset managers, although there can be no assurance that all of the conditions of any such exemptions will be satisfied.
Because of the foregoing, the notes should not be purchased or held by any person investing "plan assets" of any Plan, unless such purchase and holding will not constitute a nonexempt prohibited transaction under ERISA and the Code or similar violation of any applicable Similar Laws. In this regard, by purchasing the notes and exchange notes, you will be deemed to have made certain representations. See "Notice to Investors."
The foregoing discussion is general in nature and is not intended to be all inclusive. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing the notes on behalf of, or with the assets of, any Plan, consult with their counsel regarding the potential applicability of ERISA, Section 4975 of the Code and any Similar Laws to such investment and whether an exemption would be applicable to the purchase and holding of the notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for original notes where such original notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that for a period of 30 days after effectiveness of the exchange offer registration statement, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by broker-dealers. Exchange notes received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the exchange notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or at negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such exchange notes. Any broker-dealer that resells exchange notes that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such exchange notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of exchange notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. By acceptance of the exchange offer, each broker-dealer that receives exchange notes pursuant to the exchange offer hereby agrees to notify us prior to using this prospectus in connection with
135
the sale or transfer of exchange notes, and acknowledges and agrees that, upon receipt of notice from us of the happening of any event which makes any statement in this prospectus untrue in any material respect or which requires the making of any changes in this prospectus in order to make the statements herein not misleading (which notice we agree to deliver promptly to such broker-dealer), such broker-dealer will suspend use of this prospectus until we have amended or supplemented the prospectus to correct such misstatement or omission and have furnished copies of the amended or supplemented prospectus to such broker-dealer.
For a period of 30 days after effectiveness of the exchange offer registration statement, we will promptly upon request send additional copies of this prospectus and any amendment or supplement thereto to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer (including the expenses of any one special counsel for the Holders of the Notes) other than commissions or concessions of any broker or dealers and will indemnify the Holders of the Notes participating in the exchange offer (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters and the validity of the exchange notes will be passed upon for us by Cahill Gordon & Reindel LLP, New York, New York.
EXPERTS
The consolidated financial statements of Collins & Aikman Corporation and subsidiaries as of and for the year ended December 31, 2003 included in this prospectus were audited by KPMG LLP, our Independent Registered Public Accounting Firm and the consolidated financial statements of Collins & Aikman Corporation and subsidiaries as of and for the year ended December 31, 2002 and for the year ended December 31, 2001 included in this prospectus were audited by PricewaterhouseCoopers LLP and are included herein in reliance upon the reports of such firms and upon the authority of such firms as experts in accounting and auditing. In connection with the offering of the original notes and this exchange offer, we have engaged our prior auditors, PricewaterhouseCoopers LLP, and in connection therewith, agreed to indemnify PricewaterhouseCoopers LLP for the payment of all legal costs and expenses incurred in PricewaterhouseCoopers LLP's successful defense of any legal action or proceeding that arises as a result of inclusion of PricewaterhouseCoopers LLP's previous audit report on our past financial statements.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference room at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more information on the public reference rooms. Our SEC filings are also available to you at the SEC's web site at http://www.sec.gov.
136
INDEX TO HISTORICAL FINANCIAL STATEMENTS
COLLINS & AIKMAN CORPORATION
| | | | | | |
| | | PAGE |
| Report of Independent Registered Public Accounting Firm | | | F-2 | |
| Report of Independent Registered Public Accounting Firm | | | F-3 | |
| Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 | | | F-4 | |
| Consolidated Balance Sheets at December 31, 2003 and 2002 | | | F-5 | |
| Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 | | | F-6 | |
| Consolidated Statements of Common Stockholders' Equity (Deficit) for the years ended December 31, 2003, 2002 and 2001 | | | F-7 | |
| Notes to Consolidated Financial Statements | | | F-8 | |
| Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 | | | F-59 | |
Unaudited Condensed Consolidated Balance Sheets at September 30, 2004 and
December 31, 2003 | | | F-60 | |
| Unaudited Condensed Consolidated Statements of Cash Flow for the nine months ended September 30, 2004 and 2003 | | | F-61 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | | | F-62 | |
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Collins & Aikman Corporation:
We have audited the accompanying consolidated balance sheet of Collins & Aikman Corporation and subsidiaries as of December 31, 2003, and the related consolidated statements of operations, cash flows, and common stockholders' equity (deficit) for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Collins & Aikman Corporation and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for crib supply inventories in 2003.
/s/ KPMG LLP
Detroit, Michigan
March 15, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
of Collins & Aikman Corporation:
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows and common stockholders' equity (deficit) present fairly, in all material respects, the financial position of Collins & Aikman Corporation and its subsidiaries at December 31, 2002 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill (and other intangible assets) in accordance with the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
Effective January 1, 2003, the Company reclassified the 2001 extraordinary loss on retirement of debt to other expense (income), net, upon the adoption of Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002".
PricewaterhouseCoopers LLP
February 18, 2003
F-3
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
| | | | | | | | | | | | | | |
| | | Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| Net sales | | $ | 3,983.7 | | | $ | 3,885.8 | | | $ | 1,823.3 | |
| Cost of goods sold | | | 3,539.5 | | | | 3,367.7 | | | | 1,604.5 | |
| Gross profit | | | 444.2 | | | | 518.1 | | | | 218.8 | |
| Selling, general and administrative expenses | | | 273.2 | | | | 293.5 | | | | 164.4 | |
| Restructuring charges | | | 40.6 | | | | 38.9 | | | | 11.2 | |
| Impairment of long-lived assets | | | 28.4 | | | | 18.0 | | | | 7.6 | |
| Operating income | | | 102.0 | | | | 167.7 | | | | 35.6 | |
| Interest expense, net of interest income of $0.7, $1.4 and $2.0 | | | 151.3 | | | | 148.9 | | | | 84.3 | |
| Interest expense from subsidiary preferred stock dividends | | | 32.0 | | | | — | | | | — | |
| Interest expense from subsidiary preferred stock accretion | | | 5.3 | | | | — | | | | — | |
| Subsidiary preferred stock dividends | | | — | | | | 30.8 | | | | 1.5 | |
| Subsidiary preferred stock accretion | | | — | | | | 7.6 | | | | 0.9 | |
| Loss on sale of receivables | | | 7.3 | | | | 4.2 | | | | 10.8 | |
| Other expense (income), net | | | (32.9 | ) | | | 10.0 | | | | 14.4 | |
| Loss from continuing operations before income taxes | | | (61.0 | ) | | | (33.8 | ) | | | (76.3 | ) |
| Income tax expense (benefit) | | | (1.9 | ) | | | 17.5 | | | | (21.3 | ) |
| Loss from continuing operations before extraordinary loss and cumulative effect of a change in accounting principle | | | (59.1 | ) | | | (51.3 | ) | | | (55.0 | ) |
| Income from discontinued operations, net of income taxes of $0.8, $6.3 and $5.7 | | | 1.6 | | | | 9.5 | | | | 8.8 | |
| Loss before cumulative effect of change in accounting principle | | | (57.5 | ) | | | (41.8 | ) | | | (46.2 | ) |
| Cumulative effect of a change in accounting principle, net of income taxes of $0 | | | — | | | | (11.7 | ) | | | — | |
| Net loss | | $ | (57.5 | ) | | $ | (53.5 | ) | | $ | (46.2 | ) |
| Earnings per share data: | | | | | | | | | | | | |
| Net loss | | $ | (57.5 | ) | | $ | (53.5 | ) | | $ | (46.2 | ) |
| Loss on redemption of subsidiary preferred stock | | | — | | | | (36.3 | ) | | | — | |
| Net loss attributable to common shareholders | | $ | (57.5 | ) | | $ | (89.8 | ) | | $ | (46.2 | ) |
| Net income (loss) per basic and diluted common share: | | | | | | | | | | | | |
| Continuing operations | | $ | (0.71 | ) | | $ | (1.15 | ) | | $ | (1.42 | ) |
| Discontinued operations | | | 0.02 | | | | 0.12 | | | | 0.23 | |
| Cumulative effect of a change in accounting principle | | | — | | | | (0.15 | ) | | | — | |
| Net loss attributable to common shareholders | | $ | (0.69 | ) | | $ | (1.18 | ) | | $ | (1.19 | ) |
| Average common shares outstanding: | | | | | | | | | | | | |
| Basic and diluted | | | 83.6 | | | | 76.3 | | | | 38.9 | |
|
The Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-4
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| ASSETS | | | | | |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 13.2 | | | $ | 81.3 | |
| Accounts and other receivables, net of allowances of $9.2 and $18.6 | | | 257.3 | | | | 373.0 | |
| Inventories | | | 169.4 | | | | 171.6 | |
| Other | | | 216.0 | | | | 177.4 | |
| Total current assets | | | 655.9 | | | | 803.3 | |
| Property, plant and equipment, net | | | 825.9 | | | | 737.8 | |
| Deferred tax assets | | | 178.1 | | | | 165.0 | |
| Goodwill | | | 1,363.1 | | | | 1,265.5 | |
| Intangible assets, net | | | 66.9 | | | | 85.3 | |
| Other assets | | | 101.3 | | | | 100.2 | |
| | | $ | 3,191.2 | | | $ | 3,157.1 | |
| LIABILITIES AND COMMON STOCKHOLDERS' EQUITY | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Short-term borrowings | | $ | 16.0 | | | $ | 10.5 | |
| Current maturities of long-term debt and capital lease obligations | | | 31.5 | | | | 23.5 | |
| Accounts payable | | | 638.9 | | | | 595.5 | |
| Accrued expenses | | | 238.9 | | | | 299.9 | |
| Total current liabilities | | | 925.3 | | | | 929.4 | |
| Long-term debt and capital lease obligations | | | 1,237.7 | | | | 1,255.2 | |
| Mandatorily redeemable preferred stock of subsidiary | | | 161.2 | | | | — | |
| Other, including pensions and post-retirement benefit obligations | | | 423.4 | | | | 438.4 | |
Commitments and contingencies
Minority interest in consolidated subsidiary | | | 3.3 | | | | 12.7 | |
| Total liabilities | | | 2,750.9 | | | | 2,635.7 | |
| Mandatorily redeemable preferred stock of subsidiary | | | — | | | | 123.9 | |
| Common stock ($.01 par value, 300.0 shares authorized, 83.6 shares issued and outstanding at December 31, 2003 and 2002) | | | 0.8 | | | | 0.8 | |
| Other paid-in capital | | | 1,282.3 | | | | 1,282.3 | |
| Accumulated deficit | | | (830.1 | ) | | | (772.6 | ) |
| Accumulated other comprehensive loss | | | (12.7 | ) | | | (113.0 | ) |
| Total common stockholders' equity | | | 440.3 | | | | 397.5 | |
| | | $ | 3,191.2 | | | $ | 3,157.1 | |
|
The Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-5
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | | | | |
| | | Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net loss | | $ | (57.5 | ) | | $ | (53.5 | ) | | $ | (46.2 | ) |
| Adjustments to derive cash flow operating activities: | | | | | | | | | | | | |
| Impairment of goodwill | | | — | | | | 11.7 | | | | — | |
| Impairment of long-lived assets | | | 28.4 | | | | 19.3 | | | | 7.6 | |
| Deferred income tax benefit | | | (8.7 | ) | | | (3.6 | ) | | | (26.0 | ) |
| Subsidiary preferred stock requirements | | | 37.3 | | | | 38.4 | | | | 2.4 | |
| Depreciation | | | 113.8 | | | | 97.0 | | | | 64.2 | |
| Goodwill amortization | | | — | | | | — | | | | 7.1 | |
| Amortization of other assets | | | 26.4 | | | | 20.0 | | | | 10.5 | |
| Loss (gain) on sale of property, plant and equipment | | | (3.5 | ) | | | 3.4 | | | | 8.7 | |
| Decrease in accounts and other receivables | | | 32.5 | | | | 23.7 | | | | 135.0 | |
| Proceeds from (reduction of) participating interests in accounts receivable, net of redemptions | | | 7.8 | | | | (13.9 | ) | | | (2.6 | ) |
| Proceeds from non-recourse factoring facilities | | | 88.5 | | | | — | | | | — | |
| Decrease (increase) in inventories | | | 4.6 | | | | (26.6 | ) | | | 53.4 | |
| Increase (decrease) in accounts payable | | | 32.3 | | | | 50.1 | | | | (31.9 | ) |
| Undistributed equity in earnings of joint ventures | | | — | | | | 5.5 | | | | — | |
| Increase (decrease) in interest payable | | | 2.8 | | | | (4.0 | ) | | | (4.1 | ) |
| Changes in other assets | | | (196.2 | ) | | | 62.4 | | | | (6.5 | ) |
| Changes in other liabilities | | | 14.4 | | | | (40.5 | ) | | | (34.5 | ) |
| Net cash provided by operating activities | | | 122.9 | | | | 189.4 | | | | 137.1 | |
| INVESTING ACTIVITIES | | | | | | | | | | | | |
| Additions to property, plant, equipment and other non-current assets | | | (175.1 | ) | | | (147.9 | ) | | | (54.5 | ) |
| Sales of property, plant and equipment | | | 18.3 | | | | 13.3 | | | | 88.1 | |
| Additional investment in joint venture | | | — | | | | (5.9 | ) | | | — | |
| Payments for acquisitions and related costs, net of cash acquired | | | (33.1 | ) | | | (45.6 | ) | | | (760.9 | ) |
| Sale of business | | | — | | | | — | | | | 3.5 | |
| Net cash used in investing activities | | | (189.9 | ) | | | (186.1 | ) | | | (723.8 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | |
| Issuance of long-term debt | | | 13.1 | | | | — | | | | 950.0 | |
| Debt issuance costs | | | — | | | | — | | | | (59.4 | ) |
| Repayment of long-term debt | | | (28.9 | ) | | | (23.9 | ) | | | (383.2 | ) |
| Repurchase of preferred stock | | | — | | | | (100.0 | ) | | | — | |
| Increase (decrease) in short-term borrowings | | | 4.7 | | | | (16.0 | ) | | | 10.1 | |
| Net borrowings (repayments) on revolving credit facilities | | | 6.3 | | | | — | | | | (150.2 | ) |
| Net proceeds from issuance of common stock | | | — | | | | 150.6 | | | | 207.2 | |
| Reissue of treasury stock, net | | | — | | | | — | | | | 61.3 | |
| Repayment of debt assumed in acquisition | | | — | | | | (6.7 | ) | | | — | |
| Net cash provided by (used in) financing activities | | | (4.8 | ) | | | 4.0 | | | | 635.8 | |
| Effect of exchange rate changes on cash | | | 3.7 | | | | 0.1 | | | | 3.9 | |
| Increase (decrease) in cash and cash equivalents | | | (68.1 | ) | | | 7.4 | | | | 53.0 | |
| Cash and cash equivalents at beginning of year | | | 81.3 | | | | 73.9 | | | | 20.9 | |
| Cash and cash equivalents at end of year | | $ | 13.2 | | | $ | 81.3 | | | $ | 73.9 | |
| Supplementary information: | | | | | | | | | | | | |
| Debt assumed in acquisition | | $ | — | | | $ | 6.7 | | | $ | — | |
| Taxes paid | | $ | 18.4 | | | $ | 12.8 | | | $ | 15.5 | |
| Interest paid | | $ | 135.4 | | | $ | 139.9 | | | $ | 76.3 | |
|
The Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-6
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Income
(loss)(a) | | Common
Stock | | Other
Paid-in
Capital | | Treasury
Stock |
| Balance at January 1, 2001 | | $ | (154.9 | ) | | $ | (636.6 | ) | | $ | (42.9 | ) | | $ | 0.3 | | | $ | 585.9 | | | $ | (61.6 | ) |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (46.2 | ) | | | (46.2 | ) | | | — | | | | — | | | | — | | | | — | |
| Foreign currency translation adjustments | | | (9.0 | ) | | | — | | | | (9.0 | ) | | | — | | | | — | | | | — | |
| Pension equity adjustment, net of tax(b) | | | (15.4 | ) | | | — | | | | (15.4 | ) | | | — | | | | — | | | | — | |
| Total comprehensive loss | | | (70.6 | ) | | | | | | | | | | | | | | | | | | | | |
| Compensation expense | | | 1.2 | | | | — | | | | — | | | | — | | | | 1.2 | | | | — | |
| Issuance of common stock | | | 533.0 | | | | — | | | | — | | | | 0.4 | | | | 532.6 | | | | — | |
| Reissue of treasury stock (8.5 shares) | | | 61.3 | | | | — | | | | — | | | | — | | | | (0.3 | ) | | | 61.6 | |
| Exercise of stock options (1.1 shares) | | | 4.7 | | | | — | | | | — | | | | — | | | | 4.7 | | | | — | |
| Balance at December 31, 2001 | | | 374.7 | | | | (682.8 | ) | | | (67.3 | ) | | | 0.7 | | | | 1,124.1 | | | | — | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (53.5 | ) | | | (53.5 | ) | | | — | | | | — | | | | — | | | | — | |
| Foreign currency translation adjustments | | | 10.7 | | | | — | | | | 10.7 | | | | — | | | | — | | | | — | |
| Pension equity adjustment, net of tax(b) | | | (56.4 | ) | | | — | | | | (56.4 | ) | | | — | | | | — | | | | — | |
| Total comprehensive loss | | | (99.2 | ) | | | | | | | | | | | | | | | | | | | | |
| Loss on redemption of subsidiary preferred stock | | | (36.3 | ) | | | (36.3 | ) | | | — | | | | — | | | | — | | | | — | |
| Issuance of common stock | | | 157.2 | | | | — | | | | — | | | | 0.1 | | | | 157.1 | | | | — | |
| Exercise of stock options (0.1 shares) | | | 1.1 | | | | — | | | | — | | | | — | | | | 1.1 | | | | — | |
| Balance at December 31, 2002 | | | 397.5 | | | | (772.6 | ) | | | (113.0 | ) | | | 0.8 | | | | 1,282.3 | | | | — | |
| Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | (57.5 | ) | | | (57.5 | ) | | | — | | | | — | | | | — | | | | — | |
| Foreign currency translation adjustment | | | 110.9 | | | | — | | | | 110.9 | | | | — | | | | — | | | | — | |
| Pension equity adjustment, net of tax(b) | | | (10.6 | ) | | | — | | | | (10.6 | ) | | | — | | | | — | | | | — | |
| Total comprehensive income | | | 42.8 | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2003 | | $ | 440.3 | | | $ | (830.1 | ) | | $ | (12.7 | ) | | $ | 0.8 | | | $ | 1,282.3 | | | $ | — | |
|
| |
| (a) | The components of Accumulated Other Comprehensive Income (Loss) are $70.0 million of foreign currency translation adjustment and $(82.7) million of pension equity adjustment as of December 31, 2003. |
| |
| (b) | For 2003, 2002 and 2001, the tax effect of the pension equity adjustment is $6.0 million, $42.6 million and $3.2 million, respectively. |
The Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
F-7
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Collins & Aikman Corporation (the "Company") is a Delaware corporation, headquartered in Troy, Michigan. The Company conducts all of its operating activities through its wholly owned Collins & Aikman Products Co. ("Products") subsidiary. The Company is a global leader in design, engineering and manufacturing of automotive interior components, including instrument panels, fully assembled cockpit modules, floor and acoustic systems, automotive fabric, interior trim and convertible top systems. The Company changed the composition of its reportable segments on January 1, 2003 and further redefined the segments July 1, 2003 to reflect organizational changes and restated prior period segment data to be comparable. The Company operates through three segments: U.S. and Mexico Plastics, International Plastics and Global Soft Trim.
During February 2001, Heartland Industrial Partners, L.P. and its affiliates ("Heartland") acquired a controlling interest equal to approximately 60% of the Company through a purchase of 10 million shares of common stock from the Company and a purchase of 10.8 million shares from Blackstone Partners and WP Partners. As a result of the sale of shares, the Company received gross proceeds of $125.0 million, or approximately $94.6 million after fees and expenses associated with the transactions. The Company also received a profit participation right that it shares with Blackstone Partners and WP Partners on future common stock sales by Heartland to non-permitted transferees subject to a limit, in the case of the Company, of approximately $6.25 million. As a result of the above transactions ("Heartland Transaction"), Heartland is entitled to designate a majority of the Company's Board of Directors.
The Company completed its acquisition of Becker Group, LLC, a supplier of plastic components to the automotive industry, the automotive fabric operations of Joan Fabrics and an affiliate in July and September 2001, respectively. The acquisitions included the issuance of approximately 12 million shares of common stock with a market value of $169.3 million.
In December 2001, the Company completed its acquisition of Textron Automotive Company's ("Textron's") automotive trim division ("TAC-Trim") for $940 million. The purchase price consisted primarily of: $632.2 million in cash and assumed debt; 7.2 million shares of common stock, with a market value of $160.9 million; and preferred stock of Products with an aggregate liquidation preference of $326.4 million, valued at $146.9 million. The cash purchase price was financed through a combination of the sale of an additional 12.8 million shares of common stock, valued at $160.0 million, to Heartland and debt financing.
On December 31, 2003, Heartland owned approximately 37% of the outstanding shares; Blackstone Partners' and WP Partners' owned approximately 11%; Joan Fabrics Corp., Mr. Elkin McCallum and associates owned approximately 6%; Mr. Charles E. Becker owned approximately 9% and Textron, Inc. owned approximately 6% (which it has subsequently sold).
2. Summary of Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and in the opinion of management, contain all adjustments, including adjustments of a normal and recurring nature, necessary for a fair presentation of financial position and results of operations. All significant intercompany items have been eliminated in the preparation of the consolidated financial statements. Certain prior year items have been reclassified to conform to the fiscal 2003 presentation.
Investments in entities in which the Company has control are consolidated. Investments in 50% or less owned entities in which the Company has significant influence have been accounted for under the equity method. In connection with the 2001 TAC-Trim acquisition, the Company acquired a 50% interest in Textron Automotive Holdings (Italy) S.r.L., an Italian joint venture, of which Textron indirectly owned the other 50% interest. The Company accounted for this investment under the equity method for the years
F-8
ended December 31, 2002 and 2001. The Company did not control the joint venture prior to December 31, 2002 but was required to provide certain administrative, technical and engineering services and to license certain patents and other know how to the Italian joint venture. The Company recorded certain fees and reimbursement of certain expenses in providing these services and licensing these rights. In December 2002, the Company signed a letter-of-intent to purchase the remaining 50% and began consolidating the joint venture as of December 31, 2002. In January 2003, the Company acquired from Textron the remaining 50% interest in the Italian joint venture.
Reverse Stock Split: On May 28, 2002, the Company effected a one-for-2.5 reverse stock split of the Company's common stock. All shares and per share data have been adjusted retroactively for all periods presented to reflect the stock split.
Use of Estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes its assumptions and estimates are reasonable and appropriate, however actual results could differ from those estimates.
Employee Stock Options: Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure amended SFAS No. 123, "Accounting for Stock-Based Compensation" provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation and amends the required disclosures. SFAS No. 123 encourages companies to adopt the fair value method for compensation expense recognition related to employee stock options. The accounting requirements of Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" use the intrinsic value method in determining compensation expense, which represents the excess of the market price of the stock over the exercise price on the measurement date. The Company has elected to continue to utilize the accounting provisions of APB No. 25 for stock options and is required to provide pro forma disclosures of net income and earnings per share had the Company adopted the fair value method for recognition purposes. The following tabular information is presented as if the Company had adopted SFAS No. 123 and restated its results (in millions, except per share amounts):
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| Net loss attributable to common shareholders: | | | | | | | | | | | | |
| As reported | | $ | (57.5 | ) | | $ | (89.8 | ) | | $ | (46.2 | ) |
| Total employee stock based compensation expense determined under fair value based method for all awards, net of tax | | | (4.2 | ) | | | (3.4 | ) | | | (2.4 | ) |
| Pro forma, net loss | | | (61.7 | ) | | | (93.2 | ) | | | (48.6 | ) |
| Basic and Diluted EPS: | | | | | | | | | | | | |
| As reported | | $ | (0.69 | ) | | $ | (1.18 | ) | | $ | (1.19 | ) |
| Pro forma | | | (0.74 | ) | | | (1.22 | ) | | | (1.25 | ) |
|
For the above information, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants:
F-9
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| Weighted average expected volatility | | 77.5% | | 72.0% | | 99.0% |
| Expected lives | | 7 years | | 6 years | | 10 years |
| Weighted average risk free interest rate | | 3.72% | | 4.24%-7.32% | | 4.24%-7.32% |
| Expected dividend rate | | — | | — | | — |
| Weighted average grant date fair value of an option granted during the year | | $2.77 | | $6.71 | | $5.22 |
|
Earnings Per Share: Basic earnings per share is based on income attributable to common shareholders divided by the weighted average number of common shares outstanding. Diluted earnings per share is based on income attributable to common shareholders divided by the sum of the weighted average number of common shares outstanding and all potentially dilutive common shares. Potentially dilutive common shares include shares which may be issued upon the assumed exercise of employee stock options less the number of treasury shares assumed to be purchased from the proceeds, including applicable compensation expense attributable to future service see Note 16 "Common Stockholders' Equity and Earnings Per Share" for additional disclosure.
Cash and Cash Equivalents: Cash and cash equivalents include all cash balances and highly liquid investments with an original maturity of three months or less.
Accounts and Other Receivables: Accounts and other receivables consist primarily of the Company's trade receivables and the retained interest in the Receivables Facility. See Note 11 "Receivables Facility and Non-Recourse Factoring Facilities" for additional disclosure. The Company has provided an allowance against uncollectible accounts.
Inventories: Inventories are valued at the lower of cost or market, but not in excess of net realizable value. Cost is determined on the first-in, first-out basis.
Property, Plant and Equipment: Property, plant and equipment are stated at cost. Normal repairs and maintenance are expensed as incurred. Provisions for depreciation are primarily computed on a straight-line basis over the estimated useful lives as follows: 15 years for land improvements, 35 years for buildings, and 3-20 years for machinery and equipment. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful lives of the improvements.
Long-Lived Assets: In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business).
During 2003, the Company incurred asset impairment charges of $28.4 million of which $10.4 million related to the impairment of the Becker non-compete agreement, $7.5 million related to the initial interest acquired in an Italian joint venture, $7.8 million related to restructuring programs and $2.7 million related to other intangible assets. During 2002, the Company incurred asset impairment charges of $18.0 million recognized as part of restructuring programs (Note 15). In addition, during fiscal 2001, the Company incurred a charge of $7.6 million relating to asset impairments recognized in the Reorganization (See Note 15).
Goodwill and Intangibles: During the second quarter of 2002, the Company completed the implementation of SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142, goodwill is no
F-10
longer amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment in accordance with the provisions of SFAS 142. The Company employed a discounted cash flow analysis and a market comparable approach in conducting its impairment tests. The Company completed its initial impairment test in the second quarter of 2002 and recorded an impairment loss of $11.7 million (having no tax impact), or $0.15 per average basic and diluted share relating to the UK Plastics business in the former European and Rest of World Automotive Systems segment. The impairment loss was reported as a cumulative effect of a change in accounting principle and, therefore, is accounted for as if it occurred on January 1, 2002. The Company completed its annual impairment test on November 1, 2002 indicating that the fair value of the reporting units exceeded the carrying values.
The Company's first quarter 2003 results were below the forecasts utilized in testing for the goodwill impairment for the year ended December 31, 2002. The conditions in the markets in which the Company operates continued to deteriorate and customer production schedules continued to decline, and therefore, the Company reduced its operating and financial plans for 2003. As a result, the Company initiated an impairment test (outside of the annual testing date of November 1) during the second quarter 2003. During the second quarter, the Company carefully reviewed all of its assumptions regarding revenue growth, improved operating margins and planned capital expenditures. This analysis by each reporting unit focused on new business awards, implementation of strategic business initiatives such as restructuring, material savings, plant efficiencies, revenue growth and additional product/process technology applications. While the Company is aggressively attacking its overall cost structure, the U.S. and Mexico Plastics reporting unit had even more definitive objectives initiated after the 2003 first quarter performance on a specific plant basis. As a result of these well-defined programs, the Company, utilizing an independent outside evaluator, completed the first step of the goodwill impairment test in the second quarter of 2003 which indicated that the fair value of the reporting units exceeded the carrying values, and therefore no additional impairment testing was necessary. The Company again completed the annual impairment test as of November 1, 2003 indicating fair value of the reporting units exceeded the carrying values.
Fair value for all tests was determined based upon the discounted cash flows of the reporting units using discount rates ranging from 11.5% to 14.0% dependent on the reporting unit and a residual growth rate of 2%. The market comparable approach consisted of earnings multiples ranging from 5.2 to 6.5 times current year and forecasted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (operating income less depreciation and amortization) and a control premium on equity. Future cash flows and EBITDA are affected by future operating performance, which will be impacted by economic conditions, car builds, financial, business and other factors, many of which are beyond the Company's control. The U.S. and Mexico Plastics reporting unit can be significantly impacted by an adverse change in assumptions. Considerable judgment is often involved in making these determinations, the use of different assumptions could result in significantly different results. An approximate 50 basis point change in discount rates or an approximate 4% reduction in profit would result in a further goodwill impairment analysis as required by SFAS 142. Management believes its assumptions and estimates are reasonable and appropriate, however actual results could differ from those estimates.
Pension and Postretirement Benefits Other than Pensions: Annual net periodic expense and benefit liabilities under our defined benefit plans are determined on an actuarial basis. Assumptions used in the actuarial calculations have a significant impact on plan obligations and expense. Each September, the Company reviews the actual experience compared to the more significant assumptions used and makes adjustments to the assumptions, if warranted. The healthcare trend rates are reviewed with the actuaries based upon the results of their review of claims experience. Discount rates are based upon an expected benefit payments duration analysis and the equivalent average yield rate for high-quality fixed-income investments. Pension benefits are funded through deposits with trustees and the expected long-term rate of return on fund assets is based upon actual historical returns modified for known changes in the market and any expected change in investment policy. Postretirement benefits are not funded and our policy is to pay these benefits as they become due.
Certain accounting guidance, including the guidance applicable to pensions, does not require immediate recognition of the effects of a deviation between actual and assumed experience or the revision of an estimate. This approach allows the favorable and unfavorable effects that fall within an acceptable
F-11
range to be netted. Although this netting occurs outside the basic financial statements, disclosure of the net amount is disclosed as an unrecognized gain or loss in the footnotes to our financial statements. Considerable judgment is often involved in making these determinations, the use of different assumptions could result in significantly different results. Management believes its assumptions and estimates are reasonable and appropriate, however actual results could differ from those estimates.
Revenue Recognition: The Company recognizes revenue from product sales when it has shipped the goods. Products are shipped FOB shipping point using customer designated transportation companies with title passing at that time. Significant retroactive price adjustments are recognized in the period when such amounts become probable. Sales are recognized based upon the gross amount billed to a customer for those products in which the Company's customer has directed the sourcing of certain materials or components used in the manufacture of the final product. The Company generally allows its customers the right of return only in the case of defective products. The Company provides a reserve for estimated defective product costs at the time of the sale of the products.
Cost of Goods Sold and Selling, General and Administrative Costs: Cost of goods sold is comprised of direct material, direct labor and manufacturing overhead. Manufacturing overhead consists of indirect labor, depreciation, amortization and other manufacturing expenses. Selling, general and administrative costs consist of selling, research and development, engineering and administrative expenses.
Other Expense (Income), net: In 2003, other expense (income), net primarily included $32.4 million of foreign currency transaction gains offset by $3.5 million of losses related to derivatives used in the Company's hedging strategies and minority interest share of losses in a consolidated subsidiary of $5.6 million. In 2002, other expense (income), net primarily included $12.6 million of losses related to derivatives used in the Company's foreign currency hedging strategy offset by $5.9 million of foreign currency transaction gains, $5.5 million of losses related to investments in joint ventures and $1.9 million of losses from sale and leaseback transactions and minority interest share of losses of a consolidated subsidiary of $6.5 million. In 2001, other expense (income), net primarily included a $8.0 million loss on early extinguishment of debt and $7.8 million of foreign currency transaction losses offset by $5.0 million of derivatives gains and a $6.2 million gain related to a stock demutualization. The Company adopted SFAS 145 during 2003 and reclassified $8.0 million loss on the early extinguishment of debt recorded for the year ended December 31, 2001 to other expense (income), net from an extraordinary item in the amount of $5.3 million (net of income taxes of $2.7 million).
Customer Engineering and Tooling: Engineering and tooling balances represent tools, dies and other items used in the manufacturing of customer components. Amounts included in the consolidated balance sheets include Company-owned tools and costs incurred on customer-owned tools which are subject to reimbursement, pursuant to the terms of a customer contract. Company-owned tools are amortized over the tool's expected life or the life of the related vehicle program, whichever is shorter. Engineering, testing and other costs incurred in the design and development of production parts are expensed as incurred, unless the costs are reimbursable, as specified in a customer contract.
Emerging Issue Task Force ("EITF") Issue No. 99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements" requires that design and development costs for products to be sold under long-term supply arrangements be expensed as incurred and costs incurred for molds, dies and other tools that will be used in producing the products under long-term supply arrangements be capitalized and amortized over the shorter of the expected useful life of the assets or the term of the supply arrangement.
The Company had assets of approximately $6.8 million and $8.4 million recognized pursuant to agreements that provide for contractual reimbursement of pre-production design and development costs, at December 31, 2003 and 2002, respectively. The Company also has assets of $124.9 million and $77.1 million representing the costs for molds, dies and other tools, at December 31, 2003 and 2002, respectively, that are reimbursable by customers. In addition, the Company had $10.0 million and $11.0 million at December 31, 2003 and 2002, respectively, for molds, dies and other tools that the Company owns.
Derivative Financial Instruments: All derivatives are recognized on the consolidated balance sheet at fair value as required by SFAS No. 133 "Accounting for Derivative Instruments and Hedging
F-12
Activities." Gains and losses on the changes in fair value of the derivatives that qualify as hedges under SFAS No. 133 are recorded on the balance sheet as a component of "Accumulated other comprehensive loss" to the extent that the hedges are effective and documented, until the underlying transactions are recognized in earnings. As of December 31, 2003 and 2002, the Company had no derivatives designated as hedges under SFAS No. 133. The Company uses derivatives to hedge economic risks even though these derivatives may not be designated as hedges in accordance with SFAS No. 133. These derivative instruments are marked to fair market value and reported on the balance sheet. Gains and losses on these instruments are reported in "Other expense (income), net" on the Consolidated Statements of Operations. The gains and losses are intended to offset economic risk of foreign currency transaction losses or gains. The Company does not enter into derivative transactions for speculative purposes.
Foreign Currency Translation: Assets and liabilities of the Company's non-U.S. businesses are translated to U.S. Dollars at end-of-period exchange rates. The effects of the translations are reported as a component of "Accumulated other comprehensive loss." Remeasurement of assets and liabilities of the Company's non-U.S. businesses that use the U.S. Dollar as functional currency are included in the Consolidated Statements of Operations as "Other expense (income), net." The Statement of Operations of the Company's non-U.S. businesses are translated to U.S. dollars at average exchange rates and are recognized as part of revenues, costs and expenses. Also included in "Other expense (income), net", are gains and losses arising from transactions denominated in a currency other than the functional currency of the business involved.
Environmental: The Company records an estimated loss when it is probable that an environmental liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews all environmental claims from time to time and adjusts the reserves accordingly. Accruals for environmental liabilities are generally included in the consolidated balance sheet as other non-current liabilities at undiscounted amounts and exclude claims for recoveries from insurance or other third parties. Accruals for insurance or other third party recoveries for environmental liabilities are recorded when it is probable that the claim will be realized.
New Accounting Pronouncements: In January 2003, the FASB issued FASB Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities ("VIE"), an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements." This interpretation provides guidance on the identification of VIEs, some of which may require consolidation based on factors beyond a majority voting interest. A VIE is defined in FIN 46 as an entity in which either the equity investors (if any) do not have a controlling financial interest or the equity investment at risk is insufficient to finance that entity's activities without receiving additional subordinated financial support from other parties. FIN 46 applies immediately to VIEs created after January 31, 2003, and in the first fiscal year or interim period beginning after December 15, 2003, to VIEs in which an enterprise holds a variable interest that it acquired before February 1, 2003. In 2003, the Company and Textron agreed to have an entity that the Company held a variable interest in restructured so it was required to be consolidated by Textron and not accounted for as a VIE. The entity was part of the Textron Leasing Transaction with the maximum potential loss related to certain equipment leases that is limited to the amount of the residual value guarantee as discussed in Note 11 "Receivables Facility and Non-Recourse Factoring Facilities." There have been no VIEs created after January 31, 2003. For the period prior to January 31, 2003, the Company has not identified any other entities that would currently qualify as a VIE.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and clarifies the accounting for derivative instruments and hedging activities. This statement is effective for contracts entered into or modified after June 30, 2003 (with exceptions) and for hedging relationships designated after June 30, 2003. SFAS No. 149 did not have a material effect on the Company's earnings or financial position.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003) "Employers' Disclosures about Pensions and Other Postretirement Benefits an amendment of FASB Statements No. 87, 88, and 106." This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by other FASB Statements.
F-13
This Statement retains the disclosure requirements contained in the original SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which it replaced and requires additional disclosures about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003, except for certain provisions related to foreign plans which are effective for fiscal years ending after June 15, 2004. The Company adopted the revised disclosure requirement of this Statement for all of its U.S. plans and will adopt the requirements for its foreign plans as required in 2004.
The following table highlights the sensitivity of our pension obligations and expense to changes in assumptions (in millions):
| | | | | | | | | | |
| Change in Assumption | | Impact on
Pension Expense | | Impact on
PBO |
| 25 basis point ("bp") decrease in discount rate | | | 1.5 | | | | 15.6 | |
| 25 bp increase in discount rate | | | (1.5 | ) | | | (15.1 | ) |
| 25 bp decrease in long-term return on assets | | | 0.8 | | | | — | |
| 25 bp increase in long-term return on assets | | | (0.8 | ) | | | — | |
|
Changes in Accounting Principles: In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." With the rescission of SFAS No. 4 and 64, only gains and losses from extinguishments of debt that meet the criteria of APB Opinion No. 30 would be classified as extraordinary items. This statement amends SFAS No. 13, "Accounting for Leases," to eliminate the inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS 145 and reclassified $8.0 million loss on the early extinguishment of debt recorded for the year ended December 31, 2001 to other expense (income), net from an extraordinary item in the amount of $5.3 million (net of income taxes of $2.7 million).
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement is effective for all exit or disposal activities initiated after December 31, 2002. This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date of an entity's commitment to an exit plan. The Company implemented SFAS No. 146 on January 1, 2003.
In the third quarter, the Company adopted the FASB Staff Position No. FAS 146-1 "Determining Whether a One-Time Termination Benefit Offered in Connection with an Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit Arrangement." The effect from adopting FAS 146-1 was to defer recording $1.2 million of restructure expense to later periods. The effect on prior quarters and at December 31, 2003 for the portion of the restructuring activities deferred was not significant.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards to require issuers to classify certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has adopted this Statement by reclassifying the mandatorily redeemable preferred stock of subsidiary as a liability and reclassifying preferred stock dividends and accretion as interest expense effective with the quarter ending September 30, 2003.
During the second quarter 2003, the Company implemented a change in the method of accounting for holiday pay for interim periods so that such pay is accrued, and expense is recognized during the period in which the actual holiday occurs. The change in method better matches holiday expense with the period that the actual holiday occurs and the pay is earned. Previously, certain of the Company's
F-14
businesses accrued holiday pay and recognized expense based upon an equal monthly amount within the fiscal year. As the prior method allocated costs within the fiscal year, there was no effect on prior years. There was no effect on the entire fiscal year as the change only affected interim periods. See Note 22 "Quarterly Financial Data" for additional information.
Additionally, during the second quarter of 2003, the Company implemented a change in the method of accounting for crib supply inventories held at plants. Crib supply inventories include small motors, replacement parts for production equipment and other miscellaneous repair parts for buildings, equipment and machinery. In the second quarter the Company implemented a perpetual crib supply inventory system and harmonized its policy to consistently account for the capitalization of crib supply inventories. The new accounting method better matches the expenditure with the period benefited, as such inventories are charged to expense when placed into service. Previously, the Company had different capitalization thresholds following the various acquisitions in late 2001 and 2002, which ranged from not capitalizing any crib supply items to capitalizing only items greater than two thousand dollars. Pro forma and the cumulative effect amounts relating to the change in accounting for crib inventories is not determinable as perpetual records of crib inventory were not maintained at all the plants prior to the application of the new method in the second quarter of 2003. For the plants that previously had no perpetual records, the effect of the change was $1.8 million after tax or $0.02 per share recorded to increase inventory and reduce cost of sales in the three months ended June 30, 2003. For the year ended December 31, 2003, the incremental effect of the adoption had an insignificant effect.
3. Acquisitions and Goodwill
a. Acquisitions
On January 2, 2003, the Company acquired Delphi Corporation's plastic injection molding plant and related equipment in Logroño, Spain for $18 million. The 300,000 square foot Logroño facility includes 24 injection molding machines and one Class-A paint line.
On January 17, 2003, the Company acquired the remaining 50% interest in an Italian automotive joint venture from Textron Inc., a related party, for $15 million, which also terminated a $28 million put-option by Textron Inc., that was exercisable in December 2004. The Company incurred fixed asset impairments of $7.5 million relating to the 50% interest owned previously.
The Company completed its acquisitions of Textron Automotive Company's automotive trim division ("TAC-Trim") in December 2001, the automotive fabric operations of Joan Fabrics and all of the operating assets in Joan Fabric's affiliated yarn dying operation Western Avenue Dyers (collectively "Joan") in September 2001 and Becker Group, LLC ("Becker") a supplier of plastic components to the automotive industry in July 2001. The results of operations of the acquired companies are included in the Company's Consolidated Statements of Operations from the dates of acquisition.
Appraisals for Becker and Joan were performed during 2001, and the related allocation of purchase price was completed. In the second quarter 2002, the Company's external consultants completed the valuations of all TAC-Trim acquired intangible and fixed assets. Based upon these valuations: 1) an intangible asset of $51.0 million for customer contracts was recorded based on the value of individual customer contracts — this intangible asset is being amortized over the contract's performance period, which extends through 2012; 2) the Company revised its first quarter estimate for patents and other specifically identifiable intangible assets acquired as part of the TAC-Trim purchase from $40.0 to $24.0 million (the weighted average lives increased from 7 to 10 years); and 3) in June 2002, the valuations resulted in a $30.1 million increase in fixed assets and adjustment of their useful lives. In September 2002, the Company revised its valuation resulting in a $27.7 million increase in fixed assets and adjustment of their useful lives, based upon revised information from external consultants. The allocation of the purchase price for the TAC-Trim acquisition was completed in 2002. The Becker, Joan and TAC-Trim acquisitions are intended to solidify the Company's position as a premier supplier of interior components and automotive fabrics.
b. Goodwill
Goodwill and Intangibles: During the second quarter of 2002, the Company completed the implementation of SFAS 142, "Goodwill and Other Intangible Assets." Under SFAS 142, goodwill is no
F-15
longer amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment in accordance with the provisions of SFAS 142. The Company employed a discounted cash flow analysis and a market comparable approach in conducting its impairment tests. The Company completed its initial impairment test in the second quarter of 2002 and recorded an impairment loss of $11.7 million (having no tax impact), or $0.15 per average basic and diluted share relating to the UK Plastics business in the former European and Rest of World Automotive Systems segment. The impairment loss was reported as a cumulative effect of a change in accounting principle and, therefore, is accounted for as if it occurred on January 1, 2002. The Company completed its annual impairment test on November 1, 2002 indicating that the fair value of the reporting units exceeded the carrying values.
The Company's first quarter 2003 results were below the forecasts utilized in testing for the goodwill impairment for the year ended December 31, 2002. The conditions in the markets in which the Company operates continued to deteriorate and customer production schedules continued to decline, and therefore, the Company reduced its operating and financial plans for 2003. As a result, the Company initiated an impairment test (outside of the annual testing date of November 1) during the second quarter 2003. During the second quarter, the Company carefully reviewed all of its assumptions regarding revenue growth, improved operating margins and planned capital expenditures. This analysis by each reporting unit focused on new business awards, implementation of strategic business initiatives such as restructuring, material savings, plant efficiencies, revenue growth and additional product/process technology applications. While the Company is aggressively attacking its overall cost structure, the U.S. and Mexico Plastics reporting unit had even more definitive objectives initiated after the 2003 first quarter performance on a specific plant basis. As a result of these well-defined programs, the Company, utilizing an independent outside evaluator, completed the first step of the goodwill impairment test in the second quarter of 2003 which indicated that the fair value of the reporting units exceeded the carrying values, and therefore no additional impairment testing was necessary. The Company again completed the annual impairment test as of November 1, 2003 indicating fair value of the reporting units exceeded the carrying values.
Fair value for all tests was determined based upon the discounted cash flows of the reporting units using discount rates ranging from 11.5% to 14.0% dependent on the reporting unit and a residual growth rate of 2%. The market comparable approach consisted of earnings multiples ranging from 5.2 to 6.5 times current year and forecasted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (operating income less depreciation and amortization) and a control premium on equity. Future cash flows and EBITDA are affected by future operating performance, which will be impacted by economic conditions, car builds, financial, business and other factors, many of which are beyond the Company's control. The U.S. and Mexico Plastics reporting unit can be significantly impacted by an adverse change in assumptions. Considerable judgment is often involved in making these determinations, the use of different assumptions could result in significantly different results. An approximate 50 basis point change in discount rates or an approximate 4% reduction in profit would result in a further goodwill impairment analysis as required by SFAS 142. Management believes its assumptions and estimates are reasonable and appropriate, however actual results could differ from those estimates.
The changes in the carrying amounts of goodwill for the year ended December 31, 2003 were primarily a result of the additional acquisition of the remaining 50% interest of an Italian joint venture and the effect of foreign currency translation.
In accordance with the provisions of SFAS No. 142, the Company did not amortize goodwill during 2002. If goodwill amortization had not been recorded uring 2001, the net loss would have decreased $6.1 million to an adjusted net loss of $40.1 million. The related loss per share for fiscal 2001 would have decreased $0.14 per share resulting in adjusted loss per share of $1.05.
F-16
c. Intangible Assets
The components of the Company's acquired and other amortizable intangible assets as of December 31, 2003 and 2002 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2003 | | December 31, 2002 |
| | | Cost | | Accumulated
Amortization | | Net Carrying
Amount | | Cost | | Accumulated
Amortization | | Net Carrying
Amount |
| Customer contracts | | $ | 51.0 | | | $ | 13.1 | | | $ | 37.9 | | | $ | 51.0 | | | $ | 6.3 | | | $ | 44.7 | |
| Patents and other | | | 39.2 | | | | 10.2 | | | | 29.0 | | | | 31.5 | | | | 3.5 | | | | 28.0 | |
| Non-compete agreement | | | — | | | | — | | | | — | | | | 18.0 | | | | 5.4 | | | | 12.6 | |
| | | $ | 90.2 | | | $ | 23.3 | | | $ | 66.9 | | | $ | 100.5 | | | $ | 15.2 | | | $ | 85.3 | |
|
Amortization expense for intangible assets for the periods ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter will be $12.5 million, $12.6 million, $12.1 million, $9.7 million, $6.7 million and $13.3 million, respectively. See Related Party Transactions (Note 19).
4. Inventories
Inventory balances are summarized below (in millions):
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| Raw materials | | $ | 95.0 | | | $ | 90.3 | |
| Work in process | | | 24.6 | | | | 33.7 | |
| Finished goods | | | 49.8 | | | | 47.6 | |
| | | $ | 169.4 | | | $ | 171.6 | |
|
5. Other Current Assets
Other current asset balances are summarized below (in millions):
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| Deferred tax asset | | $ | 25.2 | | | $ | 25.3 | |
| Reimbursable tooling and pre-production design and development | | | 126.5 | | | | 83.0 | |
| Other | | | 64.3 | | | | 69.1 | |
| | | $ | 216.0 | | | $ | 177.4 | |
|
6. Property, Plant and Equipment, Net
Property, plant and equipment, net, are summarized below (in millions):
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| Land and improvements | | $ | 34.5 | | | $ | 26.1 | |
| Buildings | | | 213.9 | | | | 177.8 | |
| Machinery and equipment | | | 1,076.9 | | | | 959.6 | |
| Leasehold improvements | | | 36.0 | | | | 27.4 | |
| Construction in progress | | | 119.2 | | | | 106.2 | |
| | | | 1,480.5 | | | | 1,297.1 | |
| Less accumulated depreciation | | | (654.6 | ) | | | (559.3 | ) |
| | | $ | 825.9 | | | $ | 737.8 | |
|
F-17
7. Accrued Expenses
Accrued expenses are summarized below (in millions):
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| Payroll and employee benefits | | $ | 82.7 | | | $ | 61.7 | |
| Interest | | | 13.6 | | | | 12.3 | |
| Insurance | | | 23.6 | | | | 16.5 | |
| Restructuring reserves | | | 30.9 | | | | 28.2 | |
| Taxes payable | | | 0.4 | | | | 12.0 | |
| Other | | | 87.7 | | | | 169.2 | |
| | | $ | 238.9 | | | $ | 299.9 | |
|
8. Short-Term Borrowings
The Company utilizes uncommitted lines of credit to satisfy a portion of its short-term working capital requirements of certain of its foreign affiliates. As of December 31, 2003, the Company had lines of credit from international credit facilities of $37.1 million, of which $16.0 million was outstanding with $21.1 million available. As of December 31, 2002, the Company had unsecured lines of credit from financial institutions of $36.5 million, of which $10.5 million was outstanding with $26.0 million available. The weighted average interest rate on the outstanding borrowings at December 31, 2003 and 2002 was approximately 16.0% and 8.3%, respectively.
9. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations are summarized below (in millions):
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| Senior Secured Credit Facilities: | | | | | | | | |
| Tranche A Term Loan Facility | | $ | 62.9 | | | $ | 83.8 | |
| Tranche B Term Loan Facility | | | 287.2 | | | | 293.8 | |
| Revolving Credit Facility | | | 6.3 | | | | — | |
| Public Debt: | | | | | | | | |
| 11½% Senior Subordinated Notes, due 2006 | | | 400.0 | | | | 400.0 | |
| 10¾% Senior Notes, due 2011 | | | 500.0 | | | | 500.0 | |
| Other (including capital lease obligations) | | | 12.8 | | | | 1.1 | |
| Total debt | | | 1,269.2 | | | | 1,278.7 | |
| Less current maturities (including current portion of capital lease obligations) | | | (31.5 | ) | | | (23.5 | ) |
| Total Long-term debt and capital lease obligations | | $ | 1,237.7 | | | $ | 1,255.2 | |
|
Senior Secured Credit Facilities
In December 2001, in conjunction with the TAC-Trim acquisition, the Company entered into new Senior Secured Credit Facilities, which refinanced its prior bank credit facilities. The principal and interest on the prior bank credit facilities totaled $362.5 million. The cost and expenses associated with the refinancing of the prior bank credit facilities totaling $25.7 million were deferred and will be amortized over the four-year life of the term loans described below. The Company adopted SFAS 145 during 2003 and reclassified $8.0 million loss on the early extinguishment of debt to other expense (income), net from an extraordinary item in the amount of $5.3 million (net of income taxes of $2.7 million) in connection with the retirement of the prior bank credit facilities.
The Senior Secured Credit Facilities include a floating rate Revolving Facility and two floating rate Term Loan Facilities that mature on December 31, 2005. The Revolving Facility allows the Company to
F-18
borrow revolving loans up to $175.0 million including Canadian dollars up to $75.0 million. The facility can be utilized for letters of credit. The Term Loan Facilities consist of a Tranche A Term Loan with an original principal balance of $100.0 million and a Tranche B Term Loan with an original principal balance of $300.0 million. As required by the credit agreement, the full amounts of the Term Loan Facilities were drawn down on the closing date. As of December 31, 2003 the Tranche A Term Loan and Tranche B Term Loan had principal balances of $62.9 million and $287.2 million, respectively. Amounts borrowed under the Term Loan Facilities that are repaid or prepaid cannot be reborrowed. The Tranche A Term Loan Facility is payable in quarterly installments that increase in amounts each year until maturity. The Tranche B Term Loan Facility is payable in quarterly installments of $0.8 million for the first three years and quarterly installments of $72.7 million during the final year. These maturities were modified as part of the fifth amendment completed in February 2004. See the proforma maturity table below.
Under the Senior Secured Credit Facilities, the interest rate on the Revolving Facility is, at the Company's option, London Inter-Bank Offer Rate ("LIBOR") plus 4.00% or the Alternate Base Rate ("ABR") plus 3.00%. The ABR is the highest of The JP Morgan Chase ("Chase's") announced prime rate, the Federal Funds Rate plus 0.5% and Chase's base certificate of deposit rate plus 1%. A per annum fee equal to the spread over the LIBOR accrues on the face amount of letters of credit. Also, there is a 1.00% commitment fee on the unused portion of the facility. The interest rates on the Canadian-dollar denominated debt is at the Company's option (the "Canadian Prime Rate") plus 3.00% or the bill of exchange rate ("Bankers' Acceptance" or "BA") denominated in Canadian dollars for one, two, three or six months plus 4.00%. The interest rate on the Tranche A Term Loan Facility is, at the Company's option, LIBOR plus 4.00% or the ABR plus 3.00%, subject to adjustment quarterly, based on performance targets. The interest rate on the Tranche B Term Loan Facility is, at the Company's option, either LIBOR plus 4.75% or ABR plus 3.75%. On any Tranche B Term Loans repaid whether voluntary or mandatory, there is a prepayment premium of 1.00%. The LIBOR rate shall not be less than 3.00% per annum. The weighted average rate of interest on the Senior Secured Credit Facilities at December 31, 2003 and 2002 was 7.60% and 6.94%, respectively.
Borrowings under the Senior Secured Credit Facility are collateralized by a first priority lien on the assets of the Company, Products and its U.S. and Canadian subsidiaries with certain exceptions including assets included in the Company's receivables facility, certain scheduled assets, and certain assets whose value relative to cost of lien perfection was deemed too low to include, as well as a pledge of stock of Products and its significant subsidiaries and certain intercompany debt and guarantees from the Company and its U.S. subsidiaries (subject to certain exceptions).
The Senior Secured Credit Facilities contain restrictive covenants including maintenance of interest coverage and leverage ratios and various other restrictive covenants that are customary for such facilities. The target levels established by these covenants limit the Company's ability to utilize availability under its liquidity facilities, including the Senior Secured Credit Facilities and are based on the Company's financial performance. At December 31, 2003, there were no funding limitations. The covenants of the Senior Secured Credit Facilities also limit investments, dividends or other distributions of capital stock, capital expenditures, the purchase of subsidiary preferred stock, the prepayment of debt other than loans under the senior facilities, liens and certain lease transactions.
In February 2004, the Company entered into the fifth amendment to the Senior Secured Credit Facilities Credit Agreement which allowed the establishment of a new $100 million Supplemental Revolving Credit Facility and the $185 million Tranche A-1 Term Loan. In connection with these new expanded facilities, $181.5 million was used to prepay existing Tranche A and Tranche B Term Loans in direct order of maturity.
In October 2003, the Company entered into amendment numbers three and four to the Senior Secured Credit Facilities Credit Agreement. The Third Amendment permitted the add-back of charges related to restructuring actions taken during the third quarter 2003 for covenant calculation purposes and increased the maximum permitted leverage ratio at September 30, 2003 to 4.50:1.00. The Fourth Amendment permitted the add-back of charges up to $11 million related to future restructuring actions for covenant calculation purposes and increased the maximum permitted leverage ratio in future quarters, including a leverage ratio of 5.00:1.00 at December 31, 2003 and decreased the minimum interest coverage
F-19
ratio in future quarters, including an interest coverage ratio of 1.85:1.00 at December 31, 2003. The two financial covenants remain at the same level for the first quarter 2004 and then step-down during the year to a leverage ratio of 4.25:1.00 and an interest coverage ratio of 2.20:1.00 at December 31, 2004. In connection with the Fourth Amendment, the Company agreed to increase its applicable margin for interest rate purposes by 0.25% at times when the Company's previously reported leverage ratios exceeded 3.50:1.00 and to make adjustments to the interest coverage ratio.
Previously, in the second quarter 2003, the Company signed a second amendment to the Senior Secured Credit Facilities Credit Agreement. The principal changes were to increase the maximum permitted leverage ratio for periods following the first quarter of 2003 and to decrease the minimum permitted interest coverage ratio for periods following the first quarter of 2003. In connection with the amendment, the Company agreed that its applicable margin for interest rate purposes could be increased by up to 0.50% at times when the Company's previously reported leverage ratio exceeded 3.5:1.00. The Company paid customary fees to lenders in connection with all of the amendments.
Effective December 2002, the Company amended its Senior Credit Facilities to provide for the purchase of certain assets in Spain and Portugal as well as the remaining 50% interest in the Company's joint venture in Italy.
Public Debt
In December 2001, Products issued 10¾% Senior Notes due 2011 in a total principal amount of $500.0 million ("Notes"). The Notes were not registered under the Securities Act of 1933 and were offered only to qualified institutional buyers. In June 2002, the Company effected and registered an exchange offer of a new and identical issue of 10¾% Senior Notes due 2011 of Products in exchange for the outstanding Senior Notes of Products. The exchange offer raised no new proceeds for the Company and was made in accordance with contractual commitments arising from the December 2001 issuance. The cost of issuing the Notes totaling about $23.1 million was deferred and will be amortized over 10 years.
The Notes are unconditionally guaranteed on an unsecured senior basis by the parent and by each wholly owned domestic subsidiary that is a guarantor of the Bank Credit Facilities as of the issue date. This is all of the Company's wholly owned domestic subsidiaries other than its receivable and insurance subsidiaries. The debt evidenced by the Notes and Parent and Subsidiary Guarantees are unsecured senior obligations of the Company ranking senior in right of payment to all existing and future Subordinated Debt including the Existing Notes and related Guarantees and future unsecured and unsubordinated Debt. The Notes are redeemable prior to December 31, 2004 only in the event the Company receives cash proceeds from one or more equity offerings in which case the Company may at its option use all or a portion of such cash proceeds to redeem up to 35% of the principal amount of the notes. The Notes will be subject to redemption at the option of the Company, in whole or in part at any time after December 31, 2006 at a stated premium redemption price expressed as a percentage in excess of the principal amount. After December 31, 2008, the redemption price is 100%. Within 30 days of the occurrence of a change of ownership control, unless the Company has mailed a redemption notice with respect to all outstanding Notes, the Company will be required to make an offer to purchase all outstanding Notes at a purchase price equal to 101% of their principal amount. The indenture governing the notes limits the Company's ability to issue more debt, pay dividends and make distributions, repurchase stock, make investments, merge or consolidate, transfer assets, enter into transactions with affiliates and issue stock of subsidiaries. These restrictive covenants are customary for such securities and are subject to a number of exceptions.
In June 1996, Products, issued at face value $400 million principal amount of 11½% Senior Subordinated Notes due 2006 which are guaranteed by the Company. The indenture governing the 11½ % Senior Subordinated Notes generally prohibits the Company, Products and any Restricted Subsidiary (as defined) from making certain payments and investments unless a certain financial test is satisfied and the aggregate amount of such payments and investments since the issue date is less than a specified amount. The prohibition is subject to a number of significant exceptions, including dividends to stockholders of the Company or stock repurchases not exceeding $10 million in any fiscal year or $20 million in the aggregate, dividends to stockholders of the Company or stock repurchases in the amount
F-20
of the net proceeds from the sale of the Company's Imperial Wallcoverings, Inc. subsidiary ("Wallcoverings") and dividends to the Company to permit it to pay its operating and administrative expenses. The indenture also contains other restrictive covenants (including, among others, limitations on the incurrence of debt, asset dispositions and transactions with affiliates), which are customary for such securities. These covenants are also subject to a number of significant exceptions.
The Company solicited and received consent from holders of a sufficient amount of the outstanding principal of the 11½% Senior Subordinated Notes allowing the Change of Control precipitated by the Heartland Transaction. A Second Supplemental Indenture dated February 8, 2001 amended the Senior Subordinated Notes indenture to reflect this and certain other changes, including allowance for the incurrence of debt in the form of the Term Loan D Facility. In connection with the TAC-Trim acquisition, the Company further amended the indenture governing these notes to make each subsidiary guarantor of the new 10¾% Senior Notes a guarantor of these existing notes on a senior subordinated basis.
At December 31, 2003, the scheduled annual maturities of long-term debt and capital lease obligations are as follows (in millions):
| | | | | | |
| Year Ending | | |
| 2004 | | $ | 31.5 | |
| 2005 | | | 333.1 | |
| 2006 | | | 402.9 | |
| 2007 | | | 1.7 | |
| 2008 | | | — | |
| Later years | | | 500.0 | |
| | | $ | 1,269.2 | |
|
In February 2004 the Company entered into the fifth amendment to the Senior Secured Credit Facilities Credit Agreement subsequent to year-end. The proforma scheduled annual maturities of long-term debt and capital lease obligations are as follows (in millions):
| | | | | | |
| Year Ending | | |
| 2004(a) | | $ | 4.4 | |
| 2005(a) | | | 360.2 | |
| 2006 | | | 402.9 | |
| 2007 | | | 1.7 | |
| 2008 | | | — | |
| Later years | | | 500.0 | |
| | | $ | 1,269.2 | |
|
| |
| (a) | $181.5 million of Tranche A and B loans were refinanced by Term Loan A-1 in February of 2004. An additional $3.5 million was borrowed under Term Loan A-1 during February 2004 to pay related fees and expenses of the offering. The Company will recognize approximately $1.5 million of loss on early extinguishment of debt related to the refinancing. |
F-21
10. Mandatorily Redeemable Preferred Stock of Subsidiary
In December 2001, Products issued 182,700 shares of its Series A Redeemable Preferred Stock, 123,700 shares of Series B Redeemable Preferred Stock and 20,000 shares of Series C Redeemable Preferred Stock. The Preferred Stock was recorded at fair value of $146.9 million, which was less than the liquidation value of $1,000 per share or $326.4 million. The estimated fair value was based on market prices for securities with similar terms, maturities and risk characteristics, and included a liquidation discount to reflect market conditions and was agreed to by the Company and Textron as part of the TAC-Trim purchase agreement. The difference between the initial recorded value and the liquidation value is being accreted over the 11 year terms of the securities. The 2003 and 2002 results included subsidiary preferred stock requirements calculated using the effective interest method of $37.3 million and $38.4 million, respectively. The preferred stock requirement includes both accretion and dividend costs of $5.3 million and $32.0 million, respectively for 2003 compared to $7.6 million and $30.8 million, respectively for 2002. The carrying value of the Redeemable Preferred Stock includes accretion and accrued dividends.
In June 2002, $100.0 million of proceeds from the 16 million share common stock offering was used to repurchase Series A preferred stock at a price of 75% of its liquidation preference of $133.3 million. The redeemed Series A preferred stock had a carrying value of $63.7 million. The difference between the $63.7 million in carrying value and the $100.0 million cash payment was excluded from net income and recorded as a charge to equity in the Company's accumulated deficit account. This $36.3 million equity charge is included in the computation of loss per share and is included in the net loss attributable to common shareholders.
Products is required to redeem all Series A and B Preferred Stock outstanding on January 1, 2013 and Series C Preferred Stock outstanding on February 1, 2022. The redemption price is equal to 100% of the liquidation preference plus accrued and unpaid dividends plus common equity participation for the Series C Preferred Stock. The Series A and Series B Preferred Stock are redeemable at Products' option, in whole or in part, on or after January 1, 2007 at a stated percent in excess of the liquidation preference plus accrued and unpaid dividends. The Series C Preferred Stock is not optionally redeemable. However, Products' or the holders of a majority of outstanding shares of Series C Preferred Stock, may exchange the Series C Preferred Stock for Series B Preferred Stock at any time following the second anniversary of its issuance date but prior to the third anniversary of its issuance date.
Shareholders of Series A Preferred Stock are entitled to receive dividends accruing annually on the liquidation preference at a rate of 11% for dividend periods ending on or prior to July 1, 2003, and 15% thereafter. Holders of Series B and C Preferred Stock are entitled to receive dividends accruing annually on the liquidation preference at a rate of 12% for dividend periods ending on or prior to July 1, 2003, and 16% thereafter.
Products exercised its option through January 1, 2004 and accrued the full amount of all dividends in lieu of cash payment of such dividends. Thereafter, Products may at its option elect to accrue dividends of up to 7% of the liquidation value annually on Series A Preferred Stock and up to 8% of the liquidation value on Series B and C Preferred Stock. Accrued dividends will be added to the liquidation preference of the applicable series of Preferred Stock.
Upon voluntary or involuntary liquidation, dissolution or winding-up of Products, holders of the Preferred Stock are entitled to be paid out of the assets of Products available for distribution to stockholders in the amount of $1,000 per share plus the total accrued dividends prior to any distribution to holders of equity securities which rank junior to the Preferred Stock. In addition, the holders of Series C Preferred Stock are entitled to a participation in distributions to Products common equity tied to appreciation in the value of Products common equity subsequent to the issuance date, not to exceed $2.0 million for all Series C Preferred Stock outstanding.
If Products experiences a change of ownership control, the holders of the Preferred Stock must be given the opportunity to sell to Products their Preferred Stock at 100% of the liquidation preference plus accrued and unpaid dividends, plus, in the case of Series C Preferred Stock, common equity participation. In the event that Products does not meet or exceed certain financial criteria based on interest coverage,
F-22
the dividend rate applicable solely to Series A Preferred Stock will increase by 1.00% for the next full dividend period and by an additional 0.50% for each dividend period thereafter provided that the dividend rate does not exceed 20%. The provision of the certificate of designation limits Products' ability to issue more debt, pay dividends and make distributions, repurchase stock, make investments, merge or consolidate, transfer assets, enter into transactions with affiliates and issue stock of subsidiaries. These covenants are subject to a number of important exceptions.
Effective April 2004, the Company will, exercise its option to convert all 20,000 shares of the Series C Redeemable Preferred Stock to Series B Preferred Stock on an equivalent share basis. The primary difference between the Series C and Series B Preferred Stock was that Series C holders are entitled to participation in distributions of Products common equity tied to the appreciation in the value of Products common equity subsequent to the issuance date of the securities. Each Series C Preferred Stock holder will receive one share of Series B Redeemable Preferred Stock on the equivalent share basis. The conversion will have no effect on the results of operations or financial position of the Company.
11. Receivables Facility and Non-Recourse Factoring Facilities
Receivables Facility
The Company has an agreement to sell, on an ongoing basis, the trade accounts receivable of certain business operations to a bankruptcy-remote, special purpose subsidiary ("Carcorp"), wholly owned and consolidated by the Company. The receivables subsidiary (Carcorp) will, subject to certain conditions, from time to time, sell an undivided fractional ownership interest in a pool of domestic and certain Canadian receivables, up to $250 million, to various multi-seller commercial paper conduits supported by a committed liquidity facility. Upon sale to the conduit, Carcorp will hold a subordinated retained interest in the receivables. Under the terms of the agreement, new receivables are added to the pool as collections reduce previously sold receivables. The Company expects to service, administer and collect the receivables on behalf of Carcorp and the conduit. The proceeds of sale will be less than the face amount of accounts receivable sold by an amount that approximates the purchaser's financing costs. In September 2002, the Company amended the receivables facility lengthening its term to expire in December 2004. The Company plans to renew or replace the receivables facility with other debt financings including potential borrowings under lines of credit.
As of December 31, 2003 and December 31, 2002, Carcorp, Inc.'s total receivables pool as defined under the receivables facility was $165.4 million and $253.3 million, respectively. As of December 31, 2003 the utilization of the Receivables Facility was $73.7 million and an additional $9.1 million was available, subject to limitations imposed under the Senior Secured Credit Facilities (Note 9). At December 31, 2002, utilization of the Receivables Facility was $66.0 million and an additional $93.2 million of funding was available but unutilized.
The Company estimates the fair value of its retained interest by considering two key assumptions: the payment rate, which is derived from the average life of the accounts receivable, which is less than 60 days, and the rate of expected credit losses. Based on the Company's favorable collection experience and the short-term nature of its receivables, both assumptions are highly predictable. Therefore, the Company's estimated fair value of its retained interests in the pool of eligible receivables is approximately equal to the previous cost, less the associated allowance for doubtful accounts.
The proceeds received by Carcorp from collections on receivables, after the payment of expenses and amounts due, are used to purchase new receivables. During 2003 and 2002, Carcorp had net cash collections of approximately $3.0 billion and $2.9 billion, respectively. These funds were used to purchase new receivables from the Sellers, under the Receivables Facility.
Restrictions: This receivables facility contains certain restrictions on Carcorp (including maintenance of $60.0 million net worth) and on the sellers (including limitations on liens on receivables, modifications of the terms of receivables and changes in credit and collection practices) customary for facilities of this type. The commitments under the receivables facility are subject to termination prior to their term upon the occurrence of certain events, including payment defaults, breach of covenants (including defined interest coverage and leverage ratios), bankruptcy, default by the Company in servicing the receivables and failure of the receivables to satisfy certain performance criteria.
F-23
Non-Recourse Factoring Facilities
The Company has entered into various agreements with international lenders to sell accounts receivables of certain international operations on a non-recourse basis. As of December 31, 2003, the Company has utilized $126.6 million from these commitments. The funding levels and commitments by the lenders are based on the eligible receivables in the Company's subsidiaries in the various countries, including subsidiaries in Belgium, Brazil, Germany, Italy, Mexico, Netherlands, Spain and Sweden. As of December 31, 2003, under the agreements, approximately $132.7 million of receivables have been sold, while the Company had retained an interest in $6.2 million on these sold receivables. The retained interest remains classified on the Company's balance sheet as trade receivables. Under the agreements, the Company usually pays a factoring fee and a discount on the daily utilization of the facility. The expenses related to these agreements are recorded in the loss on sale of receivables account on the income statement.
During 2003, the loss on the sale of the receivables totaled $7.3 million. During 2002 and 2001 the losses on the sale of receivables totaled $4.2 million and $10.8 million, respectively. The 2001 loss included $5.6 million in expenses and fees to replace the prior facility. The usage fee under the facility is 1.50%. In addition, the Company is required to pay a fee of 0.50% on the unused portion of the facility and a discount. The discount on sold interests is approximately equal to the interest rate paid by the conduits to the holders of the commercial paper plus a usage fee. The discount rate at December 31, 2003 was 1.55% compared to 1.45% at December 31, 2002.
12. Operating Leases
The Company has operating leases for land and buildings for periods up to twenty years and transportation, operating and administrative equipment for periods ranging from one to twelve years. The majority of these leases contain renewal provisions.
The Company has equipment lease agreements and building lease agreements with several lessors which, subject to specific approval, provide availability of funding for operating leases and sale-leasebacks as allowed in its other financing agreements. The Company has a purchase option on certain equipment at the end of the lease term based on the fair market value of the equipment or to purchase some or all of the equipment at prices determined under the agreement. The Company has classified the leases as operating leases.
At December 31, 2003, future minimum lease payments under operating leases for continuing operations are as follows (in millions):
| | | | | | |
| Year Ending | | |
| 2004 | | $ | 55.0 | |
| 2005 | | | 55.0 | |
| 2006 | | | 58.1 | |
| 2007 | | | 54.1 | |
| 2008 | | | 24.3 | |
| Later Years | | | 111.4 | |
| | | $ | 357.9 | |
|
Rental expense of continuing operations under operating leases was $63.7 million, $57.1 million and $29.2 million, for fiscal 2003, 2002 and 2001, respectively.
During 2003, the Company received net proceeds (after fees) of approximately $10.2 million from the sale and leasebacks of real property and equipment. The total minimum lease commitments under these leases will be $16.1 million, $0.5 million relates to 2003.
During 2002, the Company received net proceeds (after fees) of approximately $14.8 million from sale and leasebacks of real property and equipment. The total minimum lease commitments under these leases will be $18.8 million, $2.6 million of which relates to both 2003 and 2002.
F-24
During 2001, Products entered into sale and leaseback transactions for certain manufacturing equipment and non-manufacturing properties. The transactions resulted in the recognition of a $4.4 million net deferred loss that is being amortized over the lease term and the recognition of an $8.7 million loss.
During 2001, the Company received net proceeds (after fees) of approximately $86.2 million from sale and leasebacks of real property and equipment, which it used to reduce outstanding debt. The aggregate lease payments associated with these leases will be $88.8 million, $12.5 million of which related to 2002. As part of the 2001 sale-leaseback transactions, Products sold and contemporaneously leased back real property from unrelated third parties and received net proceeds (after fees) of $46.4 million. Refer to Note 19 for a discussion regarding certain sale and leaseback transactions that were entered into with related parties.
13. Employee Benefit Plans
A. Defined Benefit Pension and Postretirement Benefit Plans
Subsidiaries of the Company have defined benefit pension plans covering substantially all employees who meet eligibility requirements. Plan benefits are generally based on years of service and employees' compensation during their years of employment. Funding of retirement costs for these plans complies with the minimum funding requirements specified by the Employee Retirement Income Security Act.
Subsidiaries of the Company have also provided postretirement life and health coverage for certain retirees under plans currently in effect. Many of the subsidiaries' domestic and Canadian employees may be eligible for coverage if they reach retirement age while still employed by the Company. Most of these plans are contributory. In general, future increases in costs are passed on fully to the retiree. However, future increases in costs for the Canadian divisions and limited domestic operations are shared between the Company and the retiree.
The following tables provide a reconciliation of the projected benefit obligation, a reconciliation of plan assets, the funded status of the plans and amounts recognized in the Company's consolidated balance sheets at December 31, 2003 and December 31, 2002 (in millions).
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits(a)
Fiscal Year Ended | | Postretirement Benefits
Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2003 | | December 31,
2002 |
| Measurement Date | | September 30 | | September 30 | | September 30 | | September 30 |
| Change in benefit obligation: | | | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | | $ | 384.2 | | | $ | 372.2 | | | $ | 93.8 | | | $ | 151.2 | |
| Service cost | | | 14.0 | | | | 11.3 | | | | 1.4 | | | | 1.7 | |
| Interest cost | | | 25.9 | | | | 23.9 | | | | 5.8 | | | | 6.9 | |
| Employee contributions | | | 0.6 | | | | 0.6 | | | | 0.9 | | | | 0.9 | |
| Amendments | | | 3.9 | | | | 2.3 | | | | 10.6 | | | | (62.6 | ) |
| Actuarial gain (loss) | | | 25.2 | | | | 16.9 | | | | (5.9 | ) | | | 15.0 | |
| Purchase Accounting | | | — | | | | (26.4 | ) | | | — | | | | (12.4 | ) |
| Settlements | | | (0.6 | ) | | | — | | | | — | | | | — | |
| Benefits paid | | | (27.8 | ) | | | (19.4 | ) | | | (6.4 | ) | | | (6.4 | ) |
| Currency adjustment | | | 16.4 | | | | 2.0 | | | | — | | | | — | |
| Other | | | 2.8 | | | | 0.8 | | | | — | | | | (0.5 | ) |
| Benefit obligation at end of year | | $ | 444.6 | | | $ | 384.2 | | | $ | 100.2 | | | $ | 93.8 | |
|
F-25
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits(a)
Fiscal Year Ended | | Postretirement Benefits
Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2003 | | December 31,
2002 |
| Change in plan assets: | | | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 303.0 | | | $ | 338.0 | | | $ | — | | | $ | — | |
| Actual return (loss) on plan assets | | | 41.4 | | | | (34.4 | ) | | | — | | | | — | |
| Employer contributions | | | 8.6 | | | | 6.6 | | | | 5.5 | | | | 5.5 | |
| Employee contributions | | | 0.6 | | | | 0.6 | | | | 0.9 | | | | 0.9 | |
| Benefits paid | | | (27.8 | ) | | | (19.4 | ) | | | (6.4 | ) | | | (6.4 | ) |
| Purchase Accounting Adjustments/ Acquisitions | | | — | | | | 11.3 | | | | — | | | | — | |
| Settlements | | | (0.6 | ) | | | — | | | | — | | | | — | |
| Currency adjustment | | | 12.5 | | | | 0.3 | | | | — | | | | — | |
| Fair value of plan assets at end of year | | $ | 337.7 | | | $ | 303.0 | | | $ | — | | | $ | — | |
| Reconciliation of funded status to net amount recognized: | | | | | | | | | | | | | | | | |
| Funded status | | $ | (106.9 | ) | | $ | (81.2 | ) | | $ | (100.2 | ) | | $ | (93.8 | ) |
| Unrecognized net loss (gain) | | | 140.1 | | | | 131.7 | | | | (9.5 | ) | | | (5.0 | ) |
| Unrecognized prior service cost (gain) | | | 9.4 | | | | 5.0 | | | | (45.6 | ) | | | (63.4 | ) |
| Net amount recognized | | $ | 42.6 | | | $ | 55.5 | | | $ | (155.3 | ) | | $ | (162.2 | ) |
| Amounts recognized in the consolidated balance sheet consist of: | | | | | | | | | | | | | | | | |
| Prepaid benefit cost | | $ | 3.3 | | | $ | 2.1 | | | $ | — | | | $ | — | |
| Accrued benefit liability | | | (101.3 | ) | | | (67.6 | ) | | | (155.3 | ) | | | (162.2 | ) |
| Intangible asset | | | 10.3 | | | | 6.3 | | | | — | | | | — | |
| Accumulated other comprehensive loss | | | 130.3 | | | | 114.7 | | | | — | | | | — | |
| Net amount recognized | | $ | 42.6 | | | $ | 55.5 | | | $ | (155.3 | ) | | $ | (162.2 | ) |
|
| |
| (a) | Employer contributions and benefits paid in the above table include only those amounts contributed directly to or paid directly from plan assets. |
The accumulated benefit obligation at the end of 2003 and 2002 was $430.9 million and $372.8 million, respectively.
F-26
At the end of 2003 and 2002, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the U.S. pension plans, pension plans outside the U.S. and pension plans with an accumulated benefit obligation in excess of plan assets, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. Plans | | Non-U.S.
Plans | | Accumulated
Benefit
Obligation
Exceeds the
Fair Value of
Plan's Assets
U.S. and Non-U.S. |
| End of Year | | 2003 | | 2002 | | 2003 | | 2002 | | 2003 | | 2002 |
| Projected benefit obligation | | | 328.8 | | | | 297.4 | | | | 115.8 | | | | 86.8 | | | | 430.6 | | | | 374.2 | |
| Accumulated benefit obligation | | | 327.2 | | | | 287.8 | | | | 103.7 | | | | 85.0 | | | | 420.5 | | | | 363.9 | |
| Fair value of plan assets | | | 248.9 | | | | 240.3 | | | | 88.8 | | | | 62.7 | | | | 321.1 | | | | 291.1 | |
|
The net periodic benefit cost of continuing operations for fiscal 2003, 2002 and 2001 includes the following components (in millions):
| | | | | | | | | | | | | | |
| | | Pension Benefits
Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| Components of net periodic benefit cost: | | | | | | | | | | | | |
| Service cost | | $ | 14.0 | | | $ | 11.3 | | | $ | 6.8 | |
| Interest cost | | | 25.9 | | | | 23.9 | | | | 12.7 | |
| Expected return on plan assets | | | (27.2 | ) | | | (31.6 | ) | | | (14.6 | ) |
| Amortization of prior service cost | | | 0.3 | | | | 0.2 | | | | 0.2 | |
| Settlement gain | | | — | | | | — | | | | (0.1 | ) |
| Curtailment loss (a) | | | — | | | | 2.0 | | | | — | |
| Recognized net actuarial loss (b) | | | 9.0 | | | | 0.6 | | | | 0.1 | |
| Net periodic benefit cost | | $ | 22.0 | | | $ | 6.4 | | | $ | 5.1 | |
|
| |
| (a) | Curtailment loss resulted from termination of employees that were covered under a Canadian plan. |
| |
| (b) | Includes $2.8 million of termination benefits for a former executive recorded as a restructuring charge in 2003. |
| | | | | | | | | | | | | | |
| | | Postretirement Benefits
Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| Components of net periodic benefit cost: | | | | | | | | | | | | |
| Service cost | | $ | 1.4 | | | $ | 1.7 | | | $ | 1.0 | |
| Interest cost | | | 5.8 | | | | 6.9 | | | | 3.8 | |
| Amortization of prior service cost | | | (7.5 | ) | | | (5.6 | ) | | | (1.4 | ) |
| Recognized net actuarial gain | | | (1.2 | ) | | | (1.4 | ) | | | (1.7 | ) |
| Curtailment gain | | | — | | | | (0.6 | ) | | | — | |
| Net periodic benefit cost | | $ | (1.5 | ) | | $ | 1.0 | | | $ | 1.7 | |
|
F-27
Weighted average assumptions end of year used to determine benefit obligations are summarized as follows (rates are used to compute the balances as of the end of the year and the expense for the following year):
| | | | | | | | | | | | | | | | | | |
| | | Pension
Benefits | | Postretirement
Benefits |
| | | 2003 | | 2002 | | 2003 | | 2002 |
| Discount rate | | | 6.3 | % | | | 6.7 | % | | | 6.2 | % | | | 7.0 | % |
| Rate of compensation increase | | | 3.2 | % | | | 3.1 | % | | | N/A | | | | N/A | |
|
Weighted average assumptions at used to determine net periodic benefit cost are summarized as follows (rates are used to compute the balances as of the end of the year and the expense for the following year):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Postretirement Benefits |
| | | 2003 | | 2002 | | 2001 | | 2003 | | 2002 | | 2001 |
| Discount rate | | | 6.7 | % | | | 7.2 | % | | | 7.4 | % | | | 7.0 | % | | | 7.5 | % | | | 7.4 | % |
| Expected return on plan assets | | | 8.9 | % | | | 9.3 | % | | | 9.2 | % | | | N/A | | | | N/A | | | | N/A | |
| Rate of compensation increase | | | 3.1 | % | | | 3.1 | % | | | 4.5 | % | | | N/A | | | | N/A | | | | N/A | |
|
The discount rate is determined by using the spot rate yield on high quality corporate bonds and the duration of the liability of the company's own benefit programs. The Company reduced its discount rate from September 2002 to September 2003 to correspond to the changes in the underlying high quality bond benchmark index.
The expected long-term rate of return for the plan's total assets is based on the expected return of each of the above categories, weighted based on the target allocation for each class. Equity securities are expected to return 9% to 11% over the long-term, while debt securities are expected to return between 4% and 7%. The Investment Advisors will provide a premium to the respective market benchmark indices.
Health care costs for domestic plans: (1) Dura Convertible was assumed to increase 9.5.% during 2004; the rates were assumed to grade down by 0.5% per year to an ultimate rate of 6% and remain at that level thereafter. (2) Wickes Engineering Materials was assumed to increase 6% during 2004 and remain at that level thereafter. (3) TAC-Trim was assumed to increase 10.5% during 2004; the rates were assumed to grade down by 0.5% per year to an ultimate rate of 6% and remain at that level thereafter. Health care trend rates for Canadian Plans were assumed to increase approximately 7.5% during 2004 grading down by 0.5% per year to a constant level of 5.0% annual increase.
Assumed health care cost trend rates may have a significant effect on the amounts reported for postretirement benefits. A one-percentage-point change in assumed health care cost trend rates would have the following effects (in millions):
| | | | | | | | | | |
| | | 1-Percentage-
Point
Increase | | 1-Percentage-
Point
Decrease |
| Effect on total of service and interest cost components | | $ | 0.7 | | | $ | (0.6 | ) |
| Effect on postretirement benefit obligation | | $ | 8.5 | | | $ | (7.0 | ) |
|
The asset allocation for the Company's U.S. pension plans at the end of 2003 and 2002, and the target allocation for 2004, by asset category, are as follows:
| | | | | | | | | | | | | | |
| | | | | Percentage of Plan
Assets at Year End |
| Asset Category | | Target Allocation
2004 | | 2003 | | 2002 |
| Equity securities | | 55%-65% | | | 62 | % | | | 52 | % |
| Debt securities | | 35%-45% | | | 37 | % | | | 42 | % |
| Other | | 0%-5% | | | 2 | % | | | 6 | % |
| Total | | | | | 100 | % | | | 100 | % |
|
US Plan Assets and Investment Strategy: The plan's expected long-term rate of return on plan assets of 9% is primarily based on both historical returns and expected returns of each of the above categories, weighted based on target allocation for each class. In addition, third party data recording expected asset class returns and inflation has been considered. Investment management responsibilities of plan assets are
F-28
delegated to registered investment advisers and overseen by an investment committee comprised of members of the Company's senior management. Written investment management agreements and policies set forth the goals, policies and investment management strategies of the plan with regard to permissive investments. Review of investment performance is made quarterly. In circumstances where market conditions cause asset allocation or manager diversification to deviate out of tolerance, assets are rebalanced into compliance typically within 30 days of occurrence.
B. Defined Contribution Plans
Subsidiaries of the Company sponsor defined contribution plans covering employees who meet eligibility requirements. Subsidiary contributions are based on formulas or are at the Company's discretion as specified in the plan documents. Contributions were $3.5 million, $6.2 million and $3.2 million in fiscal 2003, 2002 and 2001, respectively.
14. Discontinued Operations
During 2003, the Company recognized $2.4 million from workers compensation claims related to discontinued operations, for which reserves were previously charged. During 2002 and 2001, the Company received proceeds of $15.8 million and $14.5 million, respectively, on environmental claims related to discontinued operations, for which reserves were previously charged. Of these amounts, $1.6 million, $9.5 million and $8.8 million were recorded as income from discontinued operations in 2003, 2002 and 2001, respectively, net of income taxes of $0.8 million, $6.3 million and $5.7 million, respectively.
During fiscal 2000, the Company settled claims for certain environmental matters related to discontinued operations for a total of $20 million. Settlement proceeds were to be paid to the Company in three installments. The first and second installments of $7.5 million and $7.5 million were received in June 2000 and June 2001, respectively with the third installment of $5.0 million received in June 2002. Of the total $20 million settlement, the Company recorded the present value of the settlement as $7.0 million of additional environmental reserves, based on its assessment of potential environmental exposures and $6.6 million, net of income taxes, as income from discontinued operations.
The Company has significant obligations related to post-retirement, casualty, environmental, asbestos, product liability, lease and other liabilities of discontinued operations. The nature of many of these contingent liabilities is such that they are difficult to quantify and uncertain in terms of amount. The Company has accrued $21.5 million for postretirement costs and $36.7 million for environmental and product liability costs.
In connection with retained operating leases of certain discontinued operations, the Company believes that future sublease rental receipts will equal or exceed future minimum lease payments and accordingly, has not recorded any liability for these leases.
F-29
15. Restructuring
Activity related to the restructuring reserve is as follows (in millions):
| | | | | | | | | | | | | | |
| | | Severance
Costs | | Lease
Commitments
and
Other Exit
Costs | | Total |
| Restructuring reserves: | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 17.5 | | | $ | 10.7 | | | $ | 28.2 | |
| 2nd quarter 2003 program | | | 4.2 | | | | 0.7 | | | | 4.9 | |
| 3rd quarter 2003 program | | | 20.4 | | | | 6.8 | | | | 27.2 | |
| 4th quarter 2003 program | | | 7.6 | | | | 1.7 | | | | 9.3 | |
| Adjustments to prior year's expenses | | | — | | | | (0.8 | ) | | | (0.8 | ) |
| Total net expense | | | 32.2 | | | | 8.4 | | | | 40.6 | |
| Transfers to other balance sheet accounts | | | (2.8 | ) | | | — | | | | (2.8 | ) |
| Costs paid | | | (25.3 | ) | | | (9.8 | ) | | | (35.1 | ) |
| Ending balance | | $ | 21.6 | | | $ | 9.3 | | | $ | 30.9 | |
| 3rd quarter 2003 restructuring: | | | | | | | | | | | | |
| Costs expected | | | 21.2 | | | | 6.8 | | | | 28.0 | |
| Costs paid in period and to date | | | (7.8 | ) | | | (3.1 | ) | | | (10.9 | ) |
| 4th quarter 2003 restructuring | | | | | | | | | | | | |
| Costs expected | | | 7.8 | | | | 1.7 | | | | 9.5 | |
| Costs paid in period and to date | | | (2.8 | ) | | | — | | | | (2.8 | ) |
|
During the fourth quarter 2003, the Company undertook a restructuring program to rightsize its overhead structure, reduce salaried headcount and strengthen and streamline the senior management team on a worldwide basis with the primary focus on domestic operations resulting in a restructuring charge of $9.3 million. The 2003 charge included approximately $7.6 million of severance cost and $1.7 million of costs related to the establishment of accruals for lease commitments and other exit costs. The Company restructuring plan includes severance of nearly 1,000 personnel, with approximately 100 personnel from the Company's U.S. and Mexico Plastics segment, approximately 500 from the International Plastics segment and approximately 400 from Global Soft Trim segment. Additionally, the Company recognized a $4.6 million write down of fixed assets related to U.S. and Mexico Plastics and Global Soft Trim locations.
| | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. and
Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other | | Total |
| 4th Quarter 2003 Restructuring: | | | | | | | | | | | | | | | | | | | | |
| Total costs expected | | $ | 0.9 | | | $ | 4.0 | | | $ | 3.6 | | | $ | 1.0 | | | $ | 9.5 | |
| Costs incurred in period and todate | | | 0.9 | | | | 3.8 | | | | 3.6 | | | | 1.0 | | | | 9.3 | |
|
During the third quarter 2003, the Company undertook a restructuring program to rightsize its overhead structure, reduce salaried headcount and strengthen and streamline the senior management team on a worldwide basis with the primary focus on domestic operations resulting in a restructuring charge of $27.2 million. The 2003 charge included approximately $20.4 million of severance cost and $6.8 million of costs related to the establishment of accruals for lease commitments and other exit costs. The Company restructuring plan includes severance of nearly 1,600 personnel, with approximately 500 personnel from the Company's U.S. and Mexico Plastics segment, approximately 300 from the International Plastics segment, approximately 600 from Global Soft Trim segment and approximately 200 from the Company's corporate locations. Additionally, the Company recognized a $2.2 million write down of fixed assets related primarily to International Plastics locations.
In the third quarter, the Company adopted the FASB Staff Position No. FAS 146-1 "Determining Whether a One-Time Termination Benefit Offered in Connection with an Exit or Disposal Activity Is, in Substance, an Enhancement to an Ongoing Benefit Arrangement." The effect from adopting FAS 146-1
F-30
was to defer recording $1.2 million of restructure expense to later periods. The effect on prior quarters and December 31, 2003 for the portion of the restructuring activities deferred was not significant.
Included in the third quarter 2003 restructuring charge severance cost were charges related to the separation agreement with Jerry L. Mosingo, the former President and CEO. In August 2003, the Company's Board of Directors appointed David Stockman as CEO, in addition to retaining his position of Chairman. Under the terms of his separation agreement, Mr. Mosingo received $0.6 million in the third quarter of 2003 and will receive $0.2 million per quarter through December 31, 2004, $0.1 million for the quarter ending March 31, 2005 and other fringe and retirement benefits. The resulting third quarter 2003 restructuring charge was $5.3 million that includes the present value of future benefits of $2.8 million which is included in pension liability.
| | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. and
Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other | | Total |
| 3rd Quarter 2003 Restructuring: | | | | | | | | | | | | | | | | | | | | |
| Total costs expected | | $ | 6.3 | | | $ | 5.6 | | | $ | 5.9 | | | $ | 10.2 | | | $ | 28.0 | |
| Costs incurred in period and to date | | | 6.3 | | | | 5.0 | | | | 5.7 | | | | 10.2 | | | | 27.2 | |
|
During the second quarter 2003, the Company undertook a restructuring program to rationalize operations on a worldwide basis with the primary focus on U.S. and Mexico operations resulting in a restructuring charge of $4.9 million. The 2003 charge included approximately $4.2 million of severance cost and $0.7 million of costs related to the establishment of reserves for lease commitments and other exit costs. The Company's restructuring plan includes severance of over 500 personnel. Of the 500 personnel approximately 450 were terminated in the second quarter of 2003 with approximately 170 personnel at the Company's International Plastics segment, approximately 160 at Global Soft Trim segment and approximately 120 at the Company's corporate locations. Additionally, the Company recognized a $0.8 million write down of fixed assets related to an International Plastics location. Activity related to 2003 for this program was $4.2 million for severance costs and $0.6 million of lease commitment and other exit costs with $0.1 million of severance costs remaining to be paid.
During 2003, the Company recognized a $7.5 million write-down of fixed assets related to its 50% interest in an Italian joint venture acquired in 2001, $10.4 million impairment of the Becker non-compete agreement and $2.7 million related to other intangible assets (see Notes 3 and 19 for additional information).
Included in the 2003 charges are adjustments related to previously established accruals which did not require cash outlays of $0.8 million.
In the fourth quarter of 2002, the Company undertook a restructuring program primarily to consolidate European operations that resulted in a restructuring charge of $14.1 million. This restructuring charge included $4.0 million of severance costs, $0.8 million of costs related to other contractual obligations and $9.3 million of costs related to fixed asset impairments. The severance costs related to over 300 personnel.
In the third quarter of 2002, the Company undertook a restructuring program primarily to realign the operations in North America that resulted in a restructuring charge of $33.8 million. This restructuring charge included $23.8 million of severance costs, $1.3 million of costs related to the establishment of reserves for lease commitments and lease termination fees and $8.7 million of costs related to fixed asset impairments. The severance costs related to over 700 personnel.
Included in the third quarter 2002 restructuring charge severance costs were charges related to the separation agreement with Thomas Evans the former Chairman and CEO. In August 2002, the Company's Board of Directors appointed Jerry L. Mosingo as President, Chief Executive Officer (CEO) and Director of the Company. Under the terms of his separation agreement, Mr. Evans received $5.5 million on August 15, 2002 and will receive quarterly payments of $0.3 million through June 30, 2004. The resulting third quarter 2002 restructuring charge was $8.9 million.
In the first quarter 2002, the Company undertook a restructuring program to rationalize operations in North America and Europe resulting in a restructuring charge of $9.1 million. This restructuring
F-31
included $5.5 million of severance costs and $3.6 million of costs related to the establishment of reserves for lease commitments and lease termination fees. The Company recognized severance costs for over 100 personnel primarily at the Company's North America and European headquarters. The reserve for lease commitments relates to contractual obligations for the Company's former headquarters facility, while the termination fees relate to an aircraft lease.
During 2001, the Company undertook restructuring programs to rationalize its formerly reported operations in North American, European and Specialty segments resulting in a restructuring charge aggregating $18.8 million. The charge included $11.2 million of severance costs and $7.6 million of asset impairments. The Company recognized severance costs for over 900 operating personnel at the Company's convertible tops, fabrics, carpet and acoustics locations in North America and Specialty operations. The asset impairments, primarily related to machinery and equipment located at North American, European and Specialty operations sites, are based on management's estimates of values to be realized upon disposition of the assets.
During 2001, the Company recorded a restructuring reserve in connection with the Becker acquisition aggregating $5.3 million of which $1.6 million was severance and $3.7 million for lease termination and other exit costs.
16. Common Stockholders' Equity and Earnings Per Share
A. Common Stock
In April 2002, the Company issued 400,000 shares of common stock as part of the purchase of a lamination company wholly owned by a current director and shareholder of the Company. In June 2002, the Company issued 16 million shares of common stock for $160 million before expenses. The Company used $100 million of the $152 million in net proceeds to redeem $133 million of face value Series A Redeemable Preferred Stock and the remainder for general corporate purposes.
B. Stock Option Plans
The 1994 Employee Stock Option Plan ("1994 Plan") was adopted as a successor to the 1993 Employee Stock Option Plan to facilitate awards to certain key employees and consultants. The 1994 Plan was amended in 1999 primarily to increase the number of shares available for issuance under the Plan by 1,000,000 shares. The 1994 Plan provides that no options may be granted after 10 years from the effective date of this plan. Options vest, in each case, as specified by the Company's compensation committee, generally over three years after issuance. At December 31, 2003, 1,592,214 shares were available for issuance under the 1994 Plan. The Company also adopted the 1994 Directors Stock Option Plan, which provides for the issuance of options to acquire a maximum of 240,000 shares of common stock to directors who are not part of management and are not affiliated with a major stockholder. As of December 31, 2003, 68,000 options had been granted. The Company adopted the 1997 United Kingdom Scheme, which provides for the issuance of options to key employees under the 1994 Plan. Effective January 1, 2000, the Company adopted the 2000 Employee Stock Option Plan, which provides for the issuance of up to 2,400,000 shares to key employees and consultants. At December 31, 2003, no options had been awarded under the 2000 plan. The Company adopted effective March 28, 2002, the 2002 Employee Stock Option Plan, which provides for the issuance of up to 6,600,000 shares to key employees and consultants. Under the 2002 plan 60% of the issued options vest and become exercisable in 20% increments in 2003, 2004 and 2005, accordingly, based on when the option was granted. The remaining 40% vest subject to performance targets and become exercisable during 2012 and 2013 or on an accelerated basis if performance targets are met.
The Company issued 1,723,000 options during the year and repriced 3,559,256 options that had an original average exercise price of $10.00 to an exercise price of $8.00. The weighted average exercise price was $8.87 after repricing 3,559,256 stock options in the first quarter of 2003. At December 31, 2003, options representing 3,335,122 shares of common stock were available for grants.
F-32
All shareholder plans have been approved by stockholders. Stock option activity under the plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2003 | | December 31, 2002 | | December 31, 2001 |
| | | Number of
shares | | Weighted
Average
Exercise
Price | | Number of
shares | | Weighted
Average
Exercise
Price | | Number of
shares | | Weighted
Average
Exercise
Price |
| Outstanding beginning of year | | | 4,427,248 | | | $ | 10.12 | | | | 2,830,920 | | | $ | 5.59 | | | | 4,344,432 | | | $ | 5.47 | |
| Impact of 2002 Stock Split | | | — | | | | — | | | | (1,698,553 | ) | | | — | | | | — | | | | — | |
| Adjusted Beginning Balance | | | 4,427,248 | | | | 10.12 | | | | 1,132,367 | | | | 13.98 | | | | 4,344,432 | | | | 5.47 | |
| Awarded | | | 1,723,000 | | | | 8.00 | | | | 5,182,929 | | | | 10.00 | | | | 40,000 | | | | 5.76 | |
| Cancelled | | | (1,140,792 | ) | | | 8.55 | | | | (1,819,634 | ) | | | 10.14 | | | | (458,090 | ) | | | 7.48 | |
| Exercised | | | — | | | | — | | | | (68,414 | ) | | | 12.79 | | | | (1,095,422 | ) | | | 4.31 | |
| Outstanding at end of year | | | 5,009,456 | | | $ | 8.32 | | | | 4,427,248 | | | $ | 10.12 | | | | 2,830,920 | | | $ | 5.59 | |
|
The following table summarizes information about stock options outstanding at December 31, 2003:
| | | | | | | | | | | | | | | | | | | | | | |
| Range of Exercise Price | | Number of
Shares
Outstanding | | Weighted
Average
Remaining
Life | | Weighted
Average
Exercise
Price | | Number of
Stock
Options
Exercisable | | Weighted
Average
Exercise
Price |
| $ 8.00 — $10.00 | | | 4,945,456 | | | | 9.9 | | | $ | 8.21 | | | | 1,354,555 | | | $ | 8.75 | |
| $10.94 — $25.00 | | | 64,000 | | | | 6.7 | | | $ | 17.10 | | | | 64,000 | | | $ | 17.10 | |
|
The Company has elected to continue to utilize the accounting provisions of APB No. 25 for stock options and is required to provide pro forma disclosures of net income and earnings per share had the Company adopted the fair value method for recognition purposes. See Note 2, "Summary of Significant Accounting Policies — Employee Stock Options" for the tabular presentation as if the Company had adopted SFAS No. 123 and restated its results and for discussion related to the 2003 proforma cost related to options.
In accordance with SFAS No. 123, the 3,559,256 repriced options were revalued during 2003 to determine additional compensation cost that resulted from the difference in the fair value of the options prior to repricing and subsequent to repricing. As a result of the repricing $0.4 million of additional compensation cost, net of tax, was incurred on a proforma basis. These options have a weighted average expected life of approximately 6 years. The assumptions used in valuing the repriced options are as follows: expected volatility ranged from 77.54% to 118.309%; expected lives ranged from 1 year to 75½ years; the risk free interest rate ranged from 1.2% to 3.72% in 2003; and a zero expected dividend rate.
Additionally, as a result of repricing the Company's stock options, the options are treated as variable-based awards in accordance with APB No. 25. Because these options are considered to be variable-based awards, the Company will incur future compensation expense if the stock price exceeds the $8.00 exercise price established at the time of the repricing.
C. Earnings Per Share
Basic earnings per common share were computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share were determined assuming the exercise of the stock options issued under the Company's stock option plans. There were no reconciling items between basic earnings per common share and diluted earnings per common share for 2003, 2002 and 2001.
F-33
In 2003, 2002 and 2001, potentially dilutive securities have been excluded from the diluted earnings per share calculation since their inclusion would have been antidilutive. Below is a summary of potentially dilutive securities (in millions, except weighted average exercise price):
| | | | | | | | | | | | | | |
| | | 2003 | | 2002 | | 2001 |
| Stock options | | | 5.0 | | | | 4.4 | | | | 2.8 | |
| Weighted average exercise price | | $ | 8.32 | | | $ | 10.12 | | | $ | 5.59 | |
| Warrants | | | 0.5 | | | | 0.5 | | | | 0.5 | |
| Weighted average exercise price | | $ | 10.00 | | | $ | 10.00 | | | $ | 5.00 | |
|
17. Income Taxes
The provisions for income taxes applicable to continuing operations for fiscal 2003, 2002 and 2001 are summarized as follows (in millions):
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| Current: | | | | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | — | |
| State | | | 4.2 | | | | 5.8 | | | | 2.6 | |
| Foreign | | | 1.5 | | | | 15.3 | | | | 4.8 | |
| | | | 5.7 | | | | 21.1 | | | | 7.4 | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | 4.9 | | | | 19.6 | | | | (21.7 | ) |
| State | | | 1.0 | | | | 2.1 | | | | (1.3 | ) |
| Foreign | | | (13.5 | ) | | | (25.3 | ) | | | (5.7 | ) |
| | | | (7.6 | ) | | | (3.6 | ) | | | (28.7 | ) |
| Income tax expense (benefit) | | $ | (1.9 | ) | | $ | 17.5 | | | $ | (21.3 | ) |
|
Domestic and foreign components of income (loss) from continuing operations before income taxes are summarized as follows (in millions):
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| Domestic | | $ | 8.9 | | | $ | 45.4 | | | $ | (43.8 | ) |
| Foreign | | | (69.9 | ) | | | (79.2 | ) | | | (32.5 | ) |
| | | $ | (61.0 | ) | | $ | (33.8 | ) | | $ | (76.3 | ) |
|
F-34
A reconciliation between income taxes computed at the statutory U.S. Federal rate of 35% and the provisions for income taxes applicable to continuing operations is as follows (in millions):
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | December 31,
2003 | | December 31,
2002 | | December 31,
2001 |
| Amount at statutory Federal rate | | $ | (21.4 | ) | | $ | (11.8 | ) | | $ | (26.7 | ) |
| State taxes, net of Federal income tax | | | 3.2 | | | | 5.1 | | | | 1.0 | |
| Tax differential on foreign earnings | | | 4.0 | | | | (0.7 | ) | | | 2.9 | |
| Nontaxable interest income | | | (5.3 | ) | | | (3.9 | ) | | | — | |
| Amortization of goodwill | | | — | | | | — | | | | 1.5 | |
| Subsidiary preferred stock dividends and accretion | | | 13.1 | | | | 13.4 | | | | 0.8 | |
| Change in valuation allowance | | | 10.8 | | | | 15.9 | | | | (1.2 | ) |
| General business tax credits | | | (4.5 | ) | | | (2.5 | ) | | | (0.5 | ) |
| Other | | | (1.8 | ) | | | 2.0 | | | | 0.9 | |
| Income tax expense (benefit) | | $ | (1.9 | ) | | $ | 17.5 | | | $ | (21.3 | ) |
|
Deferred income taxes are provided for the temporary differences between the financial reporting and tax basis of the Company's assets and liabilities. The components of the net deferred tax assets as of December 31, 2003 and 2002 were as follows (in millions):
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| Deferred tax assets: | | | | | | | | |
| Employee benefits, including postretirement benefits | | $ | 130.8 | | | $ | 124.9 | |
| Net operating loss carryforwards (NOLs) | | | 189.2 | | | | 162.5 | |
| General business tax credit carryforwards | | | 20.2 | | | | 10.7 | |
| Alternative minimum tax credit carryforwards | | | 8.9 | | | | 12.2 | |
| Other liabilities and reserves | | | 21.3 | | | | 33.7 | |
| Valuation allowance | | | (89.2 | ) | | | (78.4 | ) |
| Total deferred tax assets | | | 281.2 | | | | 265.6 | |
| Deferred tax liabilities: | | | | | | | | |
| Property, plant and equipment | | | (70.7 | ) | | | (68.1 | ) |
| Undistributed earnings of foreign subsidiaries | | | (7.2 | ) | | | (7.2 | ) |
| Total deferred tax liabilities | | | (77.9 | ) | | | (75.3 | ) |
| Net deferred tax asset | | $ | 203.3 | | | $ | 190.3 | |
|
The Company has net operating losses in its foreign jurisdictions of $92 million. These losses will begin expiring in 2005 through 2015. Additionally, the Company has foreign net operating losses of $212 million which have no expiration date.
The valuation allowance at December 31, 2003 and December 31, 2002 provides for certain deferred tax assets that in management's assessment may not be realized due to tax limitations on the use of such amounts, due to expiration prior to utilization or that relate to tax attributes that are subject to uncertainty due to the long-term nature of their realization. During fiscal 2003, the valuation allowance increased $10.8 million from fiscal 2002. This increase resulted primarily from the increase in loss carryforwards that may not be realized in future periods. The valuation allowance at December 31, 2003 includes $11.8 million related to the Textron acquisition. If the deferred tax assets related to the $11.8 million valuation allowance become realizable, the valuation allowance offset will be to goodwill.
F-35
The above amounts have been classified in the consolidated balance sheets as follows (in millions):
| | | | | | | | | | |
| | | December 31,
2003 | | December 31,
2002 |
| Deferred tax assets: | | | | | | | | |
| Current domestic and foreign, included in other current assets | | $ | 25.2 | | | $ | 25.3 | |
| Noncurrent domestic and foreign | | | 178.1 | | | | 165.0 | |
| Net deferred tax asset | | $ | 203.3 | | | $ | 190.3 | |
|
Management has reviewed the Company's operating results for recent years as well as the outlook for its continuing operations and concluded that it is more likely than not that the net deferred tax assets of $203.3 million at December 31, 2003 will be realized. Management took into consideration, among other factors, the impact of recent restructuring plans, the timing of the reversal of its temporary differences, certain tax planning strategies and the expiration dates of its NOLs. The Company's ability to generate future taxable income is dependent on numerous factors, including general economic conditions, the state of the automotive industry and other factors beyond management's control. Considerable judgement is often involved in making these determinations, the use of different assumptions could result in significantly different results.
Deferred income taxes and withholding taxes have been provided on earnings of the Company's foreign subsidiaries to the extent it is anticipated that the earnings will be remitted in the future as dividends. Deferred income taxes and withholding taxes have not been provided on the remaining undistributed earnings of foreign subsidiaries as such amounts are deemed to be permanently reinvested. The cumulative undistributed earnings as of December 31, 2003 on which the Company has not provided deferred income taxes and withholding taxes is approximately $31.9 million.
At December 31, 2003, the Company had the following tax attribute carryforwards available for U.S. Federal income tax purposes (in millions):
| | | | | | | | | | |
| | | Amount | | Expiration
Dates |
| Net operating losses — regular tax: | | | | | | | | |
| Preacquisition, subject to limitations | | $ | 103.4 | | | | 2005-2012 | |
| Subject to change in control provisions | | | 193.1 | | | | 2018-2021 | |
| Subject to change in control provisions | | | 27.1 | | | | 2021 | |
| | | $ | 323.6 | | | | | |
| Net operating losses — alternative minimum tax: | | | | | | | | |
| Preacquisition, subject to limitations | | $ | 67.9 | | | | 2005-2012 | |
| Subject to change in control provisions | | | 195.0 | | | | 2018-2021 | |
| Subject to change in control provisions | | | 14.3 | | | | 2021 | |
| | | $ | 277.2 | | | | | |
| General business tax credits: | | | | | | | | |
| Preacquisition, subject to limitations | | $ | 10.1 | | | | 2004-2021 | |
| Subject to change in control provisions | | | 7.2 | | | | 2021-2022 | |
| | | $ | 17.3 | | | | | |
| Foreign tax credits | | $ | 2.9 | | | | 2008 | |
| Alternative minimum tax credits | | $ | 8.9 | | | | | |
|
As a result of the Heartland Transaction, a change in control occurred which results in annual limitations on the Company's use of its NOLs and unused tax credits. This annual limitation on the use of NOLs and tax credits depends on the value of the equity of the Company and the amount of "built-in gain" or "built-in loss" in the Company's assets at the date of the change in control. Based on the
F-36
expiration dates of the NOLs and tax credits as well as anticipated levels of domestic income, management does not believe that the transaction will have a material impact on these deferred tax assets.
Future sales of common stock by the Company or its principal stockholders, or changes in the composition of its principal stockholders, could constitute a change in control that would result in additional annual limitations on the Company's use of its NOLs and unused tax credits. Management cannot predict whether such a change in control will occur.
18. Risk Management and Financial Instruments
Foreign Currency and Interest Rate Risk Management
The Company operates on a global basis and is exposed to the risk that its earnings, cash flows and stockholders' equity could be adversely impacted by fluctuations in currency exchange rates and interest rates. To manage the volatility relating to these exposures, the Company aggregates the exposures on a consolidated basis to take advantage of natural offsets. For exposures that are not offset within its operations, the Company may enter into various derivatives transactions pursuant to its risk management policies. The primary purpose of the Company's foreign currency and interest rate risk management policies and activities is to manage these risks to acceptable levels.
To manage its risks, the Company primarily utilizes forward exchange contracts and purchased options with durations of generally less than 12 months. The Company has in place forward exchange contracts and purchased options with third parties, denominated in multiple currencies, which will mature during fiscal 2004. The details are as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| Derivative Type | | Currency
Sold | | Currency
Purchased | | USD Equivalent of
Notional Amount | | Weighted Average
Contract Rate
(per Convention) | | Unrealized
Gain (Loss) |
| Options | | | CAD | | | | USD | | | $ | 50.0 | | | | 1.5 | | | $ | — | |
|
In order to manage the interest rate risk associated with our debt portfolio, the Company may enter into derivative transactions to manage its exposures to changes in global interest rates, although the Company did not have in place any interest rate derivatives in 2003 or 2002.
Gains and losses on derivatives qualifying as hedges under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" are recorded on the balance sheet as a component of "Accumulated other comprehensive loss" to the extent that the hedges are effective until the underlying transactions are recognized in earnings. As of December 31, 2003, the Company had no derivatives designated as hedges under SFAS No. 133. Gains and losses from all derivatives that do not qualify as hedges under SFAS No. 133, are recorded in the income statement as required by SFAS No. 133, and the fair value is recorded in the balance sheet.
Fair Value of Financial Instruments, Derivatives and Hedging Activities
The estimated fair values of the Company's continuing operations financial instruments are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | | December 31, 2003 | | December 31, 2002 |
| | | Carrying
Amount | | Estimated
Fair Value | | Carrying
Amount | | Estimated
Fair Value |
| Short-term debt, long-term debt and capital lease obligations | | $ | 1,285.2 | | | $ | 1,244.8 | | | $ | 1,289.2 | | | $ | 1,200.2 | |
| Mandatorily redeemable preferred stock of subsidiary | | $ | 161.2 | | | $ | 161.2 | | | $ | 123.9 | | | $ | 123.9 | |
| Forwards | | $ | — | | | $ | — | | | $ | 0.2 | | | $ | 0.2 | |
| Options | | $ | — | | | $ | — | | | $ | 0.3 | | | $ | 0.3 | |
|
F-37
The following methods and assumptions were used to estimate these fair values:
The fair value of the Public Debt notes are based upon quoted market prices. The fair value of the other short-term and long-term debt of the Company approximates the carrying value due to the frequent resetting of interest rates.
The fair value of the forward contracts and purchase options are based upon quoted market prices and the aggregated notional amount outstanding in U.S. dollar equivalent of $50.0 million at December 31, 2003.
Carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts and other receivables, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments.
Concentration of credit risk
In the normal course of business, the Company provides credit to customers in the automotive industry, performs credit evaluations of these customers and maintains reserves for potential credit losses. When realized, the losses have been within the range of management's allowance for doubtful accounts.
Other Concentrations of Risk
The Company invests the majority of its excess cash in money market accounts and, where appropriate, diversifies the concentration of cash among financial institutions. With respect to financial institutions, the Company has diversified its selection of counterparties and has arranged master-netting agreements, where allowed by law, and the Company's policies, to minimize the risk of loss.
19. Related Party Transactions
Heartland Transactions
Heartland is a private equity firm established in 1999 for the purpose of acquiring and expanding industrial companies operating in various sectors of the North American economy that are well positioned for global consolidation and growth. The managing general partner of Heartland is Heartland Industrial Associates, L.L.C. Certain directors and officers of the Company are members of the general partner, specifically Messrs. Stockman (a Director and our Chairman and Chief Executive Officer), Stepp (a Director and our Vice Chairman and Chief Financial Officer) and Tredwell, Leuliette, McConnell and Valenti (each Directors). Other of our directors or their affiliates, specifically Messrs. Becker and McCallum, are limited partners in Heartland with interests representing less than 5% of the commitments in Heartland. Heartland has informed us that its limited partners include many financial institutions, private and government employee pension funds and corporations, among other types of investors. The Company may, in the ordinary course of business, have on a normal, customary and arms' length basis relationships with certain of Heartland's limited partners, including banking, insurance and other relationships.
The Company is a party to a Services Agreement with Heartland under which Heartland provides advisory and consulting services, including services with respect to developments in the automotive industry and supply markets, advice on financial and strategic plans and alternatives and other matters as it may reasonably request and are within Heartland's expertise. The Services Agreement terminates on the earlier of its tenth anniversary or the date upon which Heartland ceases to own Company shares equivalent to 25% of that owned by them on February 23, 2001.
Under the Services Agreement, the Company is obligated to pay to Heartland a $4.0 million annual advisory fee payable in quarterly installments and reimburse its out-of-pocket expenses related to the services it provides. The Company has also agreed to pay a fee of 1% of the total enterprise value of certain acquisitions and dispositions. During 2003, 2002 and 2001 the Company recorded total fees of $4.0 million, $5.7 million and $24.5 million, respectively.
The Services Agreement with Heartland contemplates that the Company may pay additional fees to Heartland for services rendered in connection with a range of financing transactions. In March 2004, the
F-38
Company's Board of Directors, including the disinterested and independent directors of the Board, approved a fee of $1 million to Heartland for its services rendered in connection with the 2004 amendments to the Company's credit facility to add synthetic revolving and letter of credit facilities.
Charles E. Becker Transactions
On March 27, 2003, the Company entered into a termination agreement and release to buyout the non-compete agreement between the Company and Charles E. Becker, a member of the Company's Board of Directors and a limited partner in Heartland. The Company paid $11.3 million in April 2003 as part of the termination agreement and release. The non-compete agreement, which was entered into as part of the Becker acquisition, required the Company to make periodic payments. As a result of this transaction, the Company incurred a loss of $10.4 million, which is primarily due to the write-off of intangible assets initially recorded in conjunction with the Becker acquisition.
During 2002, the Company engaged Mr. Becker to serve as Vice Chairman and assist the Company with strategic planning activities, such as developing sales strategies, managing key customer relationships and recruiting senior management for the Company's European operations. The Company paid Mr. Becker $300,000 for such services. Mr. Becker's consulting arrangement and position as Vice Chairman ended in 2002.
The Company entered into a lease agreement with Becker Ventures L.L.C. ("Becker Ventures"), an entity controlled by Mr. Becker, for the Company's headquarters at 250 Stephenson Highway, Troy, Michigan with the effective date of the lease being January 1, 2002. In March 2002, the Company entered into lease agreements with Becker Ventures, effective January 1, 2002, for 150 Stephenson Highway and 350 Stephenson Highway, Troy, Michigan. The base rent for all three premises is $13.25 per sq. ft., subject to annual CPI adjustments. Total square footage for all three locations is approximately 286,000. The leases have 20-year terms, and the Company has two five-year renewal options. The 2004 base rent for the facilities will be approximately $4.0 million. In 2004, these leases were amended to provide that the Company would assume responsibility for property management with a corresponding elimination of certain aspects of the property management fees. In addition, the Company is also party to a lease with Becker Ventures for five manufacturing facilities totaling 884,000 square feet. In 2002, the Company extended the lease term an additional ten years to expire in 2021, with the base rent for these facilities totaling $3.6 million per year.
In June 2001, Products sold and contemporaneously leased back real property located in Troy, Michigan and Plymouth, Michigan from New King, L.L.C. and Anchor Court, L.L.C., respectively, which are affiliates of Becker Ventures, for net proceeds of $15.1 million in aggregate. The initial lease term in each transaction is 20 years and each lease has two successive ten year renewal options. The basic rent for the Troy, Michigan property is $1.3 million per year, and the basic rent for the Plymouth, Michigan property is $0.5 million per year. The rental rates in each case are subject to adjustment after expiration of the initial term.
Elkin McCallum Transactions
In the first quarter of 2003, the Company purchased equipment from Joan Fabrics Corporation ("Joan Fabrics"), and entered into a supply agreement with Joan Fabrics to supply certain types of fabrics. Elkin McCallum, a director of the Company, controls Joan Fabrics and is a limited partner in Heartland. Under the supply agreement, the Company supplies fabric to Joan Fabrics and Joan Fabrics is responsible for all marketing, design, customer service, distribution and sales functions related to these fabrics. The Company paid Joan Fabrics $4.7 million of consideration for these transactions, a portion of which the Company has allocated to the purchased equipment (based on its appraised value) and the remainder of which it is amortizing over the five-year term of the supply agreement.
On December 31, 2002, the Company acquired an air jet texturing business from Dutton Yarns (an affiliate of Mr. McCallum) for approximately $4.2 million. The purchased assets included equipment, inventory and intellectual property. The Company had preliminarily accounted for this transaction as an acquisition of assets, but finalized its accounting during the first quarter of 2003, and recorded the transaction as a purchase of a business.
F-39
On April 12, 2002, the Company signed and closed on a merger agreement with Mr. McCallum and a lamination company wholly owned by Mr. McCallum pursuant to which the acquired company was merged into a wholly owned subsidiary of the Company. As consideration in the transaction, Mr. McCallum received 400,000 shares of Common Stock and was repaid $2.5 million in cash as reimbursement for amounts previously invested to fund the lamination company's working capital needs. Subsequent to the merger, debt owing to Mr. McCallum of $6.7 million was repaid. The Company acquired the lamination business to optimize the supply chain on certain of its fabric products and provide low cost lamination products and services to Tier-1 customers. As part of this acquisition, the Company inherited a lease pursuant to which it leases from an entity controlled by Mr. McCallum, a portion of a manufacturing facility in El Paso, Texas. The Company continues to occupy these premises pursuant to such lease.
In April 2002, the Company amended the merger agreement with Joan Automotive to clarify ownership of certain equipment listed in a schedule attached to that agreement. The original merger agreement schedule included a list of approximately 84 looms that ultimately exceeded the Company's manufacturing requirements and facility capacity. Upon determining that the excess looms would have been uneconomically expensive to relocate and store, the Company declined to take possession of 48 of these looms, which were left in place at Joan Fabrics' Hickory, North Carolina plant. The amendment clarifies that these looms are owned by Joan Fabrics.
In September 2001, the Company completed the acquisition of Joan Automotive Industries, a leading supplier of bodycloth to the automotive industry, and all of the operating assets of Joan's affiliated yarn dying operation, Western Avenue Dyers, L.P. As a result of the Joan acquisition, Joan Fabrics became a principal stockholder of the Company. Upon completion of the Joan acquisition, Mr. McCallum became a member of the Company's Board of Directors. As part of this acquisition, the Company inherited a lease pursuant to which it leases from an entity controlled by Mr. McCallum, a technical center in Lowell, Massachusetts. The operations formerly conducted in these premises have been moved to other company facilities, however, the Company remains obligated for the related lease.
In connection with the Joan acquisition, the Company entered into a Supply Agreement dated September 21, 2001 (the "Supply Agreement") with Main Street Textiles, L.P. ("Main Street"), which is controlled by Mr. McCallum, and a Transition Services Agreement dated September 21, 2001 (the "Transition Agreement") with Joan Fabrics. Under the Supply Agreement, which was mutually terminated effective as of January 1, 2004, the Company agreed to purchase all of its requirements for flat woven automotive fabric from Main Street for a five-year period beginning on the date of the Supply Agreement. The prices which the Company agreed to pay for fabric under the agreement equaled the costs of the raw materials plus an amount representing Main Street's standard labor and overhead costs incurred in manufacturing fabric for us. Under the Transition Agreement, Joan Fabrics provided Products transitional and support services for a period not to exceed twelve months in order to support the continued and uninterrupted operation of the businesses acquired by Products in the Joan acquisition. As a part of these services, pending the Company's disassembly and removal of machinery and equipment purchased from Joan Fabrics, Joan Fabrics was permitted to continue to use that machinery and equipment to manufacture for us all of our requirements for some types of knitted and woven automotive fabrics. The terms of the Company's agreement with respect to this fabric production are substantially similar to those under the Supply Agreement. Actual prices paid by the Company for fabric under the Supply Agreement and Transition Agreement were subject to the rebates described below.
In 2002 and 2003, the Company engaged in ordinary course transactions with entities controlled by Mr. McCallum for the purchase and sale of goods and services as part of ongoing business relationships. The Company recorded purchases from entities controlled by Mr. McCallum, of $17.8 million (net of $1.2 million of rebates) in 2003, and $47.3 million (net of $10.5 million of rebates) in 2002 for goods and services purchased. These rebates received from Mr. McCallum relate to knit and woven automotive fabrics provided by entities controlled by Mr. McCallum under the Supply Agreement and Transition Agreement executed in connection with the 2001 Joan acquisition, which are described above. Supplier rebates such as these are common in the automotive industry as part of ongoing price negotiations and
F-40
adjustments. These rebates from Mr. McCallum totaled $14.7 million over the duration of the agreements. In addition, the Company recorded sales to entities controlled by Mr. McCallum, of $6.4 million in 2003 and $31.8 million in 2002.
The following table summarizes the balances outstanding from entities controlled by Mr. McCallum (in millions):
| | | | | | | | | | |
| | | As of
December 31, |
| | | 2003 | | 2002 |
| Accounts Receivable | | $ | 2.7 | | | $ | 5.9 | |
| Accounts Payable | | $ | 1.0 | | | $ | 8.0 | |
|
Textron Transactions
As discussed in Note 10 "Mandatorily Redeemable Preferred Stock of Subsidiary," and Note 12 "Operating Leases," the Company is a party to various agreements and transactions with Textron. Textron became a related party as a result of its receipt of the consideration in the 2001 TAC-Trim acquisition. In May 2002, as part of the finalization of the purchase price and related working capital adjustments of the TAC-Trim acquisition, the Company paid Textron $15.5 million in cash.
Prior to the TAC-Trim acquisition, TAC-Trim entered into an $86.9 million sale and leaseback transaction (the "Textron Leasing Transaction") with two separate single purpose affiliates of Textron Financial Corporation, as lessor and purchaser, with respect to a portfolio of manufacturing equipment situated in different locations throughout the United States and Canada. In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities ("VIE"), an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" (see Note 2 "Summary of Significant Accounting Policies" for further information on FIN 46). As part of the Company's implementation of FIN 46, it determined that one of the single purpose affiliates was a VIE. The Company negotiated and agreed to have the lease restructured so it was required to be consolidated by the other party and not accounted for as a VIE. As consideration for this lease restructuring, the Company agreed to pay Textron Financial $150,000.
Payments under the Textron leasing transaction are guaranteed by Products and secured by a first perfected mortgage lien over certain real property with a value equal to $25 million. Each lease is for an initial term of three years with three one-year renewal options. At the end of the leases (including the expiration of all renewal options), there is the option of either purchasing all of the equipment for approximately $26 million or returning the equipment to the lessor. In the event the equipment is returned, arrangements will be made for the disposition of the equipment. The Company is required to guarantee a minimum value to the lessor of up to approximately $21 million upon expiration of the leases. As is customary, the documentation for the Textron leasing transaction incorporates covenants by reference, from the Company's credit facility, that may be amended or waived by the senior lenders, and also contain events of default.
As part of the TAC-Trim acquisition, the Company entered into three intellectual property license agreements with Textron. In two of these agreements, the Company licenses back to Textron certain intellectual property that was acquired in the transaction. In the third agreement, the Company licenses from Textron other intellectual property that was not acquired in the transaction. In addition, under the TAC-Trim acquisition agreement, the Company is permitted to use the "Textron" name for 18 months in exchange for payments of $13.0 million on December 15, 2002 and $6.5 million on December 15, 2003.
F-41
20. Information About the Company's Operations
In conjunction with the 2003 restructurings, the Company changed its reportable segments to align with organization changes and senior management responsibilities. The Company's new reportable segments consist of U.S. and Mexico Plastics, International Plastics and Global Soft Trim. International Plastics includes all international plastics operations, including Canada. The U.S. and Mexico Plastics and International Plastics segments include interior trim components such as door panels, instrument panels, consoles, package trays and cargo management systems, exterior trim components such as bumper fascias and cladding and fully assembled cockpit systems and components thereof. The Global Soft Trim segment includes molded non-woven and tufted carpet, alternative molded flooring, accessory mats and acoustics systems consisting of absorbing materials, damping materials, engine compartment noise vibration and harshness systems, interior insulators, seat body cloth, insert fabric, headliner fabric, convertible roof systems, hard top retractable roof systems, tonneau covers and actuation systems. The Company changed the composition of its reportable segments on January 1, 2003 and further redefined the segments beginning July 1, 2003 and restated prior period segment data to be comparable.
The segments consist of dedicated facilities and division offices focused on the manufacturing, assembly and sequencing of the aforementioned products and systems. The other categories consist of costs not allocated to operating segments including selling, product development and administrative costs.
The Company evaluates performance based on operating profit or loss. Information about the Company's divisions is presented below (in millions):
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2003 |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other(a) | | Total |
| External revenues | | $ | 1,363.4 | | | $ | 1,258.0 | | | $ | 1,362.3 | | | $ | — | | | $ | 3,983.7 | |
| Inter-segment revenues | | | 12.0 | | | | 17.9 | | | | 1.0 | | | | (30.9 | ) | | | — | |
| Interest expense from preferred stock requirement | | | — | | | | — | | | | — | | | | 37.3 | | | | 37.3 | |
| Depreciation and amortization | | | 43.6 | | | | 39.7 | | | | 48.7 | | | | 8.2 | | | | 140.2 | |
| Goodwill | | | 761.5 | | | | 327.2 | | | | 274.4 | | | | — | | | | 1,363.1 | |
| Operating income (loss) | | | 73.6 | | | | (22.5 | ) | | | 140.5 | | | | (89.6 | ) | | | 102.0 | |
| Total assets | | | 1,074.6 | | | | 845.0 | | | | 687.0 | | | | 584.6 | | | | 3,191.2 | |
| Capital expenditures | | | 45.9 | | | | 47.4 | | | | 75.5 | | | | 6.3 | | | | 175.1 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2002 |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other(a) | | Total |
| External revenues | | $ | 1,512.2 | | | $ | 899.0 | | | $ | 1,474.6 | | | $ | — | | | $ | 3,885.8 | |
| Inter-segment revenues | | | 13.4 | | | | 16.8 | | | | 0.8 | | | | (31.0 | ) | | | — | |
| Preferred stock requirement | | | — | | | | — | | | | — | | | | 38.4 | | | | 38.4 | |
| Depreciation and amortization | | | 38.4 | | | | 24.3 | | | | 49.0 | | | | 5.3 | | | | 117.0 | |
| Goodwill | | | 715.1 | | | | 278.8 | | | | 271.6 | | | | — | | | | 1,265.5 | |
| Operating income (loss) | | | 113.1 | | | | (30.1 | ) | | | 161.6 | | | | (76.9 | ) | | | 167.7 | |
| Total assets | | | 1,176.1 | | | | 843.5 | | | | 682.8 | | | | 454.7 | | | | 3,157.1 | |
| Capital expenditures | | | 41.0 | | | | 26.9 | | | | 48.8 | | | | 31.2 | | | | 147.9 | |
|
F-42
| | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2001 |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other(a) | | Total |
| External revenues | | $ | 208.0 | | | $ | 263.1 | | | $ | 1,352.2 | | | $ | — | | | $ | 1,823.3 | |
| Inter-segment revenues | | | 1.9 | | | | 6.7 | | | | 1.4 | | | | (10.0 | ) | | | — | |
| Preferred stock requirement | | | — | | | | — | | | | — | | | | 2.4 | | | | 2.4 | |
| Depreciation and amortization | | | 10.8 | | | | 12.4 | | | | 55.9 | | | | 2.7 | | | | 81.8 | |
| Goodwill | | | 949.6 | | | | 47.1 | | | | 257.1 | | | | — | | | | 1,253.8 | |
| Operating income (loss) | | | 1.6 | | | | (2.4 | ) | | | 48.7 | | | | (12.3 | ) | | | 35.6 | |
| Total assets | | | 866.3 | | | | 354.6 | | | | 826.8 | | | | 940.2 | | | | 2,987.9 | |
| Capital expenditures | | | 6.5 | | | | 2.3 | | | | 40.9 | | | | 4.8 | | | | 54.5 | |
|
| |
| (a) | Other includes the Company's non-operating units (See Note 14) and the effect of eliminating entries. During 2003 and 2002, certain corporate costs that were previously included at the divisional units were included in the Other category. Those costs that could be attributed to a divisional unit were allocated back to the appropriate division. Operating income (loss) for the year ended December 31, 2003 includes: $53.3 million, $74.0 million and $48.7 million of corporate costs allocated back to U.S. and Mexico Plastics, International Plastics and Global Soft Trim, respectively. Operating income (loss) for the year ended December 31, 2002 includes: $60.4 million, $35.5 million and $39.6 million of corporate costs allocated back to U.S. and Mexico Plastics, International Plastics and Global Soft Trim, respectively. |
Direct and indirect sales to significant customers in excess of ten percent of consolidated net sales from continuing operations follow:
| | | | | | | | | | | | | | |
| | | Fiscal Year Ended |
| | | 2003 | | 2002 | | 2001 |
| DaimlerChrysler AG | | | 28.5 | % | | | 31.0 | % | | | 18.7 | % |
| General Motors Corporation | | | 22.4 | % | | | 23.0 | % | | | 29.0 | % |
| Ford Motor Company | | | 24.8 | % | | | 23.0 | % | | | 21.5 | % |
|
The Company recently confirmed its strategy for new business, which involves pursuing sales growth based on criteria intended to more effectively allocate the Company's resources on the most promising new business opportunities. As part of this strategy, the Company is reviewing its parts profitability for each plant and program worldwide. For example, the Company has recently concluded that a certain future business award is inconsistent with its criteria and is therefore in the process of cooperating in the transition of this award to another supplier.
At the end of the second quarter, the Company received notice from one of its customers, DaimlerChrysler Corporation, of an issue regarding the calculation methods for determining the current year valuation of price givebacks. Discussions on this issue, as well as various aspects of the broader relationship, are continuing. While the Company seeks to improve the profitability of its programs with this and all of its customers, there can be no assurance that the Company will not lose desirable programs over time. While the Company continues to believe that all of these issues will be resolved to the mutual satisfaction of the parties, there can be no assurances that such a resolution is imminent or that actions by the customer with respect to the broader relationship will not have a material adverse impact on the Company.
F-43
Information about the Company's continuing operations in different geographic areas for fiscal 2003, 2002 and 2001 is presented below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, 2003 | | Fiscal Year Ended
December 31, 2002 | | Fiscal Year Ended
December 31, 2001 |
| | | Net Sales | | Long-Lived
Assets | | Net Sales | | Long-Lived
Assets | | Net Sales | | Long-Lived
Assets |
| United States | | $ | 2,200.4 | | | $ | 1,472.9 | | | $ | 2,412.0 | | | $ | 1,445.3 | | | $ | 1,346.0 | | | $ | 1,545.4 | |
| Canada | | | 464.3 | | | | 432.3 | | | | 488.2 | | | | 343.4 | | | | 168.5 | | | | 99.0 | |
| Mexico | | | 254.0 | | | | 79.1 | | | | 230.7 | | | | 96.8 | | | | 50.5 | | | | 52.9 | |
| Europe | | | 1,001.6 | | | | 283.0 | | | | 660.5 | | | | 129.4 | | | | 117.3 | | | | 189.0 | |
| Other | | | 63.4 | | | | 89.9 | | | | 94.4 | | | | 173.9 | | | | 141.0 | | | | 220.6 | |
| Consolidated | | $ | 3,983.7 | | | $ | 2,357.2 | | | $ | 3,885.8 | | | $ | 2,188.8 | | | $ | 1,823.3 | | | $ | 2,106.9 | |
|
Intersegment sales between geographic areas are not material. For fiscal years 2003, 2002 and 2001, export sales from the United States to foreign countries were $408.9 million, $429.5 million and $146.2 million, respectively.
21. Commitments and Contingencies
Except as described below, the Company and its subsidiaries are not party to any material pending legal proceedings, but is involved in ordinary routine litigation incidental to the business.
Environmental
The Company is subject to federal, state, local and foreign environmental, and health and safety, laws and regulations that (i) affect ongoing operations and may increase capital costs and operating expenses in order to maintain compliance with such requirements and (ii) impose liability relating to contamination at facilities, other locations such as former facilities, facilities where we have sent wastes for treatment or disposal and other properties to which the Company may be linked. Such liability may include, for example, investigation and clean-up of the contamination, personal injury and property damage caused by the contamination and damages to natural resources. Some of these liabilities may be imposed without regard to fault and may also be joint and several (which can result in a liable party being held responsible for the entire obligation, even where other parties are also liable).
Management believes that it has obtained, and is in material compliance with, those material environmental permits and approvals necessary to conduct the Company's various businesses. Environmental compliance costs for continuing businesses are accounted for as normal operating expenses or capital expenditures, except for certain costs incurred at acquired locations. Environmental compliance costs relating to conditions existing at the time of an acquisition are generally charged to reserves established in purchase accounting. The Company accrues for environmental remediation costs when such obligations are known and reasonably estimable. In the opinion of management, based on the facts presently known to it, such environmental compliance and remediation costs will not have a material effect on the Company's business, consolidated financial condition, future results of operations or cash flows.
The Company is legally or contractually responsible or alleged to be responsible for the investigation and remediation of contamination at various sites and for personal injury or property damages, if any, associated with such contamination. At some of these sites, the Company has been notified that it is a potentially responsible party ("PRP") under the federal Superfund law or similar state laws. Other sites at which the Company may be responsible for contamination may be identified in the future, including with respect to divested and acquired businesses.
The Company is currently engaged in investigating or remediating certain sites as discussed in the paragraphs below. In estimating the cost of investigation and remediation, the Company considered, among other things, its prior experience in remediating contaminated sites, remediation efforts by other parties, data released by the United States Environmental Protection Agency ("USEPA"), the professional judgment of the Company's environmental experts, outside environmental specialists and other
F-44
experts and the likelihood that other identified PRPs will have the financial resources to fulfill their obligations at sites where they and the Company may be jointly and severally liable. It is difficult to estimate the total cost of investigation and remediation due to various factors including:
| |
| • | incomplete information regarding particular sites and other PRPs; |
| |
| • | uncertainty regarding the nature and extent of environmental problems and the Company's share, if any, of liability for such problems; |
| |
| • | the ultimate selection among alternative approaches by governmental regulators; |
| |
| • | the complexity and evolving nature of environmental laws, regulations and governmental directives and |
| |
| • | changes in cleanup standards. |
The Company is a party to a Consent Decree with the State of New Hampshire to remediate a former industrial landfill known as the Cardinal Landfill in Farmington, New Hampshire. Pursuant to that Consent Decree, the Company is currently conducting a pilot test for a proposed remediation of chlorinated compound contaminants in groundwater. The Consent Decree calls for a remedy to be in place during 2004. The Company is a defendant in two lawsuits filed by a total of 91 individual plaintiffs for alleged personal injuries arising from Cardinal Landfill conditions. The Company will vigorously contest these allegations. As of December 31, 2003, the Company has accrued $13.6 million for Cardinal Landfill.
The Company is a party, as a member of a PRP workgroup, to a Consent Decree entered with the USEPA for the remediation of a former municipal landfill in Dover, New Hampshire. The town of Dover, New Hampshire is also a member of the PRP group and a party to the Consent Decree. Pursuant to the terms of the Consent Decree, the PRP group is currently engaged in the preparation of a remediation design. The Consent Decree requires that a remedy for the site be in place during 2004. As of December 31, 2003, the Company has accrued $8.7 million for Dover.
Pursuant to a Consent Decree signed with the USEPA, the Company is currently engaged in a full-scale remediation for groundwater and soil contamination at the former Stamina Mills manufacturing facility in North Smithfield, Rhode Island. Remediation activities have been ongoing since 1998. Another Consent Decree resolving the USEPA claim for past oversight costs was signed during 2003, and a payment of $7.3 million was made during the third quarter of 2003. As of December 31, 2003, the Company has accrued $6.6 million for Stamina Mills.
The Company is working with the Michigan Department of Environmental Quality ("MDEQ") to investigate and remediate soil and groundwater contamination at a former manufacturing plant in Mancelona, MI and at adjacent owned property formerly used for the treatment and disposal of plating waste. MDEQ is likely to require remediation of groundwater contamination. In addition, the Company is incurring costs in connection with the provision of alternate water supplies to residences in the area.
The current owner of one of the Company's former manufacturing plants located in Bowling Green, OH has entered into an Administrative Order on Consent with the Ohio Environmental Protection Agency ("OEPA") requiring investigation and remediation of contamination at the site. The Company is reimbursing the current owner for costs associated with ongoing groundwater monitoring and, following selection of an appropriate remedy by OEPA, will assume 90% of future remediation costs.
In the 1980's and 1990's, the California Regional Water Quality Control Board ("CRWQCB") and other state agencies ordered a predecessor of the Company to investigate and remediate soil and groundwater contamination at a former lumber treatment plant in Elmira, CA. In 1996, the Company entered into an agreement with the State of California to conduct long-term operation and maintenance of the remedy implemented at the site.
The Company has entered into an Administrative Order by Consent with the USEPA requiring investigation, delineation and removal of contamination from a vacant three acre site in Zanesville, Ohio. The delineation report has been submitted to USEPA for comment, and the Administrative Order by Consent calls for the submittal and implementation of an action plan during 2004.
F-45
In 2003, the Company signed a Consent Agreement with the State of South Carolina Department of Health and Environmental Control requiring soil and groundwater investigations at a former manufacturing facility in Cowpens, South Carolina. The Company had ceased operations at this location in 1981. Initial investigations will delineate potential groundwater contamination that has migrated under a residential area. These studies are scheduled to be completed in 2004.
The Company has established accruals for certain contingent environmental liabilities and management believes such reserves comply with accounting principles generally accepted in the United States of America. The Company accrues for environmental investigatory and non-capital remediation costs when litigation has commenced or a claim or assessment has been asserted or is imminent, the likelihood of an unfavorable outcome is probable and the financial impact of such outcome is reasonably estimable. As of December 31, 2003 and 2002, total reserves for these environmental costs are approximately $51.2 million and $64.5 million, respectively.
In the opinion of management, based on information presently known to it, identified environmental costs and contingencies will not have a material effect on the Company's consolidated financial condition, future results of operations or cash flows. However, management can give no assurance that they have identified or properly assessed all potential environmental liabilities arising from the business or properties, and those of present and former subsidiaries and their corporate predecessors.
Litigation
The Company and its subsidiaries have lawsuits and claims pending against them and have certain guarantees outstanding which were made in the ordinary course of business.
As of December 31, 2003, the Company is party to approximately 875 pending cases alleging personal injury from exposure to asbestos containing materials used in boilers manufactured before 1966 by former operations of the Company which were sold in 1966. Asbestos-containing refractory bricks lined the boilers and, in some instances, the Company's former operations installed asbestos-containing insulation around the boilers. These pending cases do not include cases that have been dismissed or are subject to agreements to dismiss due to the inability of the plaintiffs to establish exposure to a relevant product and cases that have been settled or are subject to settlement agreements. Total settlement costs for these cases have been less than $944,800 or an average of less than $5,700 per settled case. The defense and settlement costs have been substantially covered by our primary insurance carriers under a claims handling agreement that expires in August 2006. The Company has primary, excess and umbrella insurance coverage for various periods available for asbestos-related boiler and other claims. The Company's primary carriers have agreed to cover approximately 80% of certain defense and settlement costs up to a limit of approximately $70.5 million for all claims made, subject to reservations of rights. The excess insurance coverage, which varies in availability from year to year, is approximately $600 million in aggregate for all claims made. Based on the age of the boilers, the nature of the claims and settlements made to date and the insurance coverage, management does not believe that these cases will have a material impact on the Company's financial condition, results of operations or cash flows. However, it cannot assure that the Company will not be subjected to significant additional claims in the future, that insurance will be available as expected or that unanticipated damages or settlements in the future would not exceed insurance coverage.
As previously disclosed, a purported class action was filed on March 24, 2003 in the United States District Court for the Eastern District of Michigan, against the Company, Heartland and ten current and former senior officers and/or directors of the Company, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated there under. Four similar actions were subsequently filed in the United States District Court for the Eastern District of Michigan, purportedly filed on behalf of purchasers of the common stock of the Company between August 7, 2001 and August 2, 2002, which are identical to the purported class identified in the previously disclosed lawsuit, except in one instance in which the complaint alleges a class period beginning on July 5, 2001. On August 4, 2003, the court consolidated all five pending actions and appointed lead plaintiffs for the purported class. The Company believes that the claims are without merit and intends to vigorously defend the lawsuits. The Company does not believe that the suit will have a material impact on the Company's financial condition, results of operations or cash flows.
F-46
The Company is a defendant in a lawsuit involving a sales commissions arrangement inherited from a predecessor company and its partial ownership of an extinguished joint venture. In September 2003, the Oakland County Circuit Court entered a judgment by default against the Company for $4.2 million based upon an inadvertent failure to produce a small number of documents that were to be produced with thousands of other documents that were delivered in the discovery process. The Company and its counsel believes that the default judgment was improperly entered and that damages were improperly assessed, and it has filed an appeal of the judgment with the Michigan Court of Appeals. The Company intends to vigorously pursue its appeal in this matter and has posted a letter of credit in the amount of the judgment as part of the normal appeal process. While management believes it may have no liability to the plaintiff, the Company has established an appropriate reserve for this matter in an amount less than the amount of the current judgment.
The ultimate outcome of the legal proceedings to which the Company is a party will not, in the opinion of the Company's management, based on the facts presently known to it, have a material effect on the Company's consolidated financial condition, future results of operations or cash flows.
Completion of Audit Committee Inquiry
The Company's Audit Committee inquiry, initiated in August 2003, into certain assertions made by two former executives and related matters has been completed. The Audit Committee, aided by its independent counsel, Davis Polk & Wardwell, and by an outside accounting expert, reported its findings and recommendations to the Company's full Board of Directors. In general, the Audit Committee's inquiry extended into the following areas: (1) assertions regarding the Company's accounting for revenue and tooling, (2) a comprehensive review of related party transactions and (3) certain corporate governance procedures. The following summarizes the Committee's principal findings and recommendations:
| |
| • | The Audit Committee has not become aware of any events that would necessitate a restatement of any previously issued financial statements. |
| |
| • | While the assertions concerning related party transactions were limited to certain transactions involving Charles Becker and Elkin McCallum and entities controlled by them, the Audit Committee reviewed all material transactions entered into between the Company and Heartland Industrial Partners, L.P., Mr. McCallum and Mr. Becker and their respective affiliates. Both Mr. Becker and Mr. McCallum are directors and significant shareholders of the Company and are, directly or indirectly, limited partners in Heartland, the Company's largest shareholder. |
| |
| | The Audit Committee concluded that each of these transactions had a legitimate business purpose, was negotiated fairly, and was intended to advance the interests of the Company and not to benefit the related parties at the Company's expense. The Audit Committee further concluded that, by and large, these transactions were appropriately presented to and approved by the full Board of Directors of the Company and were properly documented and adequately disclosed. |
| |
| | The Audit Committee concluded that certain related party matters referred to below had not been formally submitted for Board approval, and that others should have been more appropriately documented. The Audit Committee recommended that disinterested members of the Board review those matters and take whatever procedural action may be deemed appropriate. Specifically, the matters to be reviewed are (1) with respect to Mr. Becker and his affiliates: leases of two buildings adjacent to the Company's headquarters, which was already the subject of a Board-approved lease from an affiliate of Mr. Becker; an amendment reducing the rent at the Company's headquarters to the rent at these two additional buildings; and amendments of existing plant leases with an affiliate of Mr. Becker to extend the term and reduce the rent for the initial term; and (2) with respect to Mr. McCallum and his affiliates, an amendment of the previously Board-approved Joan Automotive merger agreement clarifying ownership of certain equipment listed in a schedule attached to that agreement; and the final terms of a supply agreement contemplated at the time the Board approved a January 2003 purchase of certain |
F-47
| |
| | fabrics equipment from an affiliate of Mr. McCallum. Subsequent to the Board's initial discussion with the Audit Committee on March 10, 2004, the Board has held a meeting and ratified all of these actions. |
| |
| • | The Audit Committee also recommended that the Company review its public filings to determine whether disclosure of certain aspects of the related party transactions reviewed by the Audit Committee should be enhanced and additionally, it proposed a resolution for the Board that will require pre-approval of all future related party transactions, even where pre-approval of the Board is not legally required. The resolution also reiterates procedures for ensuring proper documentation and disclosure of such transactions. Subsequent to the Board's initial discussion with the Audit Committee on March 10, 2004, the Board has adopted and approved this resolution. |
As a result of the Audit Committee's recommendations, the Company has included enhanced disclosure with respect to the following: (1) disclosure of the Board-approved payment of $300,000 as compensation to Mr. Becker in 2002 for his temporary service as Vice Chairman of the Company during that year; (2) an improved description of the 2003 fabrics and 2002 Dutton Yarns air-texturing operations transactions with Mr. McCallum; and (3) the dollar volume of previously disclosed ordinary course arrangements with Mr. McCallum, specifically, from transition services, supply and rebate arrangements.
The members of the Company's Audit Committee are Robert C. Clark, the former Dean of the Harvard Law School, Marshall A. Cohen, counsel at Cassels Brock and Blackwell, a Canadian law firm, and former Senator Warren B. Rudman. The accounting expert who advised the Audit Committee is Alex Arcady, a retired partner from Ernst & Young LLP, who spent the last ten years of his career in that firm's national office.
Other Commitments
As of December 31, 2003, the Company's continuing operations had approximately $30.3 million in outstanding capital expenditure commitments. The majority of the leased properties of the Company's previously divested businesses have been assigned to third parties. Although releases have been obtained from the lessors of certain properties, Products remains contingently liable under most of the leases. Products' future liability for these leases, in management's opinion, based on the facts presently known to it, will not have a material effect on the Company's consolidated financial condition, future results of operations or cash flows.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize, at the inception of a qualified guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. In conjunction with divestitures and other transactions, the Company has provided indemnifications relating to legal and environmental issues, including product liability. The Company does not believe that any pending or threatened litigation or claims related to any such retained liabilities of discontinued operations are likely to result in any material loss.
F-48
22. Quarterly Financial Data (Unaudited)
The quarterly financial data is summarized below (in millions, except per share amounts).
| | | | | | | | | | | | | | | | | | |
| | | 2003 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Net sales | | $ | 1,035.1 | | | $ | 1,033.5 | | | $ | 902.2 | | | $ | 1,012.9 | |
| Gross profit | | | 109.4 | | | | 124.7 | | | | 95.5 | | | | 114.6 | |
| Income (loss) from continuing operations | | | (26.2 | ) | | | 10.7 | | | | (32.1 | ) | | | (11.5 | ) |
| Income (loss) before extraordinary items | | | (26.2 | ) | | | 10.7 | | | | (32.1 | ) | | | (11.5 | ) |
| Net income (loss) | | | (26.2 | ) | | | 10.7 | | | | (32.1 | ) | | | (9.9 | ) |
| Basic and diluted earnings (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | | (0.31 | ) | | | 0.13 | | | | (0.38 | ) | | | (0.14 | ) |
| Discontinued operations | | | — | | | | — | | | | — | | | | 0.02 | |
| Net income (loss) attributable to common shareholders | | | (0.31 | ) | | | 0.13 | | | | (0.38 | ) | | | (0.12 | ) |
| Common stock prices: | | | | | | | | | | | | | | | | |
| High | | | 4.83 | | | | 4.18 | | | | 3.41 | | | | 4.33 | |
| Low | | | 3.28 | | | | 2.82 | | | | 2.09 | | | | 2.43 | |
|
| | | | | | | | | | | | | | | | | | |
| | | 2002 |
| | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Net sales | | $ | 914.8 | | | $ | 1,085.3 | | | $ | 922.5 | | | $ | 963.2 | |
| Gross profit | | | 131.1 | | | | 158.5 | | | | 100.7 | | | | 127.8 | |
| Income (loss) from continuing operations | | | (6.7 | ) | | | 3.7 | | | | (45.2 | ) | | | (3.1 | ) |
| Income (loss) before extraordinary items | | | (6.7 | ) | | | 3.7 | | | | (45.2 | ) | | | (3.1 | ) |
| Net income (loss) | | | (18.4 | ) | | | 13.2 | | | | (45.2 | ) | | | (3.1 | ) |
| Basic and diluted earnings (loss) per share: | | | | | | | | | | | | | | | | |
| Continuing operations | | | (0.10 | ) | | | (0.46 | ) | | | (0.54 | ) | | | (0.04 | ) |
| Discontinued operations | | | — | | | | 0.13 | | | | — | | | | — | |
| Cumulative effect of change in accounting principle | | | (0.17 | ) | | | — | | | | — | | | | — | |
| Net loss attributable to common shareholders | | | (0.27 | ) | | | (0.33 | ) | | | (0.54 | ) | | | (0.04 | ) |
| Common stock prices: | | | | | | | | | | | | | | | | |
| High | | | 25.500 | | | | 28.375 | | | | 9.000 | | | | 4.450 | |
| Low | | | 16.750 | | | | 9.000 | | | | 2.810 | | | | 2.450 | |
|
The Company's operations are not subject to significant seasonal influences.
Changes in Accounting Principles — During the second quarter 2003, the Company implemented a change in the method of accounting for holiday pay so that such pay is accrued, and expense is recognized during the period in which the actual holiday occurs. Formerly, certain of the Company's businesses accrued holiday pay and recognized expense based upon an equal monthly amount within the fiscal year. The change in method better matches holiday expense with the period that the actual holiday occurs and the pay is earned.
As the prior method allocated costs within the fiscal year, there is no effect on prior years. There will be no effect on the entire fiscal year as the change only impacts interim periods.
F-49
The effect of the change on the first quarter 2003 is as follows (in millions):
| | | | | | | | | | |
| | | Quarter Ended |
| | | March 31, 2003
(As Previously
Reported) | | March 31, 2003
(Adjusted) |
| Net sales | | $ | 1,035.1 | | | $ | 1,035.1 | |
| Cost of goods sold | | | 928.1 | | | | 925.7 | |
| Gross profit | | | 107.0 | | | | 109.4 | |
| Selling, general and administrative expenses | | | 71.5 | | | | 71.5 | |
| Impairment of long-lived assets | | | 18.1 | | | | 18.1 | |
| Operating income | | | 17.4 | | | | 19.8 | |
| Other, net | | | 45.0 | | | | 45.1 | |
| Loss from continuing operations before income taxes | | | (27.6 | ) | | | (25.3 | ) |
| Income tax expense | | | 1.1 | | | | 0.9 | |
| Net loss | | $ | (28.7 | ) | | $ | (26.2 | ) |
| Earnings per share data: | | | | | | | | |
| Loss per basic and diluted common share | | $ | (0.34 | ) | | $ | (0.31 | ) |
| Average basic and diluted common shares outstanding | | | 83.6 | | | | 83.6 | |
|
The proforma amounts assuming the new method of accounting for holiday pay is applied retroactively to prior year periods is as follows (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | |
| | | Quarter Ended
March 31, 2002 | | Quarter Ended
June 30, 2002 | | Quarter Ended
September 30, 2002 | | Quarter Ended
December 31, 2002 |
| Net loss attributable to common shareholders | | $ | (17.2 | ) | | $ | (22.4 | ) | | $ | (44.6 | ) | | $ | (5.6 | ) |
| Net loss per common share | | $ | (0.26 | ) | | $ | (0.32 | ) | | $ | (0.53 | ) | | $ | (0.07 | ) |
|
Additionally, during the second quarter of 2003, the Company implemented a change in the method of accounting for crib supply inventories held at plants. Crib supply inventories include small motors, replacement parts for production equipment and other miscellaneous repair parts for buildings, equipment and machinery. The Company implemented a perpetual crib supply inventory system and harmonized its policy to consistently account for the capitalization of crib supply inventories. Formerly, the Company had different capitalization thresholds following the various acquisitions in late 2001 and 2002, which ranged from not capitalizing any crib supply items to capitalizing only items greater than two thousand dollars. The new accounting method better matches the cost with the period benefiting from the expenditure, as such inventories are charged to expense as they are placed into service and begin generating revenue. Pro forma and the cumulative effect amounts relating to the change in accounting for crib inventories is not determinable as perpetual records of crib inventory were not maintained at all the plants prior to the application of the new method in the second quarter of 2003. The effect of the change on the three months ended June 30, 2003, for the plants that had no perpetual records was to increase inventory and reduce cost of sales by $1.8 million after tax or $0.02 per share. For the year ended December 31, 2003, the incremental effect of the adoption had an insignificant effect.
23. Consolidating Financial Statements
Products issued Senior Notes in a total principal amount of $500.0 million in December 2001. The Senior Notes are guaranteed by the Company and all the Company's wholly owned domestic Subsidiaries other than its receivable, insurance and charitable subsidiaries (Guarantor Subsidiaries). The following are consolidating financial statements of the Company, Products, its guarantor and non-guarantor subsidiaries:
F-50
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2003 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| Net sales | | $ | — | | | $ | 310.2 | | | $ | 2,098.5 | | | $ | 1,596.2 | | | $ | (21.2 | ) | | $ | 3,983.7 | |
| Cost of goods sold | | | — | | | | 207.5 | | | | 1,850.4 | | | | 1,502.8 | | | | (21.2 | ) | | | 3,539.5 | |
| Selling, general and administrative expenses | | | 0.1 | | | | 223.1 | | | | 10.2 | | | | 39.8 | | | | — | | | | 273.2 | |
| Restructuring charge | | | — | | | | 13.2 | | | | 18.5 | | | | 8.9 | | | | — | | | | 40.6 | |
| Impairment of long-lived assets | | | — | | | | 4.1 | | | | 12.6 | | | | 11.7 | | | | — | | | | 28.4 | |
| Operating income (loss) | | | (0.1 | ) | | | (137.7 | ) | | | 206.8 | | | | 33.0 | | | | — | | | | 102.0 | |
| Interest expense, net | | | — | | | | 21.3 | | | | 121.2 | | | | 8.8 | | | | — | | | | 151.3 | |
| Interest expense from subsidiary preferred stock dividends | | | — | | | | 32.0 | | | | — | | | | — | | | | — | | | | 32.0 | |
| Interest expense from subsidiary preferred stock accretion | | | — | | | | 5.3 | | | | — | | | | — | | | | — | | | | 5.3 | |
| Intercompany interest expense (income) | | | — | | | | (21.4 | ) | | | (17.8 | ) | | | 39.2 | | | | — | | | | — | |
| Loss on sale of receivables | | | — | | | | — | | | | — | | | | 7.3 | | | | — | | | | 7.3 | |
| Other expense, net | | | — | | | | (149.7 | ) | | | 115.2 | | | | 0.6 | | | | 1.0 | | | | (32.9 | ) |
| (Loss) income from continuing operations before income taxes | | | (0.1 | ) | | | (25.2 | ) | | | (11.8 | ) | | | (22.9 | ) | | | (1.0 | ) | | | (61.0 | ) |
| Income tax expense (benefit) | | | — | | | | (3.7 | ) | | | 4.6 | | | | (2.8 | ) | | | — | | | | (1.9 | ) |
| Loss from continuing operations | | | (0.1 | ) | | | (21.5 | ) | | | (16.4 | ) | | | (20.1 | ) | | | (1.0 | ) | | | (59.1 | ) |
| Income from discontinued operations | | | — | | | | 2.4 | | | | (0.8 | ) | | | — | | | | — | | | | 1.6 | |
| Cumulative effect of a change in accounting principle | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Equity in net income (loss) of subsidiaries | | | (57.4 | ) | | | (38.3 | ) | | | (27.0 | ) | | | — | | | | 122.7 | | | | — | |
| NET INCOME (LOSS) | | $ | (57.5 | ) | | $ | (57.4 | ) | | $ | (44.2 | ) | | $ | (20.1 | ) | | $ | 121.7 | | | $ | (57.5 | ) |
|
F-51
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2002 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| Net sales | | $ | — | | | $ | 289.4 | | | $ | 2,415.7 | | | $ | 1,216.9 | | | $ | (36.2 | ) | | $ | 3,885.8 | |
| Cost of goods sold | | | — | | | | 181.8 | | | | 2,110.0 | | | | 1,112.1 | | | | (36.2 | ) | | | 3,367.7 | |
| Selling, general and administrative expenses | | | 0.1 | | | | 166.1 | | | | 82.8 | | | | 44.5 | | | | — | | | | 293.5 | |
| Restructuring charges | | | | | | | 16.5 | | | | 4.2 | | | | 18.2 | | | | — | | | | 38.9 | |
| Impairment of long-lived assets | | | — | | | | — | | | | 4.1 | | | | 13.9 | | | | — | | | | 18.0 | |
| Operating income (loss) | | | (0.1 | ) | | | (75.0 | ) | | | 214.6 | | | | 28.2 | | | | — | | | | 167.7 | |
| Interest expense, net | | | (0.1 | ) | | | 15.4 | | | | 126.2 | | | | 7.4 | | | | — | | | | 148.9 | |
| Intercompany interest expense (income) | | | (6.6 | ) | | | (5.9 | ) | | | (23.8 | ) | | | 36.3 | | | | — | | | | — | |
| Subsidiary preferred stock dividend | | | — | | | | 30.8 | | | | — | | | | — | | | | — | | | | 30.8 | |
| Subsidiary preferred stock accretion | | | — | | | | 7.6 | | | | — | | | | — | | | | — | | | | 7.6 | |
| Loss on sale of receivables | | | — | | | | 0.6 | | | | — | | | | 3.6 | | | | — | | | | 4.2 | |
| Other expense (income), net | | | — | | | | (45.8 | ) | | | 40.4 | | | | 12.5 | | | | 2.9 | | | | 10.0 | |
| Income (loss) from continuing operations before income taxes | | | 6.6 | | | | (77.7 | ) | | | 71.8 | | | | (31.6 | ) | | | (2.9 | ) | | | (33.8 | ) |
| Income tax expense (benefit) | | | 2.5 | | | | (16.2 | ) | | | 42.4 | | | | (11.2 | ) | | | — | | | | 17.5 | |
| Income (loss) from continuing operations | | | 4.1 | | | | (61.5 | ) | | | 29.4 | | | | (20.4 | ) | | | (2.9 | ) | | | (51.3 | ) |
| Income from discontinued operations | | | — | | | | 9.5 | | | | — | | | | — | | | | — | | | | 9.5 | |
| Cumulative effect of a change in accounting principle | | | — | | | | — | | | | — | | | | (11.7 | ) | | | — | | | | (11.7 | ) |
| Equity in net income (loss) of subsidiaries | | | (57.6 | ) | | | (5.6 | ) | | | (60.3 | ) | | | — | | | | 123.5 | | | | — | |
| NET INCOME (LOSS) | | $ | (53.5 | ) | | $ | (57.6 | ) | | $ | (30.9 | ) | | $ | (32.1 | ) | | $ | 120.6 | | | $ | (53.5 | ) |
|
F-52
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2001 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| Net sales | | $ | — | | | $ | 612.2 | | | $ | 676.4 | | | $ | 577.1 | | | $ | (42.4 | ) | | $ | 1,823.3 | |
| Cost of goods sold | | | — | | | | 506.3 | | | | 598.2 | | | | 542.4 | | | | (42.4 | ) | | | 1,604.5 | |
| Selling, general and administrative expenses | | | 0.1 | | | | 34.9 | | | | 81.1 | | | | 48.3 | | | | — | | | | 164.4 | |
| Restructuring charge | | | | | | | 4.7 | | | | 0.2 | | | | 6.3 | | | | | | | | 11.2 | |
| Impairment of long-lived assets | | | — | | | | 2.6 | | | | 0.7 | | | | 4.3 | | | | — | | | | 7.6 | |
| Operating income (loss) | | | (0.1 | ) | | | 63.7 | | | | (3.8 | ) | | | (24.2 | ) | | | — | | | | 35.6 | |
| Interest expense, net | | | — | | | | 45.6 | | | | 35.9 | | | | 2.8 | | | | — | | | | 84.3 | |
| Intercompany interest expense (income) | | | — | | | | 17.3 | | | | (24.7 | ) | | | 7.4 | | | | — | | | | — | |
| Subsidiary preferred stock dividend | | | — | | | | 1.5 | | | | — | | | | — | | | | — | | | | 1.5 | |
| Subsidiary preferred stock accretion | | | — | | | | 0.9 | | | | — | | | | — | | | | — | | | | 0.9 | |
| Loss on sale of receivables | | | — | | | | 6.1 | | | | — | | | | 4.7 | | | | — | | | | 10.8 | |
| Other expense (income), net | | | — | | | | 12.5 | | | | 3.4 | | | | 1.8 | | | | (3.3 | ) | | | 14.4 | |
| Income (loss) from continuing operations before income taxes | | | (0.1 | ) | | | (20.2 | ) | | | (18.4 | ) | | | (40.9 | ) | | | 3.3 | | | | (76.3 | ) |
| Income tax expense (benefit) | | | 0.2 | | | | (14.4 | ) | | | (5.8 | ) | | | (1.3 | ) | | | — | | | | (21.3 | ) |
| Income (loss) from continuing operations | | | (0.3 | ) | | | (5.8 | ) | | | (12.6 | ) | | | (39.6 | ) | | | 3.3 | | | | (55.0 | ) |
| Income from discontinued operations | | | — | | | | 8.8 | | | | — | | | | — | | | | — | | | | 8.8 | |
| Equity in net income (loss) of subsidiaries | | | (45.9 | ) | | | (48.9 | ) | | | (33.5 | ) | | | — | | | | 128.3 | | | | — | |
| NET INCOME (LOSS) | | $ | (46.2 | ) | | $ | (45.9 | ) | | $ | (46.1 | ) | | $ | (39.6 | ) | | $ | 131.6 | | | $ | (46.2 | ) |
|
F-53
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2003 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| ASSETS | |
| Current Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | — | | | $ | (71.2 | ) | | $ | 78.4 | | | $ | 6.0 | | | $ | — | | | $ | 13.2 | |
| Accounts and other receivables, net | | | — | | | | 1.1 | | | | 34.4 | | | | 220.4 | | | | 1.4 | | | | 257.3 | |
| Inventories | | | — | | | | 14.2 | | | | 96.2 | | | | 59.0 | | | | — | | | | 169.4 | |
| Other | | | — | | | | 47.8 | | | | 109.2 | | | | 59.0 | | | | — | | | | 216.0 | |
| Total current assets | | | — | | | | (8.1 | ) | | | 318.2 | | | | 344.4 | | | | 1.4 | | | | 655.9 | |
| Investment in subsidiaries | | | 439.7 | | | | 1,654.4 | | | | (1.8 | ) | | | — | | | | (2,092.3 | ) | | | — | |
| Property, plant and equipment, net | | | — | | | | 55.9 | | | | 339.9 | | | | 430.1 | | | | — | | | | 825.9 | |
| Goodwill | | | — | | | | — | | | | 948.9 | | | | 414.2 | | | | — | | | | 1,363.1 | |
| Other assets | | | — | | | | 276.0 | | | | 15.8 | | | | 54.5 | | | | — | | | | 346.3 | |
| | | $ | 439.7 | | | $ | 1,978.2 | | | $ | 1,621.0 | | | $ | 1,243.2 | | | $ | (2,090.9 | ) | | $ | 3,191.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) | |
| Current Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | — | | | | — | | | | — | | | | 16.0 | | | | — | | | | 16.0 | |
| Current maturities of long-term debt and capital lease obligations | | | — | | | | 27.8 | | | | 0.1 | | | | 3.6 | | | | — | | | | 31.5 | |
| Accounts payable | | | — | | | | 46.0 | | | | 301.4 | | | | 291.5 | | | | — | | | | 638.9 | |
| Accrued expenses | | | — | | | | 146.9 | | | | 2.2 | | | | 90.4 | | | | (0.6 | ) | | | 238.9 | |
| Total current liabilities | | | — | | | | 220.7 | | | | 303.7 | | | | 401.5 | | | | (0.6 | ) | | | 925.3 | |
| Long-term debt and capital lease obligations | | | — | | | | 1,230.1 | | | | — | | | | 7.6 | | | | — | | | | 1,237.7 | |
| Mandatorily redeemable preferred stock of subsidiary | | | — | | | | 161.2 | | | | — | | | | — | | | | — | | | | 161.2 | |
| Intercompany payable (receivable) | | | — | | | | (317.3 | ) | | | (215.7 | ) | | | 533.0 | | | | — | | | | — | |
| Other noncurrent liabilities | | | — | | | | 243.8 | | | | 74.9 | | | | 108.0 | | | | — | | | | 426.7 | |
| Total liabilities | | | — | | | | 1,538.5 | | | | 162.9 | | | | 1,050.1 | | | | (0.6 | ) | | | 2,750.9 | |
| Total common stockholders' equity (deficit) | | | 439.7 | | | | 439.7 | | | | 1,458.1 | | | | 193.1 | | | | (2,090.3 | ) | | | 440.3 | |
| | | $ | 439.7 | | | $ | 1,978.2 | | | $ | 1,621.0 | | | $ | 1,243.2 | | | $ | (2,090.9 | ) | | $ | 3,191.2 | |
|
F-54
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2002 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| ASSETS | |
| Current Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | — | | | $ | 0.2 | | | $ | 0.3 | | | $ | 80.8 | | | $ | — | | | $ | 81.3 | |
| Accounts and other receivables, net | | | — | | | | 5.0 | | | | 40.7 | | | | 324.4 | | | | 2.9 | | | | 373.0 | |
| Inventories | | | — | | | | 13.0 | | | | 106.7 | | | | 51.9 | | | | — | | | | 171.6 | |
| Other | | | — | | | | 51.4 | | | | 75.5 | | | | 50.5 | | | | — | | | | 177.4 | |
| Total current assets | | | — | | | | 69.6 | | | | 223.2 | | | | 507.6 | | | | 2.9 | | | | 803.3 | |
| Investment in subsidiaries | | | 397.5 | | | | 1,794.5 | | | | (54.8 | ) | | | — | | | | (2,137.2 | ) | | | — | |
| Property, plant and equipment, net | | | — | | | | 51.2 | | | | 316.9 | | | | 370.4 | | | | (0.7 | ) | | | 737.8 | |
| Goodwill | | | — | | | | — | | | | 1,144.8 | | | | 120.7 | | | | — | | | | 1,265.5 | |
| Other assets | | | — | | | | 212.3 | | | | 85.8 | | | | 52.4 | | | | — | | | | 350.5 | |
| | | $ | 397.5 | | | $ | 2,127.6 | | | $ | 1,715.9 | | | $ | 1,051.1 | | | $ | (2,135.0 | ) | | $ | 3,157.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) | |
| Current Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | — | | | | — | | | | — | | | | 10.5 | | | | — | | | | 10.5 | |
| Current maturities of long- term debt | | | — | | | | 22.7 | | | | 0.1 | | | | 0.7 | | | | — | | | | 23.5 | |
| Accounts payable | | | — | | | | 73.5 | | | | 269.7 | | | | 252.3 | | | | — | | | | 595.5 | |
| Accrued expenses | | | — | | | | 142.5 | | | | 50.8 | | | | 106.6 | | | | — | | | | 299.9 | |
| Total current liabilities | | | — | | | | 238.7 | | | | 320.6 | | | | 370.1 | | | | — | | | | 929.4 | |
| Long-term debt | | | — | | | | 1,255.0 | | | | 0.1 | | | | 0.1 | | | | — | | | | 1,255.2 | |
| Intercompany payable (receivable) | | | — | | | | (92.1 | ) | | | (359.9 | ) | | | 452.0 | | | | — | | | | — | |
| Other noncurrent liabilities | | | — | | | | 204.6 | | | | 140.8 | | | | 105.7 | | | | — | | | | 451.1 | |
| Total liabilities | | | — | | | | 1,606.2 | | | | 101.6 | | | | 927.9 | | | | — | | | | 2,635.7 | |
| Mandatorily redeemable preferred stock of subsidiary | | | — | | | | 123.9 | | | | — | | | | — | | | | — | | | | 123.9 | |
| Total common stockholders' equity (deficit) | | | 397.5 | | | | 397.5 | | | | 1,614.3 | | | | 123.2 | | | | (2,135.0 | ) | | | 397.5 | |
| | | $ | 397.5 | | | $ | 2,127.6 | | | $ | 1,715.9 | | | $ | 1,051.1 | | | $ | (2,135.0 | ) | | $ | 3,157.1 | |
|
F-55
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2003 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities | | $ | — | | | $ | (256.7 | ) | | $ | 339.2 | | | $ | 40.4 | | | $ | — | | | $ | 122.9 | |
INVESTING ACTIVITIES
Additions to property, plant and equipment | | | — | | | | (13.8 | ) | | | (84.3 | ) | | | (77.0 | ) | | | — | | | | (175.1 | ) |
| Sales of property, plant and equipment | | | — | | | | — | | | | 0.6 | | | | 17.7 | | | | — | | | | 18.3 | |
| Payments for acquisitions and related costs | | | — | | | | — | | | | (33.1 | ) | | | — | | | | — | | | | (33.1 | ) |
| Net cash provided by (used in) investing activities | | | — | | | | (13.8 | ) | | | (116.8 | ) | | | (59.3 | ) | | | — | | | | (189.9 | ) |
FINANCING ACTIVITIES
Issuance of long-term debt and capital lease obligations | | | — | | | | 1.8 | | | | — | | | | 11.3 | | | | — | | | | 13.1 | |
| Repayment of long-term debt and capital lease obligations | | | — | | | | (27.9 | ) | | | (0.1 | ) | | | (0.9 | ) | | | — | | | | (28.9 | ) |
| Increase (decrease) in short-term borrowings | | | — | | | | — | | | | — | | | | 4.7 | | | | — | | | | 4.7 | |
| Net borrowings (repayments) on revolving credit facilities | | | — | | | | — | | | | — | | | | 6.3 | | | | — | | | | 6.3 | |
| Intercompany transfers (from) to Subsidiary | | | — | | | | 225.2 | | | | (144.2 | ) | | | (81.0 | ) | | | — | | | | — | |
| Net cash provided by (used in) financing activities | | | — | | | | 199.1 | | | | (144.3 | ) | | | (59.6 | ) | | | — | | | | (4.8 | ) |
| Effect of exchange rate changes on cash | | | — | | | | — | | | | — | | | | 3.7 | | | | — | | | | 3.7 | |
| Increase (decrease) in cash and cash equivalents | | | — | | | | (71.4 | ) | | | 78.1 | | | | (74.8 | ) | | | — | | | | (68.1 | ) |
| Cash and cash equivalents at beginning of year | | | — | | | | 0.2 | | | | 0.3 | | | | 80.8 | | | | — | | | | 81.3 | |
| Cash and cash equivalents at end of year | | $ | — | | | $ | (71.2 | ) | | $ | 78.4 | | | $ | 6.0 | | | $ | — | | | $ | 13.2 | |
|
F-56
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2002 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities | | $ | (0.2 | ) | | $ | 24.0 | | | $ | (271.3 | ) | | $ | 436.9 | | | $ | — | | | $ | 189.4 | |
INVESTING ACTIVITIES
Additions to property, plant and equipment | | | — | | | | (31.2 | ) | | | (71.9 | ) | | | (44.8 | ) | | | — | | | | (147.9 | ) |
| Sales of property, plant and equipment | | | — | | | | — | | | | 13.3 | | | | — | | | | — | | | | 13.3 | |
| Additional investment in joint venture | | | — | | | | — | | | | — | | | | (5.9 | ) | | | — | | | | (5.9 | ) |
| Payment for acquisitions and related costs | | | — | | | | — | | | | (46.4 | ) | | | 0.8 | | | | — | | | | (45.6 | ) |
| Net cash used in investing activities | | | — | | | | (31.2 | ) | | | (105.0 | ) | | | (49.9 | ) | | | — | | | | (186.1 | ) |
FINANCING ACTIVITIES
Repayment of long-term debt | | | — | | | | (22.4 | ) | | | (0.1 | ) | | | (1.4 | ) | | | — | | | | (23.9 | ) |
| Repayment of preferred stock | | | — | | | | (100.0 | ) | | | — | | | | — | | | | — | | | | (100.0 | ) |
| Decrease in short-term borrowings | | | — | | | | — | | | | — | | | | (16.0 | ) | | | — | | | | (16.0 | ) |
| Net proceeds from issuance of common stock | | | 150.6 | | | | — | | | | — | | | | — | | | | — | | | | 150.6 | |
| Repayment of debt assumed in acquisition | | | — | | | | (6.7 | ) | | | — | | | | — | | | | — | | | | (6.7 | ) |
| Intercompany transfers (from) to Subsidiary | | | (150.6 | ) | | | 140.3 | | | | 364.0 | | | | (353.7 | ) | | | — | | | | — | |
| Net cash provided by (used in) financing activities | | | — | | | | 11.2 | | | | 363.9 | | | | (371.1 | ) | | | — | | | | 4.0 | |
| Effect of exchange rate changes on cash | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | 0.1 | |
| Increase (decrease) in cash and cash equivalents | | | (0.2 | ) | | | 4.0 | | | | (12.4 | ) | | | 16.0 | | | | — | | | | 7.4 | |
| Cash and cash equivalents at beginning of year | | | 0.2 | | | | (3.8 | ) | | | 12.7 | | | | 64.8 | | | | — | | | | 73.9 | |
| Cash and cash equivalents at end of year | | $ | — | | | $ | 0.2 | | | $ | 0.3 | | | $ | 80.8 | | | $ | — | | | $ | 81.3 | |
|
F-57
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, 2001 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
OPERATING ACTIVITIES
Net cash provided by (used in) operating activities | | $ | (0.3 | ) | | $ | (266.6 | ) | | $ | 237.6 | | | $ | 166.4 | | | $ | — | | | $ | 137.1 | |
INVESTING ACTIVITIES
Additions to property, plant and equipment | | | — | | | | (14.8 | ) | | | (14.5 | ) | | | (25.2 | ) | | | — | | | | (54.5 | ) |
| Sales of property, plant and equipment | | | — | | | | 62.2 | | | | 24.0 | | | | 1.9 | | | | — | | | | 88.1 | |
| Payments for acquisitions and related costs | | | — | | | | (760.9 | ) | | | — | | | | — | | | | — | | | | (760.9 | ) |
| Sale of business | | | — | | | | — | | | | 3.5 | | | | — | | | | — | | | | 3.5 | |
| Net cash provided by (used in) investing activities | | | — | | | | (713.5 | ) | | | 13.0 | | | | (23.3 | ) | | | — | | | | (723.8 | ) |
FINANCING ACTIVITIES
Issuance of long-term debt | | | — | | | | 950.0 | | | | — | | | | — | | | | — | | | | 950.0 | |
| Debt issuance costs | | | — | | | | (59.4 | ) | | | — | | | | — | | | | — | | | | (59.4 | ) |
| Repayment of long-term debt | | | — | | | | (383.2 | ) | | | — | | | | — | | | | — | | | | (383.2 | ) |
| Increase (decrease) in short-term borrowings | | | — | | | | 9.7 | | | | 2.0 | | | | (1.6 | ) | | | — | | | | 10.1 | |
| Net repayments on revolving credit facilities | | | — | | | | (133.4 | ) | | | — | | | | (16.8 | ) | | | — | | | | (150.2 | ) |
| Net proceeds from issuance of common stock | | | 207.2 | | | | — | | | | — | | | | — | | | | — | | | | 207.2 | |
| Reissue treasury stock, net | | | 61.3 | | | | — | | | | — | | | | — | | | | — | | | | 61.3 | |
| Intercompany transfers (from) to Subsidiary | | | (268.5 | ) | | | 596.8 | | | | (240.9 | ) | | | (87.4 | ) | | | — | | | | — | |
| Net cash provided by (used in) financing activities | | | — | | | | 980.5 | | | | (238.9 | ) | | | (105.8 | ) | | | — | | | | 635.8 | |
| Effect of exchange rate changes on cash | | | — | | | | — | | | | — | | | | 3.9 | | | | — | | | | 3.9 | |
| Increase (decrease) in cash and cash equivalents | | | (0.3 | ) | | | 0.4 | | | | 11.7 | | | | 41.2 | | | | — | | | | 53.0 | |
| Cash and cash equivalents at beginning of year | | | 0.5 | | | | (4.2 | ) | | | 1.0 | | | | 23.6 | | | | — | | | | 20.9 | |
| Cash and cash equivalents at end of year | | $ | 0.2 | | | $ | (3.8 | ) | | $ | 12.7 | | | $ | 64.8 | | | $ | — | | | $ | 73.9 | |
|
F-58
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | Nine Months Ended |
| | | September 30,
2004 | | September 30,
2003 | | September 30,
2004 | | September 30,
2003 |
| | | (Unaudited) |
| | | (in millions, except for per share data) |
| Net sales | | $ | 864.8 | | | $ | 902.2 | | | $ | 2,967.5 | | | $ | 2,970.8 | |
| Cost of goods sold | | | 800.8 | | | | 812.1 | | | | 2,687.7 | | | | 2,658.3 | |
| Gross profit | | | 64.0 | | | | 90.1 | | | | 279.8 | | | | 312.5 | |
| Selling, general and administrative expenses | | | 35.2 | | | | 57.7 | | | | 144.7 | | | | 193.0 | |
| Restructuring charge | | | 9.0 | | | | 21.9 | | | | 28.9 | | | | 26.8 | |
| Impairment of long-lived assets | | | 10.3 | | | | 2.2 | | | | 40.7 | | | | 21.1 | |
| Operating income | | | 9.5 | | | | 8.3 | | | | 65.5 | | | | 71.6 | |
| Interest expense | | | 46.9 | | | | 37.8 | | | | 127.4 | | | | 111.3 | |
| Interest expense from subsidiary preferred stock dividends | | | 10.5 | | | | 9.2 | | | | 30.5 | | | | 22.4 | |
| Interest expense from subsidiary preferred stock accretion | | | 0.6 | | | | 0.4 | | | | 1.6 | | | | 4.8 | |
| Loss on sale of receivables | | | 2.4 | | | | 1.8 | | | | 7.2 | | | | 4.5 | |
| Loss on early extinguishment of debt | | | 18.8 | | | | — | | | | 20.3 | | | | — | |
| Other expense (income), net | | | (0.7 | ) | | | (0.2 | ) | | | 4.1 | | | | (23.9 | ) |
| Loss from continuing operations before income taxes | | | (69.0 | ) | | | (40.7 | ) | | | (125.6 | ) | | | (47.5 | ) |
| Income tax expense (benefit) | | | (13.4 | ) | | | (8.6 | ) | | | (17.0 | ) | | | 0.1 | |
| Net loss | | $ | (55.6 | ) | | $ | (32.1 | ) | | $ | (108.6 | ) | | $ | (47.6 | ) |
| Net loss per basic and diluted common share | | $ | (0.67 | ) | | $ | (0.38 | ) | | $ | (1.30 | ) | | $ | (0.57 | ) |
| Average common shares outstanding: | |
| Basic and diluted | | | 83.6 | | | | 83.6 | | | | 83.6 | | | | 83.6 | |
|
The Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-59
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | |
| | | September 30,
2004 | | December 31,
2003 |
| | | (Unaudited) | |
| | | (in millions) |
| ASSETS | |
| Current Assets: | |
| Cash and cash equivalents | | $ | 3.5 | | | $ | 13.2 | |
| Accounts and other receivables, net of allowances of $6.4 and $9.2 | | | 255.1 | | | | 257.3 | |
| Inventories | | | 178.8 | | | | 169.4 | |
| Other | | | 217.1 | | | | 212.2 | |
| Total current assets | | | 654.5 | | | | 652.1 | |
| Property, plant and equipment, net | | | 806.0 | | | | 834.1 | |
| Deferred tax assets | | | 206.0 | | | | 178.1 | |
| Goodwill | | | 1,378.5 | | | | 1,363.1 | |
| Intangible assets, net | | | 45.7 | | | | 66.9 | |
| Other assets | | | 106.0 | | | | 96.9 | |
| | | $ | 3,196.7 | | | $ | 3,191.2 | |
| LIABILITIES AND COMMON STOCKHOLDERS' EQUITY | |
| Current Liabilities: | |
| Short-term borrowings | | $ | 25.3 | | | $ | 16.0 | |
| Current maturities of long-term debt and capital lease obligations | | | 8.5 | | | | 31.5 | |
| Accounts payable | | | 636.3 | | | | 638.9 | |
| Accrued expenses | | | 225.1 | | | | 238.9 | |
| Total current liabilities | | | 895.2 | | | | 925.3 | |
| Long-term debt and capital lease obligations | | | 1,361.2 | | | | 1,237.7 | |
| Mandatorily redeemable preferred stock of subsidiary | | | 193.3 | | | | 161.2 | |
| Other, including pensions and postretirement benefit obligation | | | 404.6 | | | | 423.4 | |
| Commitments and contingencies (Note 15) | |
| Minority interest in consolidated subsidiary | | | 2.3 | | | | 3.3 | |
| Total liabilities | | | 2,856.6 | | | | 2,750.9 | |
| Common stock ($0.01 par value, 300.0 shares authorized, 83.6 shares issued and outstanding at September 30, 2004 and December 31, 2003) | | | 0.8 | | | | 0.8 | |
| Other paid-in capital | | | 1,282.3 | | | | 1,282.3 | |
| Accumulated deficit | | | (938.7 | ) | | | (830.1 | ) |
| Accumulated other comprehensive loss | | | (4.3 | ) | | | (12.7 | ) |
| Total common stockholders' equity | | | 340.1 | | | | 440.3 | |
| | | $ | 3,196.7 | | | $ | 3,191.2 | |
|
The Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-60
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
| | | | | | | | | | |
| | | Nine Months Ended
September 30, |
| | | 2004 | | 2003 |
| | | (Unaudited) |
| | | (in millions) |
| OPERATING ACTIVITIES | |
| Net loss | | $ | (108.6 | ) | | $ | (47.6 | ) |
| Adjustments to derive cash flow provided by (used in) operating activities: | |
| Impairment of long lived assets | | | 40.7 | | | | 21.1 | |
| Deferred income tax benefit | | | (24.1 | ) | | | (4.9 | ) |
| Subsidiary preferred stock requirements | | | 32.1 | | | | 27.2 | |
| Depreciation | | | 101.6 | | | | 83.7 | |
| Amortization of other assets | | | 11.1 | | | | 17.5 | |
| Gain on curtailment of postretirement benefit plans other than pensions | | | (9.4 | ) | | | — | |
| Loss on early extinguishment of debt | | | 20.3 | | | | — | |
| Loss (gain) on sale of property, plant and equipment | | | 2.5 | | | | (2.6 | ) |
| Changes in assets and liabilities: | |
| Increase (decrease) in postretirement benefit obligations | | | (4.6 | ) | | | 6.6 | |
| Decrease (increase) in net customer funded tooling | | | (9.0 | ) | | | 7.5 | |
| Decrease (increase) in accounts and other receivables | | | (49.0 | ) | | | 22.1 | |
| Proceeds from (reduction of) participating interests in accounts receivable, net of redemptions | | | 86.9 | | | | (30.8 | ) |
| Increase (decrease) in accounts receivable factored | | | (35.7 | ) | | | 43.0 | |
| Increase in inventories | | | (9.4 | ) | | | (15.4 | ) |
| Increase (decrease) in accounts payable | | | (2.6 | ) | | | 9.5 | |
| Increase in interest payable | | | 9.4 | | | | 28.6 | |
| Other, net | | | (61.1 | ) | | | (121.5 | ) |
| Net cash provided by (used in) operating activities | | | (8.9 | ) | | | 44.0 | |
| INVESTING ACTIVITIES | |
| Additions to property, plant and equipment and other non-current assets | | | (151.3 | ) | | | (119.9 | ) |
| Sales of property, plant and equipment | | | 60.4 | | | | 15.2 | |
| Payments for acquisitions and related costs, net of cash acquired | | | (3.2 | ) | | | (37.8 | ) |
| Net cash used in investing activities | | | (94.1 | ) | | | (142.5 | ) |
| FINANCING ACTIVITIES | |
| Issuance of long-term debt | | | 848.9 | | | | — | |
| Repayment of long-term debt and capital lease obligations | | | (802.6 | ) | | | (22.4 | ) |
| Payments for debt issuance costs | | | (15.6 | ) | | | — | |
| Net borrowings on revolving credit facilities | | | 53.1 | | | | 58.5 | |
| Increase in short-term borrowings | | | 8.9 | | | | 2.1 | |
| Net cash provided by financing activities | | | 92.7 | | | | 38.2 | |
| Effect of exchange rate changes on cash | | | 0.6 | | | | 1.5 | |
| Net decrease in cash and cash equivalents | | | (9.7 | ) | | | (58.8 | ) |
| Cash and cash equivalents at beginning of period | | | 13.2 | | | | 81.3 | |
| Cash and cash equivalents at end of period | | $ | 3.5 | | | $ | 22.5 | |
| Supplementary information: | |
| Taxes paid | | $ | 7.6 | | | $ | 18.2 | |
| Interest paid | | $ | 106.6 | | | $ | 73.1 | |
| Capital lease obligations incurred | | $ | 1.1 | | | $ | 1.9 | |
|
The Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-61
COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Organization
Collins & Aikman Corporation (the "Company") is a Delaware corporation, headquartered in Troy, Michigan. The Company conducts all of its operating activities through its wholly owned Collins & Aikman Products Co. ("Products") subsidiary. The Company is a global leader in design, engineering and manufacturing of automotive interior components, including instrument panels, fully assembled cockpit modules, floor and acoustic systems, automotive fabric, interior trim and convertible top systems. The Company changed the composition of its reportable segments beginning January 1, 2003 and further redefined the segments July 1, 2003 to reflect organizational changes and restated prior period segment data to be comparable. The Company operates through three segments: U.S. and Mexico Plastics, International Plastics and Global Soft Trim.
2. Summary of Significant Accounting Policies
a. Basis of Presentation
The consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and in the opinion of management, contain all adjustments necessary for a fair presentation of financial position and results of operations. All significant intercompany items have been eliminated in the preparation of the consolidated financial statements. Certain prior quarter and prior year items have been reclassified to conform to the current quarter and fiscal 2004 presentation. Specifically, for the third quarter and nine months ending 2004, the Company reclassified $4.2 million from cost of goods sold to selling, general and administrative expense. In addition, for the third quarter and nine months ending 2003, the Company reclassified $5.4 million and $17.1 million, respectively, in facility lease costs from selling, general, and administrative expenses to cost of goods sold. Results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying consolidated financial statements and footnotes should be read in conjunction with the Company's 2003 Annual Report on Form 10-K.
b. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure," amended SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock based employee compensation and amends the required disclosures. SFAS No. 123 encourages companies to adopt the fair value method for compensation expense recognition related to employee stock options. The accounting requirements of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" use the intrinsic value method in determining compensation expense, which represents the excess of the market price of the stock over the exercise price on the measurement date. The Company has elected to continue to utilize the accounting provisions of APB No. 25 for stock options and is required to provide pro forma disclosures of net income and earnings per share had the Company adopted the fair value method for recognition purposes.
In June 2004, the Compensation Committee of the Board of Directors approved a Voluntary Stock Option Exchange Program ("Program"). The Company offered option holders of grants under the 2002 Employee Stock Option Plan ("Plan") the opportunity to participate in the Program and exchange all of their existing $8.00 options for a combination of restricted stock units and stock options. The Program provided one restricted stock unit for every 50 stock options exchanged. Additionally, participants will be provided 98 options for every 100 options exchanged to be priced at the then market closing price no earlier than December 31, 2004. On June 29, 2004, 3.4 million options were exchanged, and the Company awarded 68,218 shares of restricted stock units. The restricted stock units vest in three equal annual
F-62
installments on June 29, 2005, June 29, 2006 and June 29, 2007. The fair value of the restricted shares is amortized ratably over the vesting period. Compensation expense of $0.03 million was recognized in the restricted stock for the quarter ended September 30, 2004.
If we accounted for all stock-based compensation using the fair value recognition of SFAS No. 123 and related amendments, our net loss and basic and diluted earnings per share would have been as follows (in millions, except per share amounts):
|
| | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | Nine Months Ended |
| | | September 30,
2004 | | September 30,
2003 | | September 30,
2004 | | September 30,
2003 |
| Net loss attributable to common shareholders: | |
| As reported | | $ | (55.6 | ) | | $ | (32.1 | ) | | $ | (108.6 | ) | | $ | (47.6 | ) |
| Total employee stock based compensation expense determined under fair value based method for all awards, net of tax | | | (0.7 | ) | | | (1.5 | ) | | | (2.5 | ) | | | (4.4 | ) |
| Pro forma, net loss | | $ | (56.3 | ) | | $ | (33.6 | ) | | $ | (111.1 | ) | | $ | (52.0 | ) |
| Basic and diluted EPS: | |
| As reported | | $ | (0.67 | ) | | $ | (0.38 | ) | | $ | (1.30 | ) | | $ | (0.57 | ) |
| Pro forma | | $ | (0.67 | ) | | $ | (0.40 | ) | | $ | (1.33 | ) | | $ | (0.62 | ) |
|
For the above information, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants:
|
| | | | | | | | | | |
| | | September 30, 2004 | | September 30, 2003 |
| Weighted average expected volatility | | | 81.29 | % | | | 77.50 | % |
| Expected lives | | 7 years | | 7 years |
| Weighted average risk free interest rate | | | 4.02 | % | | | 3.72 | % |
| Expected dividend rate | | | — | | | | — | |
| Weighted average grant date fair value of an option granted during the quarter | | $ | 2.77 | | | $ | 2.77 | |
|
All shareholder plans have been approved by stockholders. Stock option activity under the plans is as follows for the nine months ended September 30, 2004 and the year ended December 31, 2003:
|
| | | | | | | | | | | | | | | | | | |
| | | September 30, 2004 | | December 31, 2003 |
| | | Number of
shares | | Weighted
Average
Exercise
Price | | Number of
shares | | Weighted
Average
Exercise
Price |
| Outstanding beginning of year | | | 5,009,456 | | | $ | 8.32 | | | | 4,427,248 | | | $ | 10.12 | |
| Awarded | | | 354,000 | | | | 8.00 | | | | 1,723,000 | | | | 8.00 | |
| Exchanged, cancelled or expired | | | (5,006,256 | ) | | | 8.23 | | | | (1,140,792 | ) | | | 8.55 | |
| Outstanding at end of year | | | 357,200 | | | $ | 9.72 | | | | 5,009,456 | | | $ | 8.32 | |
|
During the first quarter of 2003, the Company repriced 3,559,256 options with an exercise price of $10.00 to an exercise price of $8.00. As a result of repricing the Company's stock options, the options are treated as variable-based awards in accordance with APB No. 25. Because these options are considered to be variable-based awards, the Company will incur future compensation expense if the stock price exceeds the $8.00 exercise price established at the time of the repricing. At September 30, 2004, 293,200 options subject to repricing remain outstanding.
F-63
3. Acquisitions and Goodwill
a. Acquisitions
During the third quarter of 2004, the Company acquired an injection molding business and a sequencing business for $3.2 million.
On January 17, 2003, the Company acquired the remaining 50% interest in an Italian automotive joint venture from Textron Inc., a related party, for $15 million, which also terminated a $28 million put-option by Textron Inc., that was exercisable in December 2004. The Company incurred fixed asset impairments of $7.5 million relating to the 50% interest owned previously.
On January 2, 2003, the Company acquired Delphi Corp's plastic injection molding plant and related equipment in Logroño, Spain for $18 million. The 300,000 square foot Logroño facility includes 24 injection molders and one Class-A paint line.
b. Goodwill
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment in accordance with the provisions of SFAS No. 142. The Company employed a discounted cash flow analysis and a market comparable approach in conducting its impairment tests. The Company completed its annual impairment test as of November 1, 2003 indicating that the fair value of the reporting units exceeded the carrying values.
Fair value for all tests was determined based upon the discounted cash flows of the reporting units using discount rates ranging from 11.5% to 14.0% dependent on the reporting unit and a residual growth rate of 2%. The market comparable approach consisted of earnings multiples ranging from 5.2 to 6.5 times current year and forecasted Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") (operating income plus depreciation and amortization) and a control premium on equity. Future cash flows and EBITDA are affected by future operating performance, which will be impacted by economic conditions, car builds, financial, business and other factors, many of which are beyond the Company's control. The U.S. and Mexico Plastics reporting unit can be significantly impacted by an adverse change in assumptions. Considerable judgment is often involved in making these determinations and the use of different assumptions could result in significantly different results. An approximate 50 basis point change in discount rates or an approximate 4% reduction in profit would have resulted in further goodwill impairment analysis as part of the annual impairment test conducted as of November 1, 2003 as required by SFAS No. 142. The U.S. and Mexico Plastics reporting unit achieved expected results for the first quarter of 2004 but lower than expected EBITDA for the second and third quarters. The U.S. and Mexico Plastics unit is expected to return to forecast EBITDA levels for the fourth quarter, however, the Company will closely evaluate this unit's performance for the year and its related goodwill when completing its annual impairment test as of November 1, 2004. Management believes its assumptions and estimates are reasonable and appropriate, however actual results could differ from those estimates.
c. Acquired Intangible Assets
The components of the Company's acquired and other amortizable intangible assets as of September 30, 2004 and December 31, 2003 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2004 | | December 31, 2003 |
| | | Cost | | Accumulated
Amortization | | Net Carrying
Amount | | Cost | | Accumulated
Amortization | | Net Carrying
Amount |
| Customer contracts | | $ | 40.0 | | | $ | 18.2 | | | $ | 21.8 | | | $ | 51.0 | | | $ | 13.1 | | | $ | 37.9 | |
| Patents and other | | | 36.9 | | | | 13.0 | | | | 23.9 | | | | 39.2 | | | | 10.2 | | | | 29.0 | |
| | | $ | 76.9 | | | $ | 31.2 | | | $ | 45.7 | | | $ | 90.2 | | | $ | 23.3 | | | $ | 66.9 | |
|
F-64
As of September 30, 2004, scheduled amortization expenses for intangible assets are as follows:
| | | | | | |
| | | Amortization Expenses |
| Remainder of 2004 | | $ | 2.3 | |
| 2005 | | | 10.3 | |
| 2006 | | | 9.5 | |
| 2007 | | | 7.1 | |
| 2008 | | | 5.2 | |
| 2009 and thereafter | | | 11.3 | |
|
During the second quarter 2004, the Company impaired a $2.7 million Intellimold patent, a finite intangible asset that was acquired as part of the TAC-Trim acquisition. Additionally, in the second quarter 2004, the Company impaired $11.0 million of customer contracts as a result of changes in customer sourcing.
4. Inventories
Inventory balances are summarized below (in millions):
|
| | | | | | | | | | |
| | | September 30,
2004 | | December 31,
2003 |
| Raw materials | | $ | 106.9 | | | $ | 95.0 | |
| Work in process | | | 26.1 | | | | 24.6 | |
| Finished goods | | | 45.8 | | | | 49.8 | |
| | | $ | 178.8 | | | $ | 169.4 | |
|
5. Customer Engineering and Tooling
The Company had tooling assets of approximately $161.6 million and $141.7 million as of September 30, 2004 and December 31, 2003, respectively. As of September 30, 2004, $133.5 million, $7.3 million and $20.8 million were classified as current other assets, long term other assets and property, plant and equipment, respectively. As of December 31, 2003, $122.7 million, $10.8 million and $8.2 million were classified as current other assets and long term other assets and property, plant and equipment, respectively. Customer engineering and tooling balances are summarized below (in millions):
|
| | | | | | | | | | |
| | | September 30,
2004 | | December 31,
2003 |
| Contractual reimbursement of pre-production design and development costs | | $ | 16.0 | | | $ | 6.8 | |
| Molds, dies and other tools reimbursable by customers | | | 115.9 | | | | 124.9 | |
| Molds, dies and other tools company owned | | | 29.7 | | | | 10.0 | |
| | | $ | 161.6 | | | $ | 141.7 | |
|
6. Short-Term Borrowings
The Company utilizes uncommitted lines of credit to satisfy a portion of its short-term working capital requirements of certain of its foreign affiliates. As of September 30, 2004, the Company had lines of credit from international credit facilities of $44.8 million, of which $25.3 million was outstanding with $19.5 million available. As of December 31, 2003, the Company had lines of credit from international credit facilities of $37.1 million, of which $16.0 million was outstanding with $21.1 million available. The weighted average interest rate on the outstanding borrowings at September 30, 2004 and December 31, 2003 was approximately 20% and 16%, respectively.
F-65
7. Long-Term Debt and Capital Lease Obligations
Long-term debt and capital lease obligations are summarized below (in millions):
|
| | | | | | | | | | |
| | | September 30,
2004 | | December 31,
2003 |
| Senior Secured Credit Facilities: | |
| Tranche A Term Loan Facility | | $ | — | | | $ | 62.9 | |
| Tranche B Term Loan Facility | | | — | | | | 287.2 | |
| Tranche B-1 Term Loan Facility | | | 400.0 | | | | — | |
| Revolving Credit Facility | | | 0.5 | | | | 6.3 | |
| Supplemental Revolving Credit Facility | | | 58.9 | | | | — | |
| Public Debt: | |
| 11 ½% Senior Subordinated Notes, due 2006. | | | — | | | | 400.0 | |
| 10 ¾% Senior Notes, due 2011 | | | 500.0 | | | | 500.0 | |
| 12 7/8% Senior Subordinated Notes, due 2012. | | | 400.3 | | | | — | |
| Other (including capital lease obligations) | | | 10.0 | | | | 12.8 | |
| Total debt | | | 1,369.7 | | | | 1,269.2 | |
| Less current maturities (including current portion of capital lease obligations) | | | (8.5 | ) | | | (31.5 | ) |
| Total long-term debt and capital lease obligations | | $ | 1,361.2 | | | $ | 1,237.7 | |
|
During the third quarter of 2004, the Company refinanced its existing Senior Secured Credit Facilities and its 11½ Senior Subordinate Notes in order to extend its debt maturities and enhance financial and operating flexibility.
Senior Secured Credit Facilities
In February 2004, the Company entered into the fifth amendment to the Senior Secured Credit Facilities, which allowed the establishment of a new $100 million Supplemental Revolving Credit Facility and the $185 million Tranche A-1 Term Loan. In connection with these new expanded facilities, $181.5 million was used to prepay existing Tranche A and Tranche B Term Loans in direct order of maturity. The Company recognized a $1.5 million loss on early extinguishment of debt in relation to the repayments.
On September 1, 2004, the Company amended and restated its existing Senior Secured Credit Facilities, which are now comprised of a $400.0 million Tranche B-1 term loan that matures on August 31, 2011, a $170.0 million supplemental revolving credit facility that matures on August 31, 2009 and a $105.0 million revolving credit facility that also matures on August 31, 2009. In connection with the amendment and restatement of the credit facilities, proceeds from the Tranche B-1 term loan were used to repay in full the term loans outstanding and to repay, in part, revolving credit facility outstandings, in each case under the original credit agreement. Proceeds from the amended and restated supplemental revolving credit facility were used to repay, in part, revolving credit facility outstandings and to repay in full supplemental revolving credit facility outstandings, in each case under the original credit agreement. The Company recognized a $14.8 million loss on early extinguishment of debt as a result of this transaction.
The Tranche B-1 term loan has scheduled repayments of $1.0 million due each December 1, March 1, June 1 and September 1 prior to the final maturity date when the balance becomes due and payable. Borrowings under the credit facility are secured by all the assets of the Company, Products and certain of Products' subsidiaries, and are unconditionally and irrevocably guaranteed jointly and severally by the Company and substantially all of its existing and subsequently acquired or organized domestic subsidiaries (other than the Company's special purpose receivables subsidiary, captive insurance subsidiaries and charitable subsidiaries).
At September 1, 2004, interest on borrowings, at the Company's option, were either (a) adjusted LIBOR plus a 4.00% margin in the case of the Tranche B-1 term loan and supplemental revolving credit
F-66
facility and a 3.00% margin in the case of the revolving credit facility or (b) the highest of (i) JPMorgan Chase Bank's prime rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and (iii) the base CD rate plus 1.00% plus a 3.00% margin in the case of the Tranche B-1 term loan facility and supplemental revolving credit facility and 2.00% margin in the case of the revolving credit facility. A commitment fee on any unused commitments under the revolving credit facility equal to 0.75% per annum is payable quarterly in arrears and is subject to downward adjustment based on attaining certain performance targets. The weighted average rate of interest on the Senior Secured Credit Facilities at September 30, 2004 and December 31, 2003 was 5.79% and 7.60%, respectively.
The amended and restated credit facility requires that the Company meet certain financial tests, including, without limitation, the following tests: a maximum leverage ratio, a minimum interest coverage ratio and certain prescribed limitations on capital expenditures at levels agreed upon between Products and the agents. The amended and restated credit facility also contains covenants and restrictions, including, among others, limitations or prohibitions on declaring dividends and other distributions, redeeming and repurchasing capital stock, prepaying, redeeming and repurchasing other indebtedness, loans and investments, additional indebtedness, liens, sale-leaseback transactions, preferred stock, recapitalizations, mergers, acquisitions, asset sales and transactions with affiliates.
The amended and restated credit facility contains certain customary events of default, including, among others cross-default and cross-acceleration to other indebtedness (including the Company's receivables facility). Upon the occurrence and during the continuation of a non-bankruptcy event of default, all obligations due under the amended and restated credit facilities may be accelerated and become immediately due and payable if the Administrative Agent so directs either at its discretion or at the request of the lenders holding an aggregate of a majority of the outstanding loans and unused commitments under the amended and restated credit facilities. In addition, upon the occurrence and during the continuance of a bankruptcy event of default, all obligations under the amended and restated credit facilities shall automatically accelerate and become immediately due and payable.
Public Debt
On August 26, 2004, Products issued $415 million aggregate principal amount of 12 7/8% Senior Subordinated Notes due 2012 at a discount of $14.9 million, which is being amortized during the life of the debt using the effective interest method. The gross proceeds of the Notes offering, or approximately $400.1 million, were used to redeem the outstanding $400 million of 11 ½% Senior Subordinated Notes due 2006. As a result of this transaction, Products incurred a $4.0 million loss on early extinguishment of debt.
The Notes were sold in the United States only to accredited investors pursuant to an exemption from the Securities Act of 1933, as amended, and subsequently resold to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S under the Securities Act. The Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
The Notes will mature on August 15, 2012 and will accrue interest at the rate of 12 7/8% per year. Interest on the notes will be payable semi-annually in arrears on each February 15 and August 15, commencing on February 15, 2005. Products may redeem some or all of the Notes at any time at 100% of the principal amount plus a make-whole premium. In addition, prior to August 15, 2007, it may redeem up to 35% of the aggregate principal amount of the Notes with the proceeds of certain equity offerings at a redemption price equal to 112.875% of the principal amount of the Notes, plus accrued and unpaid interest, if any.
If Products experiences a change of control, it may be required to offer to purchase the Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest, if any.
The Notes are fully and unconditionally guaranteed on a senior subordinated unsecured basis by the Company and by each of Products' existing wholly owned domestic subsidiaries (other than its special purpose receivables, insurance and charitable subsidiaries). Future domestic subsidiaries of Products may also be required to guarantee the Notes.
F-67
The Notes have been issued under an indenture with BNY Midwest Trust Company, as trustee. The indenture governing the Notes contains covenants that will limit the ability of Products and the ability of its restricted subsidiaries to, among other things: incur or guarantee additional indebtedness; pay dividends or make other distributions or repurchase or redeem its stock; make investments; sell assets; create liens; enter into agreements restricting its restricted subsidiaries' ability to pay dividends; enter into transactions with affiliates; and consolidate, merge or sell all or substantially all of its assets. If an event of default, as specified in the indenture governing the Notes, shall occur and be continuing, either the Trustee or the holders of at least 25% in aggregate principal amount of Notes may accelerate the maturity of all the Notes. The covenants, events of default and acceleration rights described in this paragraph are subject to important exceptions and qualifications, which are described in the indenture.
Under a registration rights agreement, Products and the guarantors have agreed to use their reasonable best efforts to file and cause to become effective a registration statement with respect to an offer to exchange the Notes for other senior subordinated notes issued by Products and guaranteed by the guarantors, which are registered with the SEC and which have substantially identical terms as the Notes. If Products and the guarantors are not able to affect this exchange offer, they will use their reasonable best efforts to file, and cause to become effective, a shelf registration statement relating to resales of the notes and the guarantees. Products will be obligated to pay additional interest on the notes if it does not complete this exchange offer within 270 days after the closing date.
Other
As of September 30, 2004, the Company believes it is in compliance with all covenants under our various obligations. The Company believes cash flow from operations, together with its revolving credit facility, receivables arrangements and sale and leaseback arrangements will provide adequate sources of liquidity for the Company to fund its operations. The Company continues to seek means to generate additional cash for debt reduction and its growth strategy. Among its potential cash generation projects, the Company seeks to further improve working capital management (including factoring of receivables) and to continue to utilize lease financings.
The Company was recently informed that certain of the accelerated payment collection programs with its larger customers will be discontinued in 2005 and that one of those customers, Ford Motor Company, intends to phase out its accelerated payment collection program from September 2004 through December 2004. At September 30, 2004, the Company had approximately $10.2 million collected under the Ford program. These programs have materially enhanced our liquidity in the past. At September 30, 2004, the Company had approximately $130.9 million collected under these arrangements, including the Ford program. The impact of the discontinuance of these programs is expected to be partially offset by a greater utilization of our existing $250 million accounts receivable securitization facility. The existing receivables facility expires on December 20, 2004, and the Company expects to have a multi-year replacement facility established before that time. The Company will also consider replacement accelerated payment programs offered on behalf of our customers or through other financial intermediaries. However, we may not be able to timely or fully replace these arrangements, and the new terms of any such program may be less advantageous than current arrangements. If the Company is unable to replace these arrangements, it could adversely affect its liquidity under its senior secured credit facilities.
8. Subsidiary Preferred Stock Requirements
In connection with the TAC-Trim acquisition on December 20, 2001, Products issued to Textron Inc. preferred stock with a liquidation preference of $326.4 million and an estimated fair market value of $146.9 million. The difference between the initial recorded value and the initial liquidation preference is being accreted over the life of the stock using the effective interest method. During the third quarter of 2004, interest expense from subsidiary preferred stock accretion and dividend costs were $0.6 million and $10.5 million, respectively. The third quarter of 2003 interest expense from preferred stock accretion and dividend costs was $0.4 million and $9.2 million, respectively. For the nine months ended September 30, 2004 interest expense from subsidiary preferred stock accretion and dividend costs were $1.6 million and $30.5 million, respectively. For the nine months ended September 30, 2003 interest expense from subsidiary preferred stock accretion and dividend costs were $4.8 million and $22.4 million, respectively.
F-68
Effective April 2004, all 20,000 shares of the Series C Preferred Stock, which were held by Textron Inc, were converted to Series B Preferred Stock on an equivalent share basis. The primary difference between the Series C and Series B Preferred Stock is that Series C holders were entitled to participation in distributions of Products common equity tied to the appreciation in the value of Products common equity subsequent to the issuance date of the securities. Each holder received one share of Series B Preferred Stock for each share of Series C Preferred Stock.
9. Receivables Facility and Non Recourse Factoring Facilities
Receivables Facility
As of September 30, 2004 and December 31, 2003, Carcorp, Inc.'s total receivables pool, as defined under the receivables facility, was $225.7 million and $165.4 million, respectively. As of September 30, 2004, the utilization of the Receivables Facility was $160.7 million and was fully drawn. At December 31, 2003, the utilization of the Receivables Facility was $73.7 million, and an additional $9.1 million was available, subject to limitations imposed under the Senior Secured Credit Facilities. The receivables facility expires on December 20, 2004, and the Company expects to have a replacement facility established before that time.
The Company is required to pay a fee of 0.50% on the unused portion of the facility. A discount on the sold receivables is approximately equal to the interest rate paid by the conduits to the holders of the commercial paper plus a usage fee that ranges from 1.50% to 2.25%. The discount rate at September 30, 2004 was 3.37%.
Non-Recourse Factoring Facilities
The Company had entered into various agreements with international lenders to sell accounts receivables of certain international operations on a non-recourse basis. As of September 30, 2004, the Company has utilized $90.9 million from these commitments. The funding levels and commitments by the lenders are based on the eligible receivables in the Company's subsidiaries in the various countries, including subsidiaries in Belgium, Brazil, Czech Republic, Germany, Italy, Mexico, Netherlands, Spain and Sweden. As of September 30, 2004, under the agreements, approximately $98.1 million of receivables have been sold, while the Company had retained an interest in $7.2 million of these sold receivables. At December 31, 2003, under the agreements, approximately $132.7 million of receivables had been sold, while the Company had retained an interest in $6.1 million of these sold receivables. The retained interest remains classified on the Company's balance sheet as trade receivables. Under the agreements, the Company usually pays a factoring fee and a discount on the daily utilization of the facility. The expenses related to these agreements are recorded in loss on sale of receivables on the income statement.
For the third quarter and year-to-date ended September 30, 2004, the loss on sale of receivables under the Receivables Facility and the non-recourse factoring facilities totaled $2.4 million and $7.2 million, respectively, compared to $1.8 million and $4.5 million for the third quarter and year-to-date ended September 30, 2003, respectively.
F-69
10. Employee Benefit Plans
The 2004 and 2003 amounts shown below reflect the defined benefit pension and other postretirement benefit expense for the three and nine months ended September 30 for each year:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter ended September 30 | | Nine months ended September 30 |
| | | Pension
Benefits | | Other
Postretirement
Benefits | | Pension
Benefits | | Other
Postretirement
Benefits |
| | | 2004 | | 2003 | | 2004 | | 2003 | | 2004 | | 2003 | | 2004 | | 2003 |
| Service cost | | $ | 3.8 | | | $ | 3.5 | | | $ | 0.2 | | | $ | 0.3 | | | $ | 11.4 | | | $ | 10.5 | | | $ | 0.8 | | | $ | 1.0 | |
| Interest cost | | | 6.7 | | | | 6.5 | | | | 1.3 | | | | 1.4 | | | | 20.1 | | | | 19.5 | | | | 4.1 | | | | 4.3 | |
| Expected return on plan assets | | | (7.4 | ) | | | (6.8 | ) | | | — | | | | — | | | | (22.2 | ) | | | (20.4 | ) | | | — | | | | — | |
| Amortization of prior service cost (gain) | | | 0.1 | | | | 0.1 | | | | (2.1 | ) | | | (1.9 | ) | | | 0.3 | | | | 0.3 | | | | (5.8 | ) | | | (5.7 | ) |
| Curtailment credits | | | — | | | | — | | | | (9.4 | ) | | | — | | | | — | | | | — | | | | (9.4 | ) | | | — | |
| Amortization of net loss/(gain) | | | 1.6 | | | | 1.5 | | | | (0.3 | ) | | | (0.3 | ) | | | 4.8 | | | | 4.5 | | | | (0.9 | ) | | | (0.9 | ) |
| Net periodic benefit cost (gain) | | $ | 4.8 | | | $ | 4.8 | | | $ | (10.3 | ) | | $ | (0.5 | ) | | $ | 14.4 | | | $ | 14.4 | | | $ | (11.2 | ) | | $ | (1.3 | ) |
|
The Company expects to contribute $10.9 million to its pension plans in 2004. Through the third quarter ended September 30, 2004, $8.6 million has been contributed.
The "Medicare Prescription Drug, Improvement and Modernization Act of 2003," (the "Act") reduced the net periodic postretirement benefit cost by $0.1 million and $0.2 million for the three and nine months ended September 30, 2004, respectively, including service cost, interest cost and amortization of the actuarial experience gain. The total impact of the Act on our actuarial liability was $3.0 million and is being accounted for as an actuarial gain, in accordance with guidance from the Financial Accounting Standards Board ("FASB") Staff Position 106-2 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." As a result, the gain will be amortized as a reduction of our periodic expense and balance sheet liability over the estimated future lifetime of the active employees, depending on the plan.
On June 24, 2004, the Company announced that postretirement medical subsidies for all non-union medical plans and all postretirement life insurance (except for union and executive plans) would be eliminated effective January 1, 2006. Accordingly, these events are treated as an amendment with curtailments as appropriate for each plan. The effect of the plan amendments for the nine months ended September 30, 2004 resulted in the Company recognizing $9.4 million of curtailment credits and a $0.4 million gain in amortization of prior service costs. These gains are recognized as a $5.2 million benefit in selling, general and administrative expenses and a $4.6 million benefit in cost of goods sold. For the fourth quarter of 2004 the Company expects to recognize approximately $10.5 million in postretirement benefits, of which approximately $2.5 million ($1.8 million, net of taxes) will be classified as income from discontinued operations. Additionally, in 2005, the Company expects to recognize approximately $50.0 million in postretirement benefits, of which approximately $11.0 million ($7.0 million, net of taxes) will be classified as income from discontinued operations, relating to the effect of the plan amendments.
F-70
11. Restructuring and Impairment
Activity related to the restructuring reserve is as follows (in millions):
|
| | | | | | | | | | | | | | |
| | | Severance
Costs | | Lease Commitments
and Other Exit Costs | | Total |
| Restructuring reserves: | |
| Balance at beginning of year | | $ | 21.6 | | | $ | 9.3 | | | $ | 30.9 | |
| 2004 Expense: | |
| 2nd quarter 2003 program | | | 0.1 | | | | — | | | | 0.1 | |
| 3rd quarter 2003 program | | | 0.8 | | | | — | | | | 0.8 | |
| 4th quarter 2003 program | | | 0.2 | | | | — | | | | 0.2 | |
| 1st quarter 2004 program | | | 7.6 | | | | 1.8 | | | | 9.4 | |
| 2nd quarter 2004 program | | | 9.1 | | | | 1.3 | | | | 10.4 | |
| 3rd quarter 2004 program | | | 10.3 | | | | 1.7 | | | | 12.0 | |
| Adjustments to prior period programs | | | (4.0 | ) | | | — | | | | (4.0 | ) |
| Total net expense | | | 24.1 | | | | 4.8 | | | | 28.9 | |
| Costs paid | | | (22.1 | ) | | | (7.1 | ) | | | (29.2 | ) |
| Ending balance at September 30, 2004 | | $ | 23.6 | | | $ | 7.0 | | | $ | 30.6 | |
| 3rd quarter 2003 restructuring: | |
| Costs expected | | $ | 21.2 | | | $ | 6.8 | | | $ | 28.0 | |
| Costs paid in 2004 | | | 4.4 | | | | 1.0 | | | | 5.4 | |
| Costs paid to date | | | 12.2 | | | | 4.1 | | | | 16.3 | |
| 4th quarter 2003 restructuring | |
| Costs expected | | $ | 6.8 | | | $ | 1.7 | | | $ | 8.5 | |
| Costs paid in 2004 | | | 3.0 | | | | 1.1 | | | | 4.1 | |
| Costs paid to date | | | 5.8 | | | | 1.1 | | | | 6.9 | |
| 1st quarter 2004 restructuring | |
| Costs expected | | $ | 7.6 | | | $ | 1.8 | | | $ | 9.4 | |
| Costs paid in 2004 | | | 4.9 | | | | 0.9 | | | | 5.8 | |
| Costs paid to date | | | 4.9 | | | | 0.9 | | | | 5.8 | |
| 2nd quarter 2004 restructuring | |
| Costs expected | | $ | 9.1 | | | $ | 1.3 | | | $ | 10.4 | |
| Costs paid in 2004 | | | 3.7 | | | | 0.1 | | | | 3.8 | |
| Costs paid to date | | | 3.7 | | | | 0.1 | | | | 3.8 | |
| 3rd quarter 2004 restructuring | |
| Costs expected | | $ | 10.3 | | | $ | 1.7 | | | $ | 12.0 | |
| Costs paid in 2004 | | | 2.0 | | | | 0.6 | | | | 2.6 | |
| Costs paid to date | | | 2.0 | | | | 0.6 | | | | 2.6 | |
|
During the third quarter 2004, the Company continued its initiative to right size its overhead structure, further reduce salaried headcount and strengthen and streamline the senior management team on a worldwide basis resulting in a restructuring charge of $12.0 million. The third quarter charge included $10.3 million of severance cost and $1.7 million of costs related to the establishment of accruals for lease commitments and other exit costs. Also included in the third quarter 2004 charges is adjustments related to previously established accruals which did not require cash outlays of $3.0 million resulting in a net charge of $9.0 million. Additionally, the Company recognized an $10.3 million write down of assets primarily related to the closing of an International Plastic location totaling $7.0 million. The $3.3 million remaining fixed asset write down was related to Global Soft Trim locations.
F-71
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other | | Total |
| 3rd Quarter 2004 Restructuring: | |
| Total costs expected | | $ | 1.5 | | | $ | 5.1 | | | $ | 3.2 | | | $ | 2.2 | | | $ | 12.0 | |
| Costs incurred in 2004 | | | 1.5 | | | | 5.1 | | | | 3.2 | | | | 2.2 | | | | 12.0 | |
| Costs incurred to date | | | 1.5 | | | | 5.1 | | | | 3.2 | | | | 2.2 | | | | 12.0 | |
| Headcount Reduction | | | 103 | | | | 528 | | | | 235 | | | | 16 | | | | 882 | |
|
During the second quarter 2004, the Company undertook a restructuring program to right size its overhead structure, further reduce salaried headcount and strengthen and streamline the senior management team on a worldwide basis resulting in a restructuring charge of $10.4 million. Additionally, the Company recognized a $27.4 million write down of assets related to the Company impairing $13.6 million of Intellimold assets, including a $2.7 million patent, a finite intangible asset, acquired as part of the TAC-Trim acquisition. The Company also impaired $11.0 million of customer contracts as a result of changes in customer sourcing. The $2.8 million remaining fixed asset write down was related primarily to Global Soft Trim locations.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other | | Total |
| 2nd Quarter 2004 Restructuring: | |
| Total costs expected | | $ | 1.3 | | | $ | 0.8 | | | $ | 5.9 | | | $ | 2.4 | | | $ | 10.4 | |
| Costs incurred in 2004 | | | 1.3 | | | | 0.8 | | | | 5.9 | | | | 2.4 | | | | 10.4 | |
| Costs incurred to date | | | 1.3 | | | | 0.8 | | | | 5.9 | | | | 2.4 | | | | 10.4 | |
| Headcount Reduction | | | 250 | | | | 10 | | | | 250 | | | | 40 | | | | 550 | |
|
During the first quarter 2004, the Company undertook a restructuring program to right size its overhead structure, further reduce salaried headcount and strengthen and streamline the senior management team on a worldwide basis resulting in a restructuring charge of $9.4 million. Additionally, the Company recognized a $3.0 million write down of fixed assets related primarily to Global Soft Trim locations. The Company also incurred and recorded restructuring charges of $1.1 million for prior year programs along with an adjustment related to a previously established accrual, which did not require cash outlays of $1.0 million.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other | | Total |
| 1st Quarter 2004 Restructuring: | |
| Total costs expected | | $ | 1.3 | | | $ | 1.9 | | | $ | 1.7 | | | $ | 4.5 | | | $ | 9.4 | |
| Costs incurred in 2004 | | | 1.3 | | | | 1.9 | | | | 1.7 | | | | 4.5 | | | | 9.4 | |
| Costs incurred to date | | | 1.3 | | | | 1.9 | | | | 1.7 | | | | 4.5 | | | | 9.4 | |
| Headcount Reduction | | | 30 | | | | 170 | | | | 30 | | | | 30 | | | | 260 | |
|
During the fourth quarter 2003, the Company undertook a restructuring program to right size its overhead structure, reduce salaried headcount and strengthen and streamline the senior management team on a worldwide basis with the primary focus on domestic operations resulting in a restructuring charge of $9.3 million. Additionally, the Company recognized a $4.6 million write down of fixed assets related to U.S. and Mexico Plastics and Global Soft Trim locations.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other | | Total |
| 4th Quarter 2003 Restructuring: | |
| Total costs expected | | $ | 0.9 | | | $ | 4.0 | | | $ | 2.6 | | | $ | 1.0 | | | $ | 8.5 | |
| Costs incurred in 2004 | | | — | | | | 0.2 | | | | (1.0 | ) | | | — | | | | (0.8 | ) |
| Costs incurred to date | | | 0.9 | | | | 4.0 | | | | 2.6 | | | | 1.0 | | | | 8.5 | |
| Headcount Reduction | | | 100 | | | | 500 | | | | 400 | | | | — | | | | 1,000 | |
|
During the third quarter 2003, the Company undertook a restructuring program to right size its overhead structure, reduce salaried headcount and strengthen and streamline the senior management
F-72
team on a worldwide basis with the primary focus on domestic operations resulting in a restructuring charge of $27.2 million. Additionally, the Company recognized a $2.2 million write down of fixed assets related primarily to International Plastics locations.
Included in the third quarter 2003 restructuring charge severance cost were charges related to the separation agreement with Jerry L. Mosingo, the former President and CEO. In August 2003, the Company's Board of Directors appointed David Stockman as CEO, in addition to retaining his position of Chairman. Under the terms of his separation agreement, Mr. Mosingo received $0.6 million in the third quarter of 2003 and will receive $0.2 million per quarter through December 31, 2004 and $0.1 million for the quarter ending March 31, 2005, and other fringe and retirement benefits. The resulting third quarter 2003 restructuring charge was $5.3 million, which includes the present value of future benefits of $2.8 million, included in pension liability.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other | | Total |
| 3rd Quarter 2003 Restructuring: | |
| Total costs expected | | $ | 6.3 | | | $ | 5.6 | | | $ | 5.9 | | | $ | 10.2 | | | $ | 28.0 | |
| Costs incurred in 2004 | | | — | | | | 0.6 | | | | 0.2 | | | | — | | | | 0.8 | |
| Costs incurred to date | | | 6.3 | | | | 5.6 | | | | 5.9 | | | | 10.2 | | | | 28.0 | |
| Headcount Reduction | | | 500 | | | | 300 | | | | 600 | | | | 200 | | | | 1,600 | |
|
During the second quarter 2003, the Company undertook a restructuring program to rationalize operations on a worldwide basis with the primary focus on U.S. and Mexico operations resulting in a restructuring charge of $4.9 million. The 2003 charge included approximately $4.2 million of severance cost and $0.7 million of costs related to the establishment of reserves for lease commitments and other exit costs. The Company's restructuring plan includes severance of over 500 personnel. Of the 500 personnel approximately 450 were terminated in the second quarter of 2003 with approximately 170 personnel at the Company's International Plastics segment, approximately 160 at Global Soft Trim segment and approximately 120 at the Company's corporate locations. Additionally, the Company recognized a $0.8 million write down of fixed assets related to an International Plastics location. Restructuring charges related to the first quarter of 2004 for this program were $0.1 million for severance costs with less than $0.1 million of severance costs remaining to be charged during 2004 and 2005.
Reserves for lease terminations costs are paid in conjunction with the remaining terms of the leases, while severance and other exit costs are generally paid within one year of the restructuring program.
During 2003, the Company recognized a $7.5 million write-down of fixed assets related to its 50% interest in an Italian joint venture acquired in 2001 and $10.4 million impairment of the Becker non-compete agreement.
12. Related Party Transactions
Heartland Transactions
The Company is a party to a Services Agreement with Heartland under which Heartland provides advisory and consulting services, including services with respect to developments in the automotive industry and supply markets, advice on financial and strategic plans and alternatives and other matters as it may reasonably request and are within Heartland's expertise. The Services Agreement terminates on the earlier of its tenth anniversary or the date upon which Heartland ceases to own Company shares equivalent to 25% of that owned by them on February 23, 2001.
Under the Services Agreement, the Company is obligated to pay to Heartland a $4.0 million annual advisory fee payable in quarterly installments and reimburse its out-of-pocket expenses related to the services it provides. The Company has also agreed to pay a fee of 1% of the total enterprise value of certain acquisitions and dispositions and 1% of the gross proceeds of certain financings.
In March 2004, the Company's Board of Directors, including the disinterested and independent directors of the Board, approved a fee of $1.0 million to Heartland for its services rendered in connection with the 2004 amendments to the Company's credit facility to add a supplemental revolving credit facility.
F-73
In May 2004, the Company's Board of Directors, including the disinterested and independent directors of the Board, approved an amendment of the Services Agreement to provide for a fee of up to $5.0 million related to services rendered in connection with the notes offering and a fee of 1% of the gross proceeds of certain future financings, excluding the amendment and restatement of our senior secured credit facility. The $1.0 million fee for the February 2004 amendments to the Company's credit facility was subsequently waived when the Company completed its credit facility and notes refinancing during the third quarter of 2004, as part of which Heartland received a fee of $5.0 million.
For the quarter and nine months ended September 30, 2004, the Company recorded total fees to Heartland of $6.3 million and $8.5 million, respectively. For the quarter and nine months ended September 30, 2003, the Company recorded total fees of $1.0 million and $3.0 million, respectively.
Charles E. Becker Transactions
For the quarter and nine months ended September 30, 2004, the Company recorded total lease payments of $2.2 million and $6.5 million, respectively, under various lease agreements with entities controlled by Charles E. Becker, a former director of the Company. For the quarter and nine months ended September 30, 2003, the Company recorded total lease payments of $2.3 million and $6.9 million, respectively, under various lease agreements.
Mr. Becker resigned as director of the Company effective as of May 6, 2004.
Elkin McCallum Transactions
In 2004 and 2003, the Company engaged in ordinary course transactions with entities controlled by Elkin McCallum, a former director of the Company, for the purchase and sale of goods and services as part of ongoing business relationships. The Company recorded purchases for goods and services from entities controlled by Mr. McCallum of $0.7 million and $4.1 million for the quarter and nine months ended September 30, 2004, respectively, and $4.1 million and $15.2 million (net $1.2 million of rebates) for the quarter and nine months ended September 30, 2003, respectively, for goods and services purchased. The rebates received from Mr. McCallum relate to knit and woven automotive fabrics provided by entities controlled by Mr. McCallum under the Supply Agreement and Transition Agreement executed in connection with the 2001 Joan acquisition. Supplier rebates such as these are common in the automotive industry as part of ongoing price negotiations and adjustments. The rebates from Mr. McCallum totaled $14.7 million over the duration of the agreements. In addition, the Company recorded sales to entities controlled by Mr. McCallum of $0.6 million and $4.0 million for the quarter and nine months ended September 30, 2004, respectively, and $0.8 million and $5.3 million for the quarter and nine months ended September 30, 2003, respectively.
The following table summarizes the balances outstanding from entities controlled by Mr. McCallum (in millions):
|
| | | | | | | | | | |
| | | September 30,
2004 | | December 31,
2003 |
| Accounts Receivable | | $ | 4.4 | | | $ | 2.7 | |
| Accounts Payable | | | 2.7 | | | | 1.0 | |
|
Mr. McCallum resigned as director of the Company effective as of May 6, 2004.
13. Income Taxes
The Company recognized an income tax benefit of $13.4 million and $8.6 million for the quarters ended September 30, 2004 and 2003, respectively. The Company recognized an income tax benefit of $17.0 million and an income tax expense of $0.1 million for the nine months ended September 30, 2004 and 2003, respectively. The primary reasons for the Company's effective tax rate being different from its statutory rate are non-deductible preferred stock dividends and accretion, foreign losses for which tax benefits are not recorded and state and foreign taxes that do not fluctuate directly with income, partially offset by the effect of a financing arrangement and tax credits.
F-74
14. Information About the Company's Operations
In conjunction with the 2003 restructurings, the Company changed its reportable segments to align with organization changes and senior management responsibilities. The Company's reportable segments consist of U.S. and Mexico Plastics, International Plastics and Global Soft Trim. International Plastics includes international plastics operations, including Canada but excluding Mexico. The U.S. and Mexico Plastics and International Plastics segments include interior trim components such as door panels, instrument panels, consoles, package trays and cargo management systems, exterior trim components such as bumper fascias and cladding and fully assembled cockpit systems and components thereof. The Global Soft Trim segment includes molded non-woven and tufted carpet, alternative molded flooring, accessory mats and acoustics systems consisting of absorbing materials, damping materials, engine compartment noise vibration and harshness systems, interior insulators, seat body cloth, insert fabric, headliner fabric, convertible roof systems, hard top retractable roof systems, tonneau covers and actuation systems. The Company changed the composition of its reportable segments beginning July 1, 2003 and restated prior period segment data to be comparable.
The Company evaluates performance based on operating profit or loss. Information about the Company's segments is presented below (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended September 30, 2004 |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other(a) | | Total |
| External revenues | | $ | 261.7 | | | $ | 319.6 | | | $ | 283.5 | | | $ | — | | | $ | 864.8 | |
| Inter-segment revenues | | | 8.2 | | | | 3.3 | | | | 1.1 | | | | (12.6 | ) | | | — | |
| Interest expense from preferred stock requirement | | | — | | | | — | | | | — | | | | 11.1 | | | | 11.1 | |
| Depreciation and amortization | | | 11.4 | | | | 11.6 | | | | 13.9 | | | | 2.3 | | | | 39.2 | |
| Operating income (loss) | | | 13.8 | | | | (8.8 | ) | | | 11.9 | | | | (7.4 | ) | | | 9.5 | |
| Capital expenditures | | | 23.6 | | | | 29.8 | | | | 15.4 | | | | 0.4 | | | | 69.2 | |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended September 30, 2003 |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other(a) | | Total |
| External revenues | | $ | 312.0 | | | $ | 273.8 | | | $ | 316.4 | | | $ | — | | | $ | 902.2 | |
| Inter-segment revenues | | | 3.0 | | | | 4.1 | | | | 0.3 | | | | (7.4 | ) | | | — | |
| Interest expense from preferred stock requirement | | | — | | | | — | | | | — | | | | 9.6 | | | | 9.6 | |
| Depreciation and amortization | | | 10.2 | | | | 9.3 | | | | 11.9 | | | | 2.2 | | | | 33.6 | |
| Operating income (loss) | | | 17.5 | | | | 1.3 | | | | 27.6 | | | | (38.1 | ) | | | 8.3 | |
| Capital expenditures | | | 11.1 | | | | 15.5 | | | | 18.0 | | | | 0.2 | | | | 44.8 | |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, 2004 |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other(a) | | Total |
| External revenues | | $ | 947.6 | | | $ | 1,072.8 | | | $ | 947.1 | | | $ | — | | | $ | 2,967.5 | |
| Inter-segment revenues | | | 21.7 | | | | 10.6 | | | | 1.5 | | | | (33.8 | ) | | | — | |
| Interest expense from preferred stock requirement | | | — | | | | — | | | | — | | | | 32.1 | | | | 32.1 | |
| Depreciation and amortization | | | 35.0 | | | | 32.7 | | | | 37.8 | | | | 7.2 | | | | 112.7 | |
| Operating income (loss) | | | 38.1 | | | | 0.9 | | | | 73.8 | | | | (47.3 | ) | | | 65.5 | |
| Capital expenditures | | | 50.6 | | | | 56.8 | | | | 40.1 | | | | 3.8 | | | | 151.3 | |
| As of September 30: | |
| Goodwill | | | 757.2 | | | | 346.9 | | | | 274.4 | | | | — | | | | 1,378.5 | |
| Total assets | | | 1,092.2 | | | | 852.2 | | | | 675.6 | | | | 576.7 | | | | 3,196.7 | |
|
F-75
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, 2003 |
| | | U.S. and Mexico
Plastics | | International
Plastics | | Global Soft
Trim | | Other(a) | | Total |
| External revenues | | $ | 1,018.2 | | | $ | 917.9 | | | $ | 1,034.7 | | | $ | — | | | $ | 2,970.8 | |
| Inter-segment revenues | | | 9.8 | | | | 12.9 | | | | 1.1 | | | | (23.8 | ) | | | — | |
| Interest expense from preferred stock requirement | | | — | | | | — | | | | — | | | | 27.2 | | | | 27.2 | |
| Depreciation and amortization | | | 31.6 | | | | 28.7 | | | | 35.0 | | | | 5.9 | | | | 101.2 | |
| Operating income (loss) | | | 49.8 | | | | (18.0 | ) | | | 118.4 | | | | (78.6 | ) | | | 71.6 | |
| Capital expenditures | | | 28.2 | | | | 34.3 | | | | 52.0 | | | | 5.4 | | | | 119.9 | |
| As of September 30: | |
| Goodwill | | | 707.3 | | | | 343.5 | | | | 274.5 | | | | — | | | | 1,325.3 | |
| Total assets | | | 1,049.1 | | | | 803.6 | | | | 697.2 | | | | 633.1 | | | | 3,183.0 | |
|
| |
| (a) | Other includes the Company's non-operating units and the effect of eliminating entries. During 2004 and 2003, certain corporate costs that were previously included at the divisional units were included in the Other category. Those costs that could be attributed to a divisional unit were allocated back to the appropriate division. Operating income (loss) for the nine months ended September 30, 2004 reflects: $46.1 million, $58.1 million and $35.5 million of corporate costs allocated back to U.S. and Mexico Plastics, International Plastics and Global Soft Trim, respectively. Operating income (loss) for the nine months ended September 30, 2003 reflects: $40.8 million, $51.6 million, and $24.6 million of corporate costs allocated back to U.S. and Mexico Plastics, International Plastics and Global Soft Trim, respectively. |
Direct and indirect sales to significant customers in excess of ten percent of consolidated net sales from continuing operations are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | Nine Months Ended |
| | | September 30,
2004 | | September 30,
2003 | | September 30,
2004 | | September 30,
2003 |
| DaimlerChrysler AG | | | 30.1 | % | | | 28.3 | % | | | 31.5 | % | | | 29.1 | % |
| General Motors Corporation | | | 20.5 | % | | | 24.4 | % | | | 19.7 | % | | | 22.2 | % |
| Ford Motor Company | | | 24.0 | % | | | 24.1 | % | | | 26.1 | % | | | 24.7 | % |
|
15. Commitments and Contingencies
Except as described below, the Company and its subsidiaries are not party to any material pending legal proceedings, but is involved in ordinary routine litigation incidental to the business.
Environmental
The Company is subject to federal, state, local and foreign environmental, and health and safety, laws and regulations that (i) affect ongoing operations and may increase capital costs and operating expenses in order to maintain compliance with such requirements and (ii) impose liability relating to contamination at facilities, other locations such as former facilities, facilities where we have sent wastes for treatment or disposal and other properties to which the Company may be linked. Such liability may include, for example, investigation and cleanup of the contamination, personal injury and property damage caused by the contamination and damages to natural resources. Some of these liabilities may be imposed without regard to fault and may also be joint and several (which can result in a liable party being held responsible for the entire obligation, even where other parties are also liable).
Management believes that it has obtained, and is in material compliance with, those material environmental permits and approvals necessary to conduct the Company's various businesses. Environmental compliance costs for continuing businesses are accounted for as normal operating expenses or capital expenditures, except for certain costs incurred at acquired locations. Environmental compliance costs relating to conditions existing at the time of an acquisition are generally charged to reserves
F-76
established in purchase accounting. The Company accrues for environmental remediation costs when such obligations are known and reasonably estimable. In the opinion of management, based on the facts presently known to it, such environmental compliance and remediation costs will not have a material effect on the Company's business, consolidated financial condition, future results of operations or cash flows.
The Company is legally or contractually responsible or alleged to be responsible for the investigation and remediation of contamination at various sites and for personal injury or property damages, if any, associated with such contamination. At some of these sites, the Company has been notified that it is a potentially responsible party ("PRP") under the federal Superfund law or similar state laws. Other sites at which the Company may be responsible for contamination may be identified in the future, including with respect to divested and acquired businesses.
The Company is currently engaged in investigating or remediating certain sites, as discussed in the paragraphs below. In estimating the cost of investigation and remediation, the Company considered, among other things, its prior experience in remediating contaminated sites, remediation efforts by other parties, data released by the United States Environmental Protection Agency ("USEPA"), the professional judgment of the Company's environmental experts, outside environmental specialists and other experts and the likelihood that other identified PRPs will have the financial resources to fulfill their obligations at sites where they and the Company may be jointly and severally liable. It is difficult to estimate the total cost of investigation and remediation due to various factors including:
| |
| • | incomplete information regarding particular sites and other PRPs; |
| |
| • | uncertainty regarding the nature and extent of environmental problems and the Company's share, if any, of liability for such problems; |
| |
| • | the ultimate selection among alternative approaches by governmental regulators; |
| |
| • | the complexity and evolving nature of environmental laws, regulations and governmental directives; |
| |
| • | changes in cleanup standards. |
The Company is a party to a Consent Decree with the State of New Hampshire to remediate a former industrial landfill known as the Cardinal Landfill in Farmington, New Hampshire. Pursuant to that Consent Decree, the Company is currently conducting a pilot test for a proposed remediation of chlorinated compound contaminants in groundwater. The Consent Decree calls for a remedy to be in place during 2005. The Company is a defendant in three lawsuits filed by a total of 91 individual plaintiffs for alleged personal injuries arising from Cardinal Landfill conditions. The Company will vigorously contest these allegations. As of September 30, 2004, the Company has accrued $11.0 million for Cardinal Landfill.
The Company is a party, as a member of a PRP workgroup, to a Consent Decree entered with the USEPA for the remediation of a former municipal landfill in Dover, New Hampshire. The town of Dover, New Hampshire is also a member of the PRP group and a party to the Consent Decree. Pursuant to the terms of the Consent Decree, the PRP group has recently completed an alternative remediation design. The USEPA and the State of New Hampshire have reviewed, provided for public comment and approved the alternative remedial design and subsequently issued an amended Record of Decision. As of September 30, 2004, the Company has accrued $8.2 million for Dover.
Pursuant to a Consent Decree signed with the USEPA, the Company is currently engaged in a full-scale remediation for groundwater and soil contamination at the former Stamina Mills manufacturing facility in North Smithfield, Rhode Island. Remediation activities have been ongoing since 1998. Another Consent Decree resolving the USEPA claim for past oversight costs was signed during 2003, and a payment of $7.3 million was made during the third quarter of 2003. As of September 30, 2004, the Company has accrued $6.4 million for Stamina Mills.
The Company is working with the Michigan Department of Environmental Quality ("MDEQ") to investigate and remediate soil and groundwater contamination at a former manufacturing plant in
F-77
Mancelona, Michigan and at adjacent owned property formerly used for the treatment and disposal of plating waste. MDEQ is likely to require remediation of groundwater contamination.
The current owner of one of the Company's former manufacturing plants located in Bowling Green, Ohio has entered into an Administrative Order on Consent with the Ohio Environmental Protection Agency ("OEPA") requiring investigation and remediation of contamination at the site. The Company is reimbursing the current owner for costs associated with ongoing groundwater monitoring and, following selection of an appropriate remedy by OEPA, will assume 90% of future remediation costs.
In the 1980's and 1990's, the California Regional Water Quality Control Board ("CRWQCB") and other state agencies ordered a predecessor of the Company to investigate and remediate soil and groundwater contamination at a former lumber treatment plant in Elmira, CA. In 1996, the Company entered into an agreement with the State of California to conduct long-term operation and maintenance of the remedy implemented at the site. Currently, the Company is conducting a pilot test of an alternative treatment option that will reduce the cost and time for clean up at this site.
The Company has entered into an Administrative Order by Consent with the USEPA requiring investigation, delineation and removal of contamination from a vacant three acre site in Zanesville, Ohio. The delineation report has been submitted to USEPA for comment, and the Administrative Order by Consent calls for the submittal and implementation of an action plan during 2004. Based on ongoing investigations at the site in regards to potential lead contamination in soil and groundwater, the USEPA has requested additional studies of groundwater and site wide soil stability studies in preparation for cap installation. Initial results of these studies indicate that there is no lead contamination in groundwater. The issue of cap installation is being evaluated in light of these recent findings.
In 2003, the Company signed a Consent Agreement with the State of South Carolina Department of Health and Environmental Control requiring soil and groundwater investigations at a former manufacturing facility in Cowpens, South Carolina. The Company had ceased operations at this location in 1981. Initial investigations will delineate potential groundwater contamination that has migrated under a residential area. These studies are scheduled to be completed in 2004.
The Company has established accruals for certain contingent environmental liabilities and management believes such reserves comply with accounting principles generally accepted in the United States of America. The Company accrues for environmental investigatory and non-capital remediation costs when litigation has commenced or a claim or assessment has been asserted or is imminent, the likelihood of an unfavorable outcome is probable, and the financial impact of such outcome is reasonably estimable. As of September 30, 2004 and December 31, 2003, total reserves for these environmental costs are approximately $45.7 million and $51.2 million, respectively.
In the opinion of management, based on information presently known to it, identified environmental costs and contingencies will not have a material effect on the Company's consolidated financial condition, future results of operations or cash flows. However, management can give no assurance that they have identified or properly assessed all potential environmental liabilities arising from the business or properties, and those of present and former subsidiaries and their corporate predecessors.
Legal Proceedings
The Company and its subsidiaries have lawsuits and claims pending against them and have certain guarantees outstanding which were made in the ordinary course of business.
As of September 30, 2004, the Company was a party to approximately 1,102 pending cases alleging personal injury from exposure to asbestos containing materials used in boilers manufactured before 1966 by former operations of the Company which were sold in 1966. Asbestos-containing refractory bricks lined the boilers and, in some instances, the Company's former operations installed asbestos-containing insulation around the boilers. These pending cases do not include cases that have been dismissed or are subject to agreements to dismiss due to the inability of the plaintiffs to establish exposure to a relevant product and cases that have been settled or are subject to settlement agreements. Total settlement costs for these cases have been less than $1.3 million or an average of less than $6,250 per settled case. The defense and settlement costs have been substantially covered by the Company's primary insurance
F-78
carriers under a claims handling agreement that expires in August 2006. The Company has primary, excess and umbrella insurance coverage for various periods available for asbestos-related boiler and other claims. The Company's primary carriers have agreed to cover approximately 80% of certain defense and settlement costs up to a limit of approximately $70.5 million for all claims made, subject to reservations of rights. The excess insurance coverage, which varies in availability from year to year, is approximately $615 million in aggregate for all claims made. The coverage may be impacted by matters described below. Based on the age of the boilers, the nature of the claims and settlements made to date and the insurance coverage, management does not believe that these cases will have a material impact on the Company's financial condition, results of operations or cash flows. However, the Company cannot assure that it will not be subjected to significant additional claims in the future in respect of these or other matters for which the insurance could be utilized, that insurance will be available as expected, that the matters described below may not impact the Company's coverage or that unanticipated damages or settlements in the future would not exceed insurance coverage.
In 1988, the Company divested its retail lumber and building materials business to Wickes Lumber Co. (now Wickes Inc.), which filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in early 2004. As part of this divestiture, Wickes assumed responsibility for all liabilities associated with this business, including those associated with certain asbestos-related claims, and the Company agreed to give them access to its general liability insurance policies for such liabilities. These are, in several instances, the same policies referred to in the preceding paragraph. Wickes has been making claims against these policies for settlements of asbestos-related claims that it has characterized as insignificant as of late 2003 in its filings with the Securities and Exchange Commission. The Company has agreed to suspend making claims for other than defense costs to permit agreement upon a framework within the bankruptcy proceedings or otherwise for coordinating these claims as between the Company and Wickes. It is possible that resolution of these issues will await confirmation of a plan of reorganization for Wickes and that an equitable portion of the insurance will be made available for Wickes asbestos or other claimants, thereby reducing the coverage available to the Company for its own claims. Based upon the information available to the Company concerning Wickes' claims history, management does not believe these matters will materially and adversely affect the Company.
A purported class action was filed on March 24, 2003 in the United States District Court for the Eastern District of Michigan, against the Company, Heartland and ten current and former senior officers and/ or directors of the Company, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated there under. Four similar actions were subsequently filed in the United States District Court for the Eastern District of Michigan, purportedly filed on behalf of purchasers of the common stock of the Company between August 7, 2001 and August 2, 2002, which are identical to the purported class identified in the previously disclosed lawsuit, except in one instance in which the complaint alleges a class period beginning on July 5, 2001. On August 4, 2003, the court consolidated all five pending actions and appointed lead plaintiffs for the purported class. The Company believes that the claims are without merit and intends to vigorously defend the lawsuits. The Company does not believe that the suit will have a material impact on its financial condition, results of operations or cash flows.
The Company is a defendant in a lawsuit involving a sales commission arrangement inherited from a predecessor company and its partial ownership of an extinguished joint venture. In September 2003, the Oakland County Circuit Court entered a judgment by default against the company for $4.2 million based upon an inadvertent failure to produce a small number of documents that were to be produced with thousands of other documents that were delivered in the discovery process. The Company and its counsel believe that the default judgment was improperly entered and that damages were improperly assessed, and it has filed an appeal of the judgment with the Michigan Court of Appeals. The Company intends to vigorously pursue its appeal in this matter and has posted a letter of credit in the amount of the judgment as part of the normal appeal process. While management believes it has no liability to the plaintiff, the Company has established an appropriate reserve for this matter in an amount less than the amount of the current judgment.
F-79
The ultimate outcome of the legal proceedings to which the Company is a party will not, in the opinion of the Company's management, based on the facts presently known to it, have a material effect on the Company's consolidated financial condition, future results of operations or cash flows.
Other Commitments
As of September 30, 2004, the Company's continuing operations had approximately $69.0 million in outstanding capital expenditure commitments. The majority of the leased properties of the Company's previously divested businesses have been assigned to third parties. Although releases have been obtained from the lessors of certain properties, Products remains contingently liable under most of the leases. Products' future liability for these leases, in management's opinion, based on the facts presently known to it, will not have a material effect on the Company's consolidated financial condition, future results of operations or cash flows.
16. Other Comprehensive Loss
Total comprehensive loss for the quarter and nine months ended September 30, 2004 and September 30, 2003 are as follows (in millions):
|
| | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | | Nine Months Ended |
| | | September 30,
2004 | | September 30,
2003 | | September 30,
2004 | | September 30,
2003 |
| Comprehensive loss: | |
| Net loss | | $ | (55.6 | ) | | $ | (32.1 | ) | | $ | (108.6 | ) | | $ | (47.6 | ) |
| Other comprehensive income (loss): | |
| Foreign currency translation adjustments | | | 20.5 | | | | (2.0 | ) | | | 8.4 | | | | 57.5 | |
| | | $ | (35.1 | ) | | $ | (34.1 | ) | | $ | (100.2 | ) | | $ | 9.9 | |
|
17. Consolidating Financial Statements
Products issued Senior Notes in a total principal amount of $500.0 million in December 2001. The Senior Notes are guaranteed by the Company and all of the Company's wholly owned domestic subsidiaries other than its receivable, insurance and charitable subsidiaries (Guarantor Subsidiaries). In conjunction with certain sale-leaseback transactions, Products has issued lease payment guarantees on behalf of certain guarantor and non-guarantor subsidiaries. Since these lease payments are guaranteed, the leases are treated as capital lease obligations in the separate financial statements of those subsidiaries, but eliminated for consolidated financial statement purposes. The following are consolidating financial statements of the Company, Products, and its guarantor and non-guarantor subsidiaries:
F-80
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Quarter Ended September 30, 2004 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| Net sales | | $ | — | | | $ | 73.7 | | | $ | 413.1 | | | $ | 388.2 | | | $ | (10.2 | ) | | $ | 864.8 | |
| Cost of goods sold | | | — | | | | 52.5 | | | | 393.1 | | | | 365.4 | | | | (10.2 | ) | | | 800.8 | |
| Selling, general and administrative expenses | | | — | | | | 39.7 | | | | (6.4 | ) | | | 2.0 | | | | (0.1 | ) | | | 35.2 | |
| Restructuring charge | | | — | | | | 0.3 | | | | 2.3 | | | | 6.4 | | | | — | | | | 9.0 | |
| Impairment of long-lived assets | | | — | | | | — | | | | 3.3 | | | | 7.0 | | | | — | | | | 10.3 | |
| Operating income (loss) | | | — | | | | (18.8 | ) | | | 20.8 | | | | 7.4 | | | | 0.1 | | | | 9.5 | |
| Interest expense, net of interest income | | | — | | | | 43.7 | | | | (0.1 | ) | | | 3.8 | | | | (0.5 | ) | | | 46.9 | |
| Interest expense from subsidiary preferred stock dividends | | | — | | | | 10.5 | | | | — | | | | — | | | | — | | | | 10.5 | |
| Interest expense from subsidiary preferred stock accretion | | | — | | | | 0.6 | | | | — | | | | — | | | | — | | | | 0.6 | |
| Intercompany interest | | | — | | | | (2.7 | ) | | | (4.5 | ) | | | 7.2 | | | | — | | | | — | |
| Loss (gain) on sale of receivables | | | — | | | | (0.2 | ) | | | — | | | | 2.6 | | | | — | | | | 2.4 | |
| Loss on early extinguishment of debt | | | — | | | | 18.8 | | | | — | | | | — | | | | — | | | | 18.8 | |
| Other expense (income), net | | | — | | | | (1.0 | ) | | | 3.2 | | | | (2.1 | ) | | | (0.8 | ) | | | (0.7 | ) |
| Income (loss) from continuing operations before income taxes | | | — | | | | (88.5 | ) | | | 22.2 | | | | (4.1 | ) | | | 1.4 | | | | (69.0 | ) |
| Income tax expense (benefit) | | | — | | | | (33.5 | ) | | | 9.2 | | | | 10.9 | | | | — | | | | (13.4 | ) |
| Income (loss) from continuing operations | | | — | | | | (55.0 | ) | | | 13.0 | | | | (15.0 | ) | | | 1.4 | | | | (55.6 | ) |
| Equity in net income (loss) of subsidiaries | | | (55.6 | ) | | | (0.6 | ) | | | (18.4 | ) | | | — | | | | 74.6 | | | | — | |
| Net income (loss) | | $ | (55.6 | ) | | $ | (55.6 | ) | | $ | (5.4 | ) | | $ | (15.0 | ) | | $ | 76.0 | | | $ | (55.6 | ) |
|
F-81
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Quarter Ended September 30, 2003 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| Net sales | | $ | — | | | $ | 74.3 | | | $ | 388.4 | | | $ | 448.4 | | | $ | (8.9 | ) | | $ | 902.2 | |
| Cost of goods sold | | | — | | | | 51.9 | | | | 342.3 | | | | 426.8 | | | | (8.9 | ) | | | 812.1 | |
| Selling, general and administrative expenses | | | — | | | | 44.5 | | | | 2.8 | | | | 10.4 | | | | — | | | | 57.7 | |
| Restructuring charge | | | — | | | | 18.4 | | | | 0.2 | | | | 3.3 | | | | — | | | | 21.9 | |
| Impairment of long-lived assets | | | — | | | | 0.7 | | | | — | | | | 1.5 | | | | — | | | | 2.2 | |
| Operating income (loss) | | | — | | | | (41.2 | ) | | | 43.1 | | | | 6.4 | | | | — | | | | 8.3 | |
| Interest expense, net of interest income | | | — | | | | 35.6 | | | | (0.2 | ) | | | 2.4 | | | | — | | | | 37.8 | |
| Interest expense from subsidiary preferred stock dividends | | | — | | | | 9.2 | | | | — | | | | — | | | | — | | | | 9.2 | |
| Interest expense from subsidiary preferred stock accretion | | | — | | | | 0.4 | | | | — | | | | — | | | | — | | | | 0.4 | |
| Intercompany interest | | | — | | | | (4.1 | ) | | | (4.2 | ) | | | 8.3 | | | | — | | | | — | |
| Loss on sale of receivables | | | — | | | | — | | | | — | | | | 1.8 | | | | — | | | | 1.8 | |
| Loss on early extinguishment of debt | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Other expense (income), net | | | — | | | | (2.3 | ) | | | 4.5 | | | | (2.6 | ) | | | 0.2 | | | | (0.2 | ) |
| Income (loss) from continuing operations before income taxes | | | — | | | | (80.0 | ) | | | 43.0 | | | | (3.5 | ) | | | (0.2 | ) | | | (40.7 | ) |
| Income tax expense (benefit) | | | — | | | | (22.7 | ) | | | 19.9 | | | | (5.8 | ) | | | — | | | | (8.6 | ) |
| Income (loss) from continuing operations | | | — | | | | (57.3 | ) | | | 23.1 | | | | 2.3 | | | | (0.2 | ) | | | (32.1 | ) |
| Cumulative effect of change in accounting principle | | | — | | | | (0.2 | ) | | | — | | | | 0.2 | | | | — | | | | — | |
| Equity in net income (loss) of subsidiaries | | | (32.1 | ) | | | 25.4 | | | | (0.4 | ) | | | — | | | | 7.1 | | | | — | |
| Net income (loss) | | $ | (32.1 | ) | | $ | (32.1 | ) | | $ | 22.7 | | | $ | 2.5 | | | $ | 6.9 | | | $ | (32.1 | ) |
|
F-82
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, 2004 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| Net sales | | $ | — | | | $ | 237.6 | | | $ | 1,464.5 | | | $ | 1,291.8 | | | $ | (26.4 | ) | | $ | 2,967.5 | |
| Cost of goods sold | | | — | | | | 174.7 | | | | 1,331.1 | | | | 1,208.3 | | | | (26.4 | ) | | | 2,687.7 | |
| Selling, general and administrative expenses | | | — | | | | 160.3 | | | | (24.9 | ) | | | 1.9 | | | | 7.4 | | | | 144.7 | |
| Restructuring charge | | | — | | | | 6.0 | | | | 6.3 | | | | 16.6 | | | | — | | | | 28.9 | |
| Impairment of long-lived assets | | | — | | | | — | | | | 28.6 | | | | 12.1 | | | | — | | | | 40.7 | |
| Operating income (loss) | | | — | | | | (103.4 | ) | | | 123.4 | | | | 52.9 | | | | (7.4 | ) | | | 65.5 | |
| Interest expense, net of interest income | | | — | | | | 118.3 | | | | (0.1 | ) | | | 10.7 | | | | (1.5 | ) | | | 127.4 | |
| Interest expense from subsidiary preferred stock dividends | | | — | | | | 30.5 | | | | — | | | | — | | | | — | | | | 30.5 | |
| Interest expense from subsidiary preferred stock accretion | | | — | | | | 1.6 | | | | — | | | | — | | | | — | | | | 1.6 | |
| Intercompany interest | | | — | | | | (9.7 | ) | | | (13.2 | ) | | | 22.9 | | | | — | | | | — | |
| Loss on sale of receivables | | | — | | | | 0.1 | | | | — | | | | 7.1 | | | | — | | | | 7.2 | |
| Loss on early extinguishment of debt | | | — | | | | 20.3 | | | | — | | | | — | | | | — | | | | 20.3 | |
| Other expense (income), net | | | — | | | | — | | | | 11.3 | | | | (6.5 | ) | | | (0.7 | ) | | | 4.1 | |
| Income (loss) from continuing operations before income taxes | | | — | | | | (264.5 | ) | | | 125.4 | | | | 18.7 | | | | (5.2 | ) | | | (125.6 | ) |
| Income tax expense (benefit) | | | — | | | | (70.8 | ) | | | 47.9 | | | | 5.9 | | | | — | | | | (17.0 | ) |
| Income (loss) from continuing operations | | | — | | | | (193.7 | ) | | | 77.5 | | | | 12.8 | | | | (5.2 | ) | | | (108.6 | ) |
| Equity in net income (loss) of subsidiaries | | | (108.6 | ) | | | 85.1 | | | | 3.8 | | | | — | | | | 19.7 | | | | — | |
| Net income (loss) | | $ | (108.6 | ) | | $ | (108.6 | ) | | $ | 81.3 | | | $ | 12.8 | | | $ | 14.5 | | | $ | (108.6 | ) |
|
F-83
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, 2003 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| Net sales | | $ | — | | | $ | 237.5 | | | $ | 1,585.7 | | | $ | 1,167.6 | | | $ | (20.0 | ) | | $ | 2,970.8 | |
| Cost of goods sold | | | — | | | | 167.7 | | | | 1,410.5 | | | | 1,100.1 | | | | (20.0 | ) | | | 2,658.3 | |
| Selling, general and administrative expenses | | | 0.1 | | | | 143.7 | | | | 16.6 | | | | 32.6 | | | | — | | | | 193.0 | |
| Restructuring charge | | | — | | | | 18.4 | | | | 3.7 | | | | 4.7 | | | | — | | | | 26.8 | |
| Impairment of long-lived assets | | | — | | | | 0.7 | | | | 10.4 | | | | 10.0 | | | | — | | | | 21.1 | |
| Operating income (loss) | | | (0.1 | ) | | | (93.0 | ) | | | 144.5 | | | | 20.2 | | | | — | | | | 71.6 | |
| Interest expense, net of interest income | | | — | | | | 106.4 | | | | (0.2 | ) | | | 5.1 | | | | — | | | | 111.3 | |
| Interest expense from subsidiary preferred stock dividends | | | — | | | | 22.4 | | | | — | | | | — | | | | — | | | | 22.4 | |
| Interest expense from subsidiary preferred stock accretion | | | — | | | | 4.8 | | | | — | | | | — | | | | — | | | | 4.8 | |
| Intercompany interest | | | — | | | | (17.8 | ) | | | (13.5 | ) | | | 31.3 | | | | — | | | | — | |
| Loss on sale of receivables | | | — | | | | — | | | | — | | | | 4.5 | | | | — | | | | 4.5 | |
| Other expense (income), net | | | — | | | | (1.8 | ) | | | 16.6 | | | | (39.8 | ) | | | 1.1 | | | | (23.9 | ) |
| Income (loss) from continuing operations before income taxes | | | (0.1 | ) | | | (207.0 | ) | | | 141.6 | | | | 19.1 | | | | (1.1 | ) | | | (47.5 | ) |
| Income tax expense (benefit) | | | — | | | | (55.9 | ) | | | 52.1 | | | | 3.9 | | | | — | | | | 0.1 | |
| Income (loss) from continuing operations | | | (0.1 | ) | | | (151.1 | ) | | | 89.5 | | | | 15.2 | | | | (1.1 | ) | | | (47.6 | ) |
| Equity in net income (loss) of subsidiaries | | | (47.5 | ) | | | 103.6 | | | | (3.6 | ) | | | — | | | | (52.5 | ) | | | — | |
| Net income (loss) | | $ | (47.6 | ) | | $ | (47.5 | ) | | $ | 85.9 | | | $ | 15.2 | | | $ | (53.6 | ) | | $ | (47.6 | ) |
|
F-84
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of September 30, 2004 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| ASSETS |
| Current Assets: | |
| Cash and cash equivalents | | $ | — | | | $ | (57.4 | ) | | $ | 58.9 | | | $ | 2.0 | | | $ | — | | | $ | 3.5 | |
| Accounts and other receivables, net | | | — | | | | 8.0 | | | | 55.2 | | | | 189.6 | | | | 2.3 | | | | 255.1 | |
| Inventories | | | — | | | | 14.3 | | | | 97.3 | | | | 67.3 | | | | (0.1 | ) | | | 178.8 | |
| Other | | | — | | | | 37.7 | | | | 113.5 | | | | 65.9 | | | | — | | | | 217.1 | |
| Total current assets | | | — | | | | 2.6 | | | | 324.9 | | | | 324.8 | | | | 2.2 | | | | 654.5 | |
| Investment in subsidiaries | | | 340.1 | | | | 1,748.6 | | | | (25.9 | ) | | | — | | | | (2,062.8 | ) | | | — | |
| Property, plant and equipment, net | | | — | | | | 51.7 | | | | 337.2 | | | | 464.6 | | | | (47.5 | ) | | | 806.0 | |
| Goodwill | | | — | | | | — | | | | 1,101.7 | | | | 276.8 | | | | — | | | | 1,378.5 | |
| Other assets | | | — | | | | 277.5 | | | | 15.8 | | | | 64.4 | | | | — | | | | 357.7 | |
| | | $ | 340.1 | | | $ | 2,080.4 | | | $ | 1,753.7 | | | $ | 1,130.6 | | | $ | (2,108.1 | ) | | $ | 3,196.7 | |
| LIABILITIES & STOCKHOLDERS' EQUITY |
| Current Liabilities: | |
| Short-term borrowings | | $ | — | | | $ | — | | | $ | — | | | $ | 25.3 | | | $ | — | | | $ | 25.3 | |
| Current maturities of long-term debt and capital lease obligations | | | — | | | | 5.1 | | | | — | | | | 3.4 | | | | — | | | | 8.5 | |
| Accounts payable | | | — | | | | 47.0 | | | | 286.0 | | | | 303.4 | | | | (0.1 | ) | | | 636.3 | |
| Accrued expenses | | | — | | | | 123.7 | | | | 24.6 | | | | 76.8 | | | | — | | | | 225.1 | |
| Total current liabilities | | | — | | | | 175.8 | | | | 310.6 | | | | 408.9 | | | | (0.1 | ) | | | 895.2 | |
| Long-term debt and capital lease obligations | | | — | | | | 1,355.9 | | | | 5.9 | | | | 40.8 | | | | (41.4 | ) | | | 1,361.2 | |
| Mandatorily redeemable preferred stock of subsidiary | | | — | | | | 193.3 | | | | — | | | | — | | | | — | | | | 193.3 | |
| Intercompany payable (receivable) | | | — | | | | (233.9 | ) | | | (279.0 | ) | | | 512.9 | | | | — | | | | — | |
| Other, including pensions and post- retirement benefit obligation | | | — | | | | 249.2 | | | | 48.2 | | | | 109.5 | | | | — | | | | 406.9 | |
| Total liabilities | | | — | | | | 1,740.3 | | | | 85.7 | | | | 1,072.1 | | | | (41.5 | ) | | | 2,856.6 | |
| Total common stockholders' equity (deficit) | | | 340.1 | | | | 340.1 | | | | 1,668.0 | | | | 58.5 | | | | (2,066.6 | ) | | | 340.1 | |
| | | $ | 340.1 | | | $ | 2,080.4 | | | $ | 1,753.7 | | | $ | 1,130.6 | | | $ | (2,108.1 | ) | | $ | 3,196.7 | |
|
F-85
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEET
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2003 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| ASSETS | | | | |
| Current Assets: | |
| Cash and cash equivalents | | $ | — | | | $ | (71.2 | ) | | $ | 78.4 | | | $ | 6.0 | | | $ | — | | | $ | 13.2 | |
| Accounts and other receivables, net | | | — | | | | 1.1 | | | | 34.4 | | | | 220.4 | | | | 1.4 | | | | 257.3 | |
| Inventories | | | — | | | | 14.2 | | | | 96.2 | | | | 59.0 | | | | — | | | | 169.4 | |
| Other | | | — | | | | 47.8 | | | | 105.4 | | | | 59.0 | | | | — | | | | 212.2 | |
| Total current assets | | | — | | | | (8.1 | ) | | | 314.4 | | | | 344.4 | | | | 1.4 | | | | 652.1 | |
| Investment in subsidiaries | | | 440.3 | | | | 1,655.0 | | | | (1.6 | ) | | | — | | | | (2,093.7 | ) | | | — | |
| Property, plant and equipment, net | | | — | | | | 55.9 | | | | 348.1 | | | | 442.8 | | | | (12.7 | ) | | | 834.1 | |
| Goodwill | | | — | | | | — | | | | 948.9 | | | | 414.2 | | | | — | | | | 1,363.1 | |
| Other assets | | | — | | | | 276.0 | | | | 11.4 | | | | 54.5 | | | | — | | | | 341.9 | |
| | | $ | 440.3 | | | $ | 1,978.8 | | | $ | 1,621.2 | | | $ | 1,255.9 | | | $ | (2,105.0 | ) | | $ | 3,191.2 | |
| LIABILITIES & STOCKHOLDERS' EQUITY |
| Current Liabilities: | |
| Short-term borrowings | | $ | — | | | $ | — | | | $ | — | | | $ | 16.0 | | | $ | — | | | $ | 16.0 | |
| Current maturities of long-term debt and capital lease obligations | | | — | | | | 27.8 | | | | 0.1 | | | | 3.6 | | | | — | | | | 31.5 | |
| Accounts payable | | | — | | | | 46.0 | | | | 301.4 | | | | 291.5 | | | | — | | | | 638.9 | |
| Accrued expenses | | | — | | | | 146.9 | | | | 2.2 | | | | 90.4 | | | | (0.6 | ) | | | 238.9 | |
| Total current liabilities | | | — | | | | 220.7 | | | | 303.7 | | | | 401.5 | | | | (0.6 | ) | | | 925.3 | |
| Long-term debt and capital lease obligations | | | — | | | | 1,230.1 | | | | — | | | | 20.0 | | | | (12.4 | ) | | | 1,237.7 | |
| Mandatorily redeemable preferred stock of subsidiary | | | — | | | | 161.2 | | | | — | | | | — | | | | — | | | | 161.2 | |
| Intercompany payable (receivable) | | | — | | | | (317.3 | ) | | | (215.7 | ) | | | 533.0 | | | | — | | | | — | |
| Other, including pensions and post- retirement benefit obligation | | | — | | | | 243.8 | | | | 74.9 | | | | 108.0 | | | | — | | | | 426.7 | |
| Total liabilities | | | — | | | | 1,538.5 | | | | 162.9 | | | | 1,062.5 | | | | (13.0 | ) | | | 2,750.9 | |
| Total common stockholders' equity (deficit) | | | 440.3 | | | | 440.3 | | | | 1,458.3 | | | | 193.4 | | | | (2,092.0 | ) | | | 440.3 | |
| | | $ | 440.3 | | | $ | 1,978.8 | | | $ | 1,621.2 | | | $ | 1,255.9 | | | $ | (2,105.0 | ) | | $ | 3,191.2 | |
|
F-86
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, 2004 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| OPERATING ACTIVITIES | |
| Net cash provided by (used in) operating activities | | $ | — | | | $ | 13.8 | | | $ | (43.9 | ) | | $ | 21.2 | | | $ | — | | | $ | (8.9 | ) |
| INVESTING ACTIVITIES | |
| Additions to property, plant and equipment and other non-current assets | | | — | | | | (3.3 | ) | | | (62.7 | ) | | | (85.3 | ) | | | — | | | | (151.3 | ) |
| Sales of property, plant and equipment | | | — | | | | — | | | | 26.6 | | | | 33.8 | | | | — | | | | 60.4 | |
| Payments of acquisitions and related costs | | | — | | | | — | | | | (2.7 | ) | | | (0.5 | ) | | | — | | | | (3.2 | ) |
| Net cash used in investing activities | | | — | | | | (3.3 | ) | | | (38.8 | ) | | | (52.0 | ) | | | — | | | | (94.1 | ) |
| FINANCING ACTIVITIES | |
| Issuance of long-term debt | | | — | | | | 848.9 | | | | — | | | | — | | | | — | | | | 848.9 | |
| Repayment of long-term debt | | | — | | | | (799.7 | ) | | | (0.1 | ) | | | (2.8 | ) | | | — | | | | (802.6 | ) |
| Payments for debt issuance costs | | | — | | | | (15.6 | ) | | | — | | | | — | | | | — | | | | (15.6 | ) |
| Decrease in short-term borrowings | | | — | | | | — | | | | — | | | | 8.9 | | | | — | | | | 8.9 | |
| Net borrowings (repayments) on revolving credit facilities | | | — | | | | 53.1 | | | | — | | | | — | | | | — | | | | 53.1 | |
| Intercompany transfers to (from) subsidiary | | | — | | | | (83.4 | ) | | | 63.3 | | | | 20.1 | | | | — | | | | — | |
| Net cash provided by financing activities | | | — | | | | 3.3 | | | | 63.2 | | | | 26.2 | | | | — | | | | 92.7 | |
| Effect of exchange rate changes on cash | | | — | | | | — | | | | — | | | | 0.6 | | | | — | | | | 0.6 | |
| Increase (decrease) in cash and cash equivalents | | | — | | | | 13.8 | | | | (19.5 | ) | | | (4.0 | ) | | | — | | | | (9.7 | ) |
| Cash and cash equivalents at beginning of period | | | — | | | | (71.2 | ) | | | 78.4 | | | | 6.0 | | | | — | | | | 13.2 | |
| Cash and cash equivalents at end of period | | $ | — | | | $ | (57.4 | ) | | $ | 58.9 | | | $ | 2.0 | | | $ | — | | | $ | 3.5 | |
|
F-87
SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATION FINANCIAL STATEMENTS
CONSOLIDATING STATEMENT OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Nine Months Ended September 30, 2003 |
| | | Parent | | Issuer | | Guarantors | | Non-
Guarantors | | Eliminations | | Consolidated
Total |
| | | (in millions) |
| OPERATING ACTIVITIES | |
| Net cash provided by (used in) operating activities | | $ | — | | | $ | 6.8 | | | $ | 115.0 | | | $ | (77.8 | ) | | $ | — | | | $ | 44.0 | |
| INVESTING ACTIVITIES | |
| Additions to property, plant and equipment and other non-current assets | | | — | | | | (11.7 | ) | | | (54.9 | ) | | | (53.3 | ) | | | — | | | | (119.9 | ) |
| Sales of property, plant and equipment | | | — | | | | — | | | | 0.5 | | | | 14.7 | | | | — | | | | 15.2 | |
| Payments of acquisitions and related costs | | | — | | | | — | | | | (37.8 | ) | | | — | | | | — | | | | (37.8 | ) |
| Net cash used in investing activities | | | — | | | | (11.7 | ) | | | (92.2 | ) | | | (38.6 | ) | | | — | | | | (142.5 | ) |
| FINANCING ACTIVITIES | |
| Issuance of long-term debt | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Repayment of long-term debt | | | — | | | | (21.6 | ) | | | — | | | | (0.8 | ) | | | — | | | | (22.4 | ) |
| Decrease in short-term borrowings | | | — | | | | — | | | | — | | | | 2.1 | | | | — | | | | 2.1 | |
| Net borrowings (repayments) on revolving credit facilities | | | — | | | | — | | | | — | | | | 58.5 | | | | — | | | | 58.5 | |
| Intercompany transfers to (from) subsidiary | | | — | | | | (21.4 | ) | | | 26.2 | | | | (4.8 | ) | | | — | | | | — | |
| Net cash provided by (used in) financing activities | | | — | | | | (43.0 | ) | | | 26.2 | | | | 55.0 | | | | — | | | | 38.2 | |
| Effect of exchange rate changes on cash | | | — | | | | — | | | | — | | | | 1.5 | | | | — | | | | 1.5 | |
| Increase (decrease) in cash and cash equivalents | | | — | | | | (47.9 | ) | | | 49.0 | | | | (59.9 | ) | | | — | | | | (58.8 | ) |
| Cash and cash equivalents at beginning of period | | | — | | | | 0.2 | | | | 0.3 | | | | 80.8 | | | | — | | | | 81.3 | |
| Cash and cash equivalents at end of period | | $ | — | | | $ | (47.7 | ) | | $ | 49.3 | | | $ | 20.9 | | | $ | — | | | $ | 22.5 | |
|
F-88
, 2005
COLLINS & AIKMAN PRODUCTS CO.
$415,000,000
12 7/8% SENIOR SUBORDINATED NOTES DUE 2012
PROSPECTUS
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU WRITTEN INFORMATION OTHER THAN THIS PROSPECTUS OR TO MAKE REPRESENTATIONS AS TO MATTERS NOT STATED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR SOLICITATION OF YOUR OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER AFTER THE DATE OF THIS PROSPECTUS SHALL CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR OUR AFFAIRS HAVE NOT CHANGED SINCE THE DATE HEREOF.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") makes provision for the indemnification of officers and directors of corporations in terms sufficiently broad to indemnify the officers and directors of the registrant under certain circumstances for liabilities (including reimbursement of expenses incurred) arising under the Securities Act.
The Company's Restated Certificate of Incorporation (the "Certificate") provides that to the fullest extent permitted by Delaware law or another applicable law, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director. Under current Delaware law, liability of a director may not be limited (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases and (iv) for any transaction from which the director derives an improper personal benefit. The effect of the provision of the Certificate is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (iv) above. This provision does not limit or eliminate the rights of the Company or any stockholder to seek nonmonetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. In addition, the Company's Restated Bylaws (the "Bylaws") provide that the Company shall indemnify its directors, officers and employees to the fullest extent permitted by applicable law.
The Bylaws provide that the Company may indemnify any person who is or was involved in any manner or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action, suit or proceeding by or in the right of the registrant to procure a judgment in its town), by reason of the fact that he is or was or had agreed to become a director, officer or employee of the registrant or is or was or had agreed to become at the request of the board or an officer of the registrant a director, officer or employee of another corporation, partnership, joint venture, trust or other entity against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding.
.
ITEM 21. EXHIBITS
The following Exhibits are filed herewith unless otherwise indicated.
| | | | | | |
Exhibit
Number | | Description |
| 2.1 | | Agreement and Plan of Merger dated May 14, 2001 by and among Collins & Aikman Corporation, Collins & Aikman Products Co., Becker Group, L.L.C., CE Becker Inc., ME McInerney Inc., J Hoehnel Inc. and the individuals party thereto as sellers is hereby incorporated by reference to Exhibit 2.1 of Collins & Aikman Corporation's Current Report on Form 8-K dated and filed July 13, 2001. |
| 2.2 | | Agreement and Plan of Merger dated as of August 17, 2001 by and among Collins & Aikman Corporation, Collins & Aikman Products Co., JAII Acquisition Co., Elkin McCallum, Joan Fabrics Corporation and Joan Automotive Industries, Inc is hereby incorporated by reference to Exhibit 2.1 of Collins & Aikman Corporation's Current Report on Form 8-K dated September 21, 2001 and filed October 10, 2001. |
|
II-1
| | | | | | |
Exhibit
Number | | Description |
| 2.3 | | First Amendment to Agreement and Plan of Merger by and among Collins & Aikman Corporation, Collins & Aikman Products Co., JAII Acquisition Co., Elkin McCallum, Joan Fabrics Corporation and Joan Automotive Industries, Inc dated as of September 21, 2001 is hereby incorporated by reference to Exhibit 2.2 of Collins & Aikman Corporation's Current Report on Form 8-K dated September 21, 2001 and filed October 10, 2001. |
| 2.4 | | Second Amendment to the Receivables Transfer Agreement among Collins & Aikman Products Co., Carcorp, Inc., the conduit purchasers party thereto from time to time, the committed purchasers party thereto from time to time, the funding agents party thereto from time to time and JPMorgan Chase Bank, as administrative agent, dated as of December 18, 2003 to the Receivables Transfer Agreement, dated December 20, 2001, as amended and restated as of September 24, 2002 is hereby incorporated by reference to Exhibit 2.4 of Collins & Aikman Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and filed on March 17, 2004. |
| 2.5 | | Purchase Agreement dated as of August 7, 2001, as amended and restated as of November 30, 2001, by and among Textron Inc., Collins & Aikman Corporation and Collins & Aikman Products Co., including Exhibit 1 (Certificate of Designation of the 15% Series A Redeemable Preferred Stock, the 16% Series B Redeemable Preferred Stock and the 16% Series C Redeemable Preferred Stock) and Exhibit 7 (Asset Purchase Agreement dated as of August 7 by and between Textron Automotive Exteriors Inc. and JPS Automotive, Inc.), which is incorporated by reference to Collins and Aikman Corporation Current Report on Form 8-k dated December 20, 2001 and filed on January 4, 2002. The Table of Contents of the Purchase Agreement listed as Exhibit 2.4 contains a list briefly identifying the contents of all omitted schedules and exhibits. Collins & Aikman Corporation will supplementally furnish a copy of any omitted schedule or Exhibit to the Commission upon request. |
| 2.6 | | Asset Purchase Agreement dated as of August 7, 2001, as amended and restated as of November 30, 2001, by and between Textron Automotive Exteriors Inc. and JPS Automotive, Inc., which is incorporated herein by reference to Exhibit 2.2 of Collins & Aikman Corporation's Current Report on Form 8-K dated December 20, 2001 and filed on January 4, 2002. |
| 2.7 | | Asset Purchase Agreement dated as of August 17, 2001 by and among Collins & Aikman Products Co., Western Avenue Dyers, L.P., Elkin McCallum, Kerry McCallum, Penny Richards and Tyng Textiles LLC, which is incorporated by reference to Exhibit 2.3 to Collins & Aikman Corporation's Current Report on Form 8-K filed on October 4, 2001. |
| 2.8 | | First Amendment to Asset Purchase Agreement dated as of September 21, 2001, which is incorporated by reference to Exhibit 2.4 to Collins & Aikman Corporation's Current Report on Form 8-K filed on October 4, 2001. |
| 3.1 | | Restated Certificate of Incorporation of Collins & Aikman Corporation is hereby incorporated by reference to Exhibit 3.1 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended June 26, 1999 and filed August 10, 1999. |
| 3.2 | | Certificate of Amendment to the Restated Certificate of Incorporation of Collins & Aikman Corporation, which is incorporated by reference to Exhibit 3.2 of Collins & Aikman Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and filed April 2, 2001. |
| 3.3 | | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Collins & Aikman Corporation is hereby incorporated by reference to Exhibit 3.5 of Collins & Aikman Corporation's Current Report on Form 8-K filed May 29, 2002. |
|
II-2
| | | | | | |
Exhibit
Number | | Description |
| 3.4 | | By-laws of Collins & Aikman Corporation, as amended, are hereby incorporated by reference to Exhibit 3.2 of Collins & Aikman Corporation's Report on Form 10-K for the fiscal year ended January 27, 1996 and filed April 22, 1996. |
| 3.5 | | Certificate of Elimination of Cumulative Exchangeable Redeemable Preferred Stock of Collins & Aikman Corporation is hereby incorporated by reference to Exhibit 3.3 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended October 28, 1995 and filed December 8, 1995. |
| 4.1 | | Specimen Stock Certificate for the Common Stock is hereby incorporated by reference to Exhibit 4.3 of Amendment No. 3 to Collins & Aikman Holdings Corporation's Registration Statement on Form S-2 (Registration No. 33-53179) filed June 21, 1994. |
| 4.2 | | Form of Warrant is hereby incorporated by reference to Exhibit 4.1 of Collins & Aikman Corporation's Current Report on Form 8-K dated and filed July 13, 2001. |
| 4.3 | | Certificate of Designation of Series A Redeemable Preferred Stock, Series B Redeemable Preferred Stock and Series C Redeemable Preferred Stock, which is incorporated herein by reference to Exhibit 4.1 of Collins & Aikman Corporation's Current Report of Form 8-K dated December 20, 2001 and filed on January 4, 2002. |
| 4.4 | | Indenture dated as of December 20, 2001 by and among Collins & Aikman Products Co., as Issuer, the Guarantors parties thereto, and BNY Midwest Trust Company, as Trustee, which is incorporated herein by reference to Exhibit 4.2 of Collins & Aikman Corporation's Current Report on Form 8-K dated December 20, 2001 and filed on January 4, 2002. |
| 4.5 | | Receivables Transfer Agreement dated as of December 20, 2001 by and among Carcorp, Inc., as Transferor, Collins & Aikman Products Co., individually and as Collection Agent, the persons parties thereto, as CP Conduit Purchasers, Committed Purchasers and Funding Agents and JPMorgan Chase Bank, as Administrative Agent, which is incorporated herein by reference to Exhibit 4.3 of Collins & Aikman Corporation's Current Report on Form 8-K dated December 20, 2001 and filed on January 4, 2002. |
| 4.6 | | Amended and Restated Receivables Purchase Agreement dated as of December 20, 2001 among Collins & Aikman Products Co. and its wholly-owned direct and indirect subsidiaries named therein, as Sellers, and Carcorp, Inc., as Purchaser, and the other Sellers from time to time named therein, which is incorporated herein by reference to Exhibit 4.4 of Collins & Aikman Corporation's Current Report on Form 8-K dated December 20, 2001 and filed on January 4, 2002. |
| 4.7 | | Guarantee and Collateral Agreement dated as of December 20, 2001 by and among Collins & Aikman Corporation, Collins & Aikman Products Co. and certain of their subsidiaries and JPMorgan Chase Bank, as Collateral Agent, which is incorporated herein by reference to Exhibit 4.6 of Collins & Aikman Corporation's Current Report on Form 8-K dated December 20, 2001 and filed on January 4, 2002. |
| 4.8 | | Amendment and Waiver, dated August 26, 2003 to the Receivables Transfer Agreement dated December 21, 2001 which is incorporated herein by reference to Exhibit 4.1 of Collins & Aikman Corporation's Report on Form 10-Q dated September 30, 2003 and filed on November 11, 2003. |
| 4.9 | | Third Amendment to Receivables Transfer Agreement dated as of December 10, 2004, among Carcorp, Inc., Collins & Aikman Products Co., General Electric Capital Corporation as Committed Purchaser, Funding Agent and Successor Agent, and JPMorgan Chase Morgan, N.A., as Existing Agent, which is incorporated herein by reference to Exhibit 99.1 of Collins & Aikman Corporation's Current Report on Form 8-K dated December 10, 2004 and filed December 13, 2004. |
|
II-3
| | | | | | |
Exhibit
Number | | Description |
| 4.10 | | Fourth Amendment to Receivables Transfer Agreement dated January 14, 2005 among Carcorp, Inc., Collins & Aikman Products Co. and General Electric Capital Corp. as Committed Purchaser and Administrative Agent, which is incorporated herein by reference to Exhibit 99.1 of Collins & Aikman Corporation's Current Report on Form 8-K dated January 14, 2005 and filed January 18, 2005. |
| 4.11 | | Registration Rights Agreement, dated February 23, 2001, by and among Collins & Aikman Corporation, Heartland Industrial Partners, L.P. and the other investor stockholders listed on Schedule 1 thereto, Blackstone Capital Company II, L.L.C., Blackstone Family Investment Partnership I L.P., Blackstone Advisory Directors Partnership L.P., Blackstone Capital Partners, L.P. and Wasserstein/C&A Holdings, L.L.C., incorporated by reference to Annex D to Exhibit 10.1 to Collins & Aikman Corporation's Current Report on Form 8-K dated January 12, 2001 and filed January 16, 2001. |
| 4.12 | | Voting Agreement between Blackstone Capital Partners L.P. and Wasserstein Perella Partners, L.P. is hereby incorporated by reference to Exhibit 99 of Amendment No. 4 to Collins & Aikman Holdings Corporation's Registration Statement on Form S-2 (Registration No. 33-53179) filed June 27, 1994 |
| 4.13 | | Stockholders Agreement dated July 3, 2001, by and among Collins & Aikman Corporation, Heartland Industrial Partners, L.P. and the other Heartland Entities named therein, the Becker Stockholders party thereto and the Joan Stockholders party thereto is hereby incorporated by reference to Exhibit 10.85 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 4.14 | | Registration Rights Agreement, dated December 20, 2001, by and among Collins & Aikman Products Co., Collins & Aikman Corporation, and each of the subsidiaries listed on the signature pages thereof, and J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation, Deutsche Banc Alex. Brown Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated and the other several initial purchasers parties to the Purchase Agreement is hereby incorporated by reference to Exhibit 10.89 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 4.15 | | Registration Rights Agreement dated as of December 20, 2001 by and among Becker Ventures, LLC, Dresdner Kleinwort Capital Partners 2001 LP, Masco Capital Corporation, ML IBK Positions, Inc. and Collins & Aikman Corporation is hereby incorporated by reference to Exhibit 10.90 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 4.16 | | Registration Rights Agreement, dated December 20, 2001, by and between Collins & Aikman Corporation, Textron Inc., and Textron Holdco Inc is hereby incorporated by reference to Exhibit 10.91 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 4.17 | | Preferred Stock Registration and Other Rights Agreement, dated as of December 20, 2001, by and among Collins & Aikman Products Co. and Textron Inc is hereby incorporated by reference to Exhibit 10.92 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 4.18 | | Indenture, dated as of August 26, 2004, among Collins & Aikman Products Co., the guarantors party thereto and BNY Midwest Trust Company, as Trustee is hereby incorporated by reference to Exhibit 99.1 of Collins & Aikman Corporation's Current Report of Form 8-K dated August 26, 2004 and filed on August 31, 2004. |
|
II-4
| | | | | | |
Exhibit
Number | | Description |
| 4.19 | | Registration Rights Agreement, dated as of August 26, 2004, among Collins & Aikman Products Co., the guarantors party thereto and the initial purchasers party thereto is hereby incorporated by reference to Exhibit 99.2 of Collins & Aikman Corporation's Current Report of Form 8-K dated August 26, 2004 and filed on August 31, 2004. |
| 4.20 | | Credit Agreement dated as of December 20, 2001, as amended and restated as of September 1, 2004 among Collins & Aikman Products Co., as borrower, Collins & Aikman Corporation, the lenders named therein, JPMorgan Securities Inc. and Credit Suisse First Boston, as Joint Lead Arrangers, JPMorgan Securities Inc. and Deutsche Bank Securities Inc., as Joint Bookrunners for the supplemental revolving credit facility, Deutsche Bank Securities Inc., as Documentation Agent, Credit Suisse First Boston as Syndication Agent and JPMorgan Chase Bank as Administrative Agent is hereby incorporated by reference to Exhibit 99.1 of Collins & Aikman Corporation's Current Report of Form 8-K dated September 1, 2004 and filed on September 7, 2004. |
| 5.1 | | Opinion of Cahill Gordon & Reindel LLP.** |
| 10.1 | | Employment Agreement, dated as of April 1, 2000, between Collins & Aikman Products Co. and an executive officer is hereby incorporated by reference to Exhibit 10.3 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended July 1, 2000. |
| 10.2 | | 1993 Employee Stock Option Plan, as amended and restated, is hereby incorporated by reference to Exhibit 10.13 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended April 29, 1995. |
| 10.3 | | 1994 Employee Stock Option Plan, as amended through February 7, 1997, is hereby incorporated by reference to Exhibit 10.12 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended March 29, 1997. |
| 10.4 | | 2000 Employee Stock Option Plan is hereby incorporated by reference to Exhibit 10.6 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended July 1, 2000. |
| 10.5 | | 1994 Directors Stock Option Plan as amended and restated is hereby incorporated by reference to Exhibit 10.15 to Collins & Aikman Corporation's Report on Form 10-K for the year ended December 26, 1998. |
| 10.6 | | 1994 Employee Stock Option Plan, as amended and restated through June 3, 1999 is hereby incorporated by reference to Exhibit 10.2 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended June 26, 1999. |
| 10.7 | | Change in Control Agreement, dated March 17, 1998, between Collins & Aikman Corporation and an executive officer is hereby incorporated by reference to Exhibit 10.22 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended March 28, 1998. |
| 10.8 | | Change in Control Agreement, dated March 17, 1998, between Collins & Aikman Corporation and an executive officer is hereby incorporated by reference to Exhibit 10.29 of Collins & Aikman Corporation's Report on Form 10-K for the fiscal year ended December 25, 1999. |
| 10.9 | | Change in Control Agreement, dated as of April 1, 2000, between Collins & Aikman Products Co. and an executive officer is hereby incorporated by reference to Exhibit 10.4 of Collins & Aikman Corporation's Report on Form 10-Q for the fiscal quarter ended July 1, 2000. |
| 10.10 | | Stockholders Agreement, dated February 23, 2001, by and among Collins & Aikman Corporation, Heartland Industrial Partners, L.P. and other investor stockholders listed on Schedule 1 thereto, Blackstone Capital Company II, L.L.C., Blackstone Family Investment Partnership I L.P., Blackstone Capital Partners L.P., and Wasserstein/C&A Holdings, L.L.C., incorporated by reference to Annex E to Exhibit 10.1 to Collins & Aikman Corporation's Current Report on form 8-K dated January 12, 2001 and filed January 16, 2001. |
|
II-5
| | | | | | |
Exhibit
Number | | Description |
| 10.11 | | Share Purchase Agreement, dated as of January 12, 2001, between Collins & Aikman Corporation and Heartland Industrial Partners, L.P., is hereby incorporated by reference to Exhibit 10.1 of Collins & Aikman Corporation's Report on Form 8-K dated January 12, 2001, incorporated by reference to Exhibit 10.1 to Collins & Aikman Corporation's Current Report on Form 8-K dated January 12, 2001 and filed January 16, 2001. |
| 10.12 | | Services Agreement, dated as of February 23, 2001, by and among Collins & Aikman Corporation, Collins & Aikman Products Co. and Heartland Industrial Partners, L.P is hereby incorporated by reference to Exhibit 10.59 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.13 | | Second Amendment dated March 15, 2004 to the Services Agreement dated February 23, 2001 is hereby incorporated by reference to Exhibit 10.1 of Collins & Aikman Corporation's report on form 10-Q for the quarter ended March 31, 2004 and filed May 7, 2004. |
| 10.14 | | Profit Participation Interest Agreement, dated as of February 23, 2001, by and among Heartland Industrial Partners, L.P. and the other investor stockholders listed on Schedule 1 thereto and each of Collins & Aikman Corporation, Blackstone Capital Company II, L.L.C. and Wasserstein/C&A Holdings, L.L.C., incorporated by reference to Annex B to Exhibit 10.1 to Collins & Aikman Corporation's Current Report on Form 8-K dated January 12, 2001 and filed January 16, 2001. |
| 10.15 | | Severance Benefit Agreement dated August 9, 1999 between Collins & Aikman Corporation and an executive officer is hereby incorporated by reference to Exhibit 10.32 of Collins & Aikman Corporation's Report on Form 10-K for the fiscal year ended December 25, 1999. |
| 10.16 | | Employment Agreement dated December 1, 2000 between Collins & Aikman Products Co. and an executive officer, which is incorporated by reference to Exhibit 10.75 of Collins & Aikman Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. |
| 10.17 | | Employment Agreement dated as of April 1, 2000, between Collins & Aikman Products Co. and an executive officer is hereby incorporated by reference to Exhibit 10.3 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended July 1, 2000. |
| 10.18 | | Service Contract between Collins & Aikman Products GmbH and an executive officer, which is incorporated by reference to Exhibit 10.5 of Collins & Aikman Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 and filed August 14, 2001. |
| 10.19 | | Lease Agreement, dated as of June 29, 2001, between New King, L.L.C., as landlord, and Collins & Aikman Products Co., as tenant is hereby incorporated by reference to Exhibit 10.82 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.20 | | Lease Agreement, dated as of June 29, 2001, between Anchor Court, L.L.C., as landlord and Collins & Aikman Products Co., as tenant is hereby incorporated by reference to Exhibit 10.84 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.21 | | Registration Rights Agreement, dated July 3, 2001, by and among Collins & Aikman Corporation, Charles E. Becker, Michael E. McInerney and Jens Höhnel and, together with the Joan Investors (as defined therein) is hereby incorporated by reference to Exhibit 10.86 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.22 | | First Amendment to Services Agreement, dated as of August 7, 2001, among Collins & Aikman Corporation, Collins & Aikman Products Co. and Heartland Industrial Partners, L.P is hereby incorporated by reference to Exhibit 10.87 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
|
II-6
| | | | | | |
Exhibit
Number | | Description |
| 10.23 | | Equipment Lease, dated as of December 18, 2001, among Textron Automotive Exteriors Inc. and Textron Automotive Interiors Inc., collectively as lessee, and IAC TAX V, LLC, as lessor is hereby incorporated by reference to Exhibit 10.88 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.24 | | Intellimold Technology License and Support Agreement, dated as of December 20, 2001, by and between Textron, Inc. and Collins & Aikman Corporation and Collins & Aikman Products Co is hereby incorporated by reference to Exhibit 10.93 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.25 | | Technology License Agreement (Retained IP), dated as of December 20, 2001, by and between Textron, Inc. and Collins & Aikman Corporation and Collins & Aikman Products Co is hereby incorporated by reference to Exhibit 10.94 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.26 | | Technology License Agreement (Licensed-Back IP), dated as of December 20, 2001, by and between Textron, Inc. and Collins & Aikman Corporation and Collins & Aikman Products Co is hereby incorporated by reference to Exhibit 10.95 of Collins & Aikman Corporation's Report on Form 10-K for the year ended December 31, 2001 and filed April 1, 2002. |
| 10.27 | | Employment Agreement between Products and an officer of the Company dated as of November 1, 2001 is hereby incorporated by reference to Exhibit 10.3 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended March 31, 2002 and filed May 15, 2002. |
| 10.28 | | Employment Agreement between Products and an officer of the Company dated as of November 1, 2001 is hereby incorporated by reference to Exhibit 10.4 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended March 31, 2002 and filed May 15, 2002. |
| 10.29 | | Employment Agreement between Products and an officer of the Company dated as of December 20, 2001 is hereby incorporated by reference to Exhibit 10.5 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended March 31, 2002 and filed May 15, 2002. |
| 10.30 | | Employment Agreement between Products and an officer of the Company dated as of December 20, 2001 is hereby incorporated by reference to Exhibit 10.6 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended March 31, 2002 and filed May 15, 2002. |
| 10.31 | | Employment Agreement between Products and an officer of the Company dated as of December 20, 2001 is hereby incorporated by reference to Exhibit 10.7 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended March 31, 2002 and filed May 15, 2002. |
| 10.32 | | Separation and Consultancy Agreement dated July 31, 2002 is hereby incorporated by reference to Exhibit 10.1 to Collins & Aikman Corporation's Current report on Form 8-K filed August 2, 2002. |
| 10.33 | | Severance Benefit Agreement between Collins and Aikman Corporation and an officer of the Company dated April 5, 2002 is hereby incorporated by reference to Exhibit 10.2 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended June 30, 2002 and filed August 14, 2002. |
| 10.34 | | Employment and Consulting Agreement between Collins and Aikman Corporation and an Employee dated July 2002 is hereby incorporated by reference to Exhibit 10.1 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended September 30, 2002 and filed November 14, 2002. |
|
II-7
| | | | | | |
Exhibit
Number | | Description |
| 10.35 | | Separation Agreement between Collins and Aikman Corporation and an officer of the Company dated October 2002 is hereby incorporated by reference to Exhibit 10.3 of Collins & Aikman Corporation's Report on Form 10-Q for the quarter ended September 30, 2002 and filed November 14, 2002. |
| 10.36 | | Employment Agreement between Collins & Aikman and an officer of the Company dated January 25, 2004 is hereby incorporated by reference to Exhibit 10.35 of Collins & Aikman Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and filed on March 17, 2004. |
| 10.37 | | Amendment to Employment Agreement between Collins & Aikman Corporation and an officer of the Company dated January 25, 2004 is hereby incorporated by reference to Exhibit 10.36 of Collins & Aikman Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and filed on March 17, 2004. |
| 10.38 | | Separation Agreement between Collins & Aikman Corporation and an officer of the Company dated February 29, 2004 is hereby incorporated by reference to Exhibit 10.37 of Collins & Aikman Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and filed on March 17, 2004. |
| 12.1 | | Computation of Ratio of Earnings to Fixed Charges.* |
| 21.1 | | Subsidiaries of the Registrant.* |
| 23.1 | | Consent of KPMG LLP, Independent Registered Public Accounting Firm.* |
| 23.2 | | Consent of PricewaterhouseCoopers, LLP, Independent Registered Pubic Accounting Firm.* |
| 24.1 | | Powers of Attorney (set forth on the signature pages to this Registration Statement). |
| 25.1 | | Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of BNY Midwest Trust Company.* |
| 99.1 | | Form Letter of Transmittal.* |
| 99.2 | | Form Notice of Guaranteed Delivery.* |
|
| |
| * | Indicates document filed herewith. |
| |
| ** | To be filed by amendment. |
II-8
ITEM 22. UNDERTAKINGS.
| |
| a) | Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrants pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrants of expenses incurred or paid by a director, officer or controlling person of the registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrants will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. |
| |
| b) | The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. |
| |
| c) | The undersigned registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. |
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, State of Michigan on January 27, 2005.
| COLLINS & AIKMAN PRODUCTS CO. |
| | |
| By: | /s/ Bryce M. Koth
Name: Bryce M. Koth
Title: Senior Vice President and
Chief Financial Officer |
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints John A. Galante and Bryce M. Koth, and each acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Registration Statement and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Registration Statement and any amendments (including post-effective amendments), supplements hereto and registration statements filed pursuant to Rule 162 of the Securities Act of 1933, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 27th day of January, 2005.
| | |
| Signature | | Title |
|
| /s/ David A. Stockman | | Chief Executive Officer
(Principal Executive Officer) |
|
| David A. Stockman |
|
| /s/ Bryce M. Koth | | Senior Vice President and Chief Financial Officer
and Director
(Principal Financial Officer) |
|
| Bryce M. Koth |
|
| /s/ John A. Galante | | Director |
|
| John A. Galante |
|
| /s/ Jay B. Knoll | | Director |
|
| Jay B. Knoll |
|
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, State of Michigan on January 27, 2005.
| COLLINS & AIKMAN CORPORATION |
| | |
| By: | /s/ Bryce M. Koth
Name: Bryce M. Koth
Title: Senior Vice President and
Chief Financial Officer |
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints John A. Galante and Bryce M. Koth, and each acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Registration Statement and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Registration Statement and any amendments (including post-effective amendments), supplements hereto and registration statements filed pursuant to Rule 162 of the Securities Act of 1933, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 27th day of January, 2005.
| | |
| Signature | | Title |
|
| /s/ David A. Stockman | | Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) |
|
| David A. Stockman |
|
| /s/ J. Michael Stepp | | Vice Chairman of the Board |
|
| J. Michael Stepp |
|
| /s/ Bryce M. Koth | | Senior Vice President and Chief Financial Officer
(Principal Accounting Officer) |
|
| Bryce M. Koth |
|
| /s/ Robert C. Clark | | Director |
|
| Robert C. Clark |
|
| /s/ Marshall A. Cohen | | Director |
|
| Marshall A. Cohen |
|
| /s/ David C. Dauch | | Director |
|
| David C. Dauch |
|
| /s/ Anthony Hardwick | | Director |
|
| Anthony Hardwick |
|
| /s/ Timothy D. Leuliette | | Director |
|
| Timothy D. Leuliette |
|
| /s/ Gerald McConnell | | Director |
|
| W. Gerald McConnell |
|
| /s/ Warren B. Rudman | | Director |
|
| Warren B. Rudman |
|
| /s/ Daniel P. Tredwell | | Director |
|
| Daniel P. Tredwell |
|
| /s/ Richard C. Jelinek | | Director |
|
| Richard C. Jelinek |
|
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, State of Michigan on January 27, 2005.
| COLLINS & AIKMAN ACCESSORY
MATS, INC. |
| | |
| By: | /s/ Bryce M. Koth
Name: Bryce M. Koth
Title: President and Chief Financial Officer |
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints John A. Galante and Bryce M. Koth, and each acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Registration Statement and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Registration Statement and any amendments (including post-effective amendments), supplements hereto and registration statements filed pursuant to Rule 162 of the Securities Act of 1933, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 27th day of January, 2005.
| | |
| Signature | | Title |
|
| /s/ Bryce M. Koth | | President, Chief Financial Officer and Director
(Principal Executive Officer and
Principal Financial Officer) |
|
| Bryce M. Koth |
|
| /s/ John A. Galante | | Director |
|
| John A. Galante |
|
| /s/ Jay B. Knoll | | Director |
|
| Jay B. Knoll |
|
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, State of Michigan on January 27, 2005.
| COLLINS & AIKMAN AUTOMOTIVE MATS, LLC |
| | |
| By: | /s/ Bryce M. Koth
Name: Bryce M. Koth
Title: President and Chief Financial Officer |
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints John A. Galante and Bryce M. Koth, and each acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Registration Statement and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Registration Statement and any amendments (including post-effective amendments), supplements hereto and registration statements filed pursuant to Rule 162 of the Securities Act of 1933, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 27th day of January, 2005.
| | |
| Signature | | Title |
|
| /s/ Bryce M. Koth | | President, Chief Financial Officer and Director
(Principal Executive Officer and
Principal Financial Officer) |
|
| Bryce M. Koth |
|
| /s/ John A. Galante | | Director |
|
| John A. Galante |
|
| /s/ Jay B. Knoll | | Director |
|
| Jay B. Knoll |
|
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, State of Michigan on January 27, 2005.
| COLLINS & AIKMAN ASSET
SERVICES, INC. |
| | |
| By: | /s/ Bryce M. Koth
Name: /s/ Bryce M. Koth
Title: President and Chief Financial Officer |
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints John A. Galante and Bryce M. Koth, and each acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Registration Statement and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Registration Statement and any amendments (including post-effective amendments), supplements hereto and registration statements filed pursuant to Rule 162 of the Securities Act of 1933, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 27th day of January, 2005.
| | |
| Signature | | Title |
|
| /s/ Bryce M. Koth | | President, Chief Financial Officer and Director
(Principal Executive Officer and
Principal Financial Officer) |
|
| Bryce M. Koth |
|
| /s/ John A. Galante | | Director |
|
| John A. Galante |
|
| /s/ Jay B. Knoll | | Director |
|
| Jay B. Knoll |
|
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, State of Michigan on January 27, 2005.
| COLLINS & AIKMAN AUTOMOTIVE
EXTERIORS, INC. |
| | |
| By: | /s/ Bryce M. Koth
Name: Bryce M. Koth
Title: President and Chief Financial Officer |
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints John A. Galante and Bryce M. Koth, and each acting alone, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments or supplements to this Registration Statement and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing necessary or appropriate to be done with this Registration Statement and any amendments (including post-effective amendments), supplements hereto and registration statements filed pursuant to Rule 162 of the Securities Act of 1933, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated and on the 27th day of January, 2005.
| | |
| Signature | | Title |
|
| /s/ Bryce M. Koth | | President, Chief Financial Officer and Director
(Principal Executive Officer and
Principal Financial Officer) |
|
| Bryce M. Koth |
|
| /s/ John A. Galante | | Director |
|
| John A. Galante |
|
| /s/ Jay B. Knoll | | Director |
|
| Jay B. Knoll |
|
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Troy, State of Michigan on January 27, 2005.
![[ ]](https://capedge.com/proxy/S-4/0000950136-05-000418/ebox.gif){kind=small}