Registration No. 33-66166
Filed pursuant to Rule 424(b)(3)
PROSPECTUS
COLOR TILE, INC.
2,200,000 SHARES
SERIES A SENIOR INCREASING RATE PREFERRED STOCK
$1.00 PAR VALUE, $25.00 LIQUIDATION PREFERENCE
All of the 2,200,000 shares of Series A Senior
Increasing Rate Preferred Stock, par value $1.00 per share,
liquidation preference $25.00 per share (the "Series A Shares"),
of Color Tile, Inc. (the "Company" or "Color Tile"), offered
hereby are being offered by the Selling Stockholders. See
"Selling Stockholders." The current quarterly dividend, which
applies to the quarters commencing on January 15, 1994 and
April 15, 1994, will be equal to $.90625 per Series A Share. The
quarterly dividend payable thereafter will increase by $.03125
per Series A Share over the previously prevailing quarterly
dividend on each July 15 and January 15 commencing July 15, 1994
up to a maximum quarterly dividend of $1.0625 per Series A Share,
provided that any quarterly dividends payable in excess of $.9375
per Series A Share may, at the option of the Company, be paid to
the holders of the Series A Shares in whole or in part by the
issuance of additional Series A Shares at the rate of one
additional Series A Share for each $25.00 of such dividends not
paid in cash. Each quarterly dividend will be fully cumulative
and will accrue (whether or not declared) without accruing
interest or additional dividends. In addition, if not earlier
redeemed, the Series A Shares will be subject to mandatory
redemption on January 15, 2003 at a price per Series A Share equal
to $25.00 plus accrued and unpaid dividends to the redemption
date. The Company's ability to pay dividends on the Series A
Shares and to redeem the Series A Shares is subject to the
satisfaction of certain covenants and restrictions under the
Company's credit facilities, the Company's Certificate of
Incorporation and the Delaware General Corporation Law. See
"Description of the Securities -- Series A Shares" for a
discussion of these and other terms of the Series A Shares.
The Company will not receive any of the proceeds from the
sale of the Series A Shares. Any or all of such Series A Shares
covered by this Prospectus may be sold, from time to time, by
means of ordinary brokerage transactions or otherwise. See "Plan
of Distribution."
The Series A Shares are being offered hereunder in order to
satisfy the obligation of the Company under an Exchange and
Registration Rights Agreement, dated as of August 13, 1992 (the
"Registration Rights Agreement"), among the Company and the
holders of the Series A Shares (together with subsequent holders
thereof, the "Series A Holders").
THERE HAS BEEN NO ACTIVE TRADING MARKET FOR THE SERIES A
SHARES NOR IS IT EXPECTED THAT SUCH AN ACTIVE TRADING MARKET WILL
DEVELOP.
FOR A DISCUSSION OF CERTAIN OTHER CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE SERIES A SHARES, SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 16, 1994
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement relating to
the Series A Shares offered hereby (herein, together with all
amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts
of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby
made to the Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect
to each such contract, agreement or other document filed as an
Exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description thereof, and each such
statement shall be deemed qualified in its entirety by such
reference.
The Company also files reports and other information with the
Commission under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Registration Statement and the exhibits
and schedules thereto and such reports and other information filed
by the Company pursuant to the Exchange Act may be inspected and
copied (at prescribed rates) at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the Commission's
regional offices located at Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven
World Trade Center, New York, New York 10048.
___________________
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and
should be read in conjunction with, the detailed information and
consolidated financial statements contained elsewhere in this
Prospectus. The Company operates on a 52-53 week fiscal year
ending on the Sunday closest to December 31 each year. The
Company's fiscal years ended January 3, 1993, December 29, 1991
and December 30, 1990 are sometimes hereinafter referred to as
"fiscal 1992," "fiscal 1991" and "fiscal 1990," respectively.
The Company's fiscal year ending January 2, 1994 is sometimes
hereinafter referred to as "fiscal 1993."
THE COMPANY
The Company is a nation-wide specialty retailer of floor
covering products, principally serving the do-it-yourself, buy-
it-yourself residential remodeling market and, to a lesser
extent, the small contractor or commercial customer. Management
believes that the Company is the largest specialty retailer of
floor-covering products in the United States based on sales. At
October 3, 1993, Color Tile sold its line of products through
794 domestic company-owned or franchised retail stores
(collectively, the "Color Tile Stores").
The Company offers a broad selection of quality floor
covering, wall covering and related products and accessories
accompanied by a high level of customer service and support at
prices competitive with other floor and wall covering retailers.
The Company's product lines include glazed ceramic tile for
floor and wall covering, resilient flooring (consisting of vinyl
tile and sheet vinyl), carpeting, hardwood flooring (consisting
of strip and plank flooring and parquet tile), window treatments
and wall coverings. The Company also sells a full line of
installation and maintenance materials (including adhesives,
grouts, caulks, waxes, polishes and sealers) and tools for use
in installing or maintaining the Company's principal products,
and arranges professional installation for its products through
local independent contractors. Net sales for the Company were
$580.4 million for the fiscal year ended January 3, 1993 and
$401.6 million for the nine months ended October 3, 1993.
Management believes that the Company's most important
competitive advantages are its national store network,
nationally recognized "Color Tile" and "ColorCarpet" trademarks,
strong vendor relationships and significant operating leverage
resulting from the Company's reduction in operating and
administrative costs as a percentage of net sales over the past
two years. The Company's strategy is to increase sales by
expanding its product offerings, opening new Color Tile Stores
and adding new channels of distribution, including direct-
response retailing. The Company has expanded its special-order
programs in order to offer the consumer a wider selection of
products in each of the principal product categories sold in its
stores. The special-order programs generally do not require
significant additional investment in inventory.
Management believes that retail sales of floor-covering
products in the United States during 1992 totaled approximately
$10 billion. Sales of carpeting and hard-surface flooring
products were approximately $7.5 billion and $2.5 billion,
respectively, during that period. Since its founding in 1953,
the Company has sold a broad selection of hard-surface flooring
products. Ceramic tile, the Company's highest-margin floor-
covering product line, is offered in a variety of sizes, colors,
textures and finishes. Resilient flooring, including sheet
vinyl and vinyl tile, represents the Company's other principal
hard-surface floor-covering product line. Vinyl tile, the
traditional "do it yourself" floor covering product, typically
costs less per square foot and is easier to install than other
types and styles of floor covering. In addition, the Company
also sells a broad selection of wood-flooring products. The
Company sells its hard-surface flooring products primarily from
in-stock supplies, supplemented by special-order programs.
Total Company sales of hard-surface flooring products in 1992
were approximately $300 million.
The Company began exploring the possibility of marketing
carpet on a nationwide basis in 1987. In 1989, the Company
introduced a full line of carpeting on a nation-wide basis using
the trade name "ColorCarpet" as an addition to its traditional
hard-surface flooring product line. The two principal features
of the Company's carpet program are the marketing of carpet by
color, rather than by style, and marketing on a cut-to-order
basis, rather than from in-stock inventory. Domestic carpet
sales and related installation revenues have grown to
approximately $115 million in 1992, representing approximately
22% of total domestic retail sales.
3
<PAGE>
In response to successful introduction of carpeting, the
Company has developed additional retail formats to increase
further its penetration of the carpeting segment of the floor
covering market. In 1992, the Company began developing two new
retailing formats: Floors A Plenty and ColorCarpet. Floors A
Plenty is a free-standing "super-store" that targets customers
who tend to be more value-conscious than Color Tile's existing
customers and who perceive the super-store format as offering
increased value. This format also targets small contractors and
other commercial customers. To capitalize on the success of the
ColorCarpet trade name, the Company also developed a format of
smaller, principally franchised specialty carpet stores
operating under the "ColorCarpet" name.
The Company has recently acquired the assets of American
Blind Factory, Inc. ("ABF") and assumed certain liabilities in
connection therewith with a portion of the net proceeds of a
public offering of $200 million of the Company's Senior Notes
due 2001 (the "Senior Notes") completed on December 17, 1993.
ABF is a direct-response marketing company engaged in the sale,
on a special-order basis, of name-brand and private-label window
treatments (blinds and similar products), and wall coverings at
significant discounts from average retail prices. ABF is a
leader in the rapidly growing direct-response distribution
channel of window treatments and wall coverings.
Management believes that the acquisition of the assets of
ABF (the "ABF Assets") will afford the Company an opportunity to
realize certain synergies between ABF and Color Tile, including
the possibility of selling Color Tile's floor covering products
to the ABF customer base. The Company's research has shown that
one-third of purchasers of wall-covering or window-treatment
products are likely to purchase floor-covering products within
six months. In addition, the Company believes that the
acquisition of the ABF Assets will enable Color Tile to enjoy
certain economies of scale in purchasing window treatments and
wall coverings.
Net sales for ABF have grown from approximately $5.9
million for the twelve months ended December 31, 1988 to
approximately $12.6 million for the twelve months ended
December 31, 1989 (representing an annual growth rate of
113.6%), approximately $24.7 million for the fiscal year ended
December 31, 1990 (representing an annual growth rate of 96.0%),
approximately $44.3 million for the fiscal year ended
December 31, 1991 (representing an annual growth rate of 79.4%)
and approximately $64.1 million for the fiscal year ended
December 31, 1992 (representing an annual growth rate of 44.7%).
Over the past four years, net sales have grown at a compound
annual growth rate of 82% (i.e., representing the percentage
change in net sales of ABF compounded each year). Net sales for
ABF were approximately $46.6 million for the nine months ended
September 30, 1992 and approximately $61.8 million for the nine
months ended September 30, 1993, representing an increase of
32.6%. Over the past five years, earnings before interest,
taxes, depreciation and amortization of ABF, adjusted for
compensation paid to certain members of management, grew to
approximately $7.2 million for the fiscal year ended December
31, 1992, or 11.2% of net sales. Earnings before interest,
taxes, depreciation and amortization of ABF (calculated on the
same basis) were approximately $4.7 million for the nine months
ended September 30, 1992, or 10.1% of net sales, and
approximately $6.3 million for the nine months ended September
30, 1993, or 10.2% of net sales. While management believes that
sales generated by the ABF Assets will continue to grow in the
future, no assurance can be given that such growth will continue
or that any future growth will occur at rates comparable to
those experienced over the past four years.
Management believes that the Company is well positioned to
take advantage of a recovery in the residential remodeling
market. Over the past two years, the Company has substantially
reduced its operating costs as a percentage of sales, which has
resulted in increased operating leverage. Management believes
that the Company's operating leverage has helped enable the
Company to withstand the current difficult economic environment
and should enhance the Company's operating results in the event
of an increase in the Company's sales. In addition, management
believes that the Company's operating leverage has enabled it to
expand its channels of distribution by implementing the
ColorCarpet and Floors A Plenty formats and acquire the ABF
Assets with only a modest increase in the Company's general and
administrative expenses.
Recently, the Company's operating results have been
adversely affected by the difficult retail environment. For
fiscal 1992, the Company experienced a pre-tax loss of
approximately $20.2 million (after certain special charges of
$30.0 million and the gain of approximately $4.0 million on the
sale of the Company's wood-flooring manufacturing plant (the
"Wood Plant")). If the special charges and the gain on the sale
of the Wood Plant recorded in fiscal 1992 were excluded, pre-tax
income would have been approximately $5.8 million. For fiscal
4
<PAGE>
1991, the Company's pre-tax loss was approximately $30.6
million. The improvement in fiscal 1992 as compared to fiscal
1991 was primarily the result of a reduction in interest expense
and an improvement in operating results. For the nine months
ended October 3, 1993, pre-tax loss was approximately $1.3
million (after a loss of $9.5 million relating to the disposal
of Color Tile's Canadian operations) compared to pre-tax income
of approximately $7.0 million (after a gain of approximately
$4.0 million on the sale of the Company's Wood Plant) for the
nine months ended September 27, 1992. Excluding the loss on
disposal of a line of business in 1993 and the gain on the sale
of assets in 1992, pre-tax income would have been approximately
$8.2 million for the nine months ended October 3, 1993 and
approximately $3.0 million for the nine months ended September
27, 1992. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition."
Of the 794 domestic Color Tile Stores, 785 are operated
under the name "Color Tile" (77 of which are owned and operated
by franchisees), one is operated under the name "Floors A
Plenty," two are operated under the name "ColorCarpet" and six
are operated under the name "Peerless." The Color Tile Stores
operated by the Company are referred to collectively herein as
"Company Stores." The Color Tile Stores operated by franchisees
are referred to collectively herein as "Franchised Stores." In
addition, the Company currently operates 37 stores in Canada
under the name "Factory Carpet" (eight of which are owned and
operated by franchisees).
The Company was acquired in December 1989 (the "1989
Merger") by Color Tile Holdings, Inc., a Delaware corporation
("CT Holdings"). CT Holdings was formed to acquire the Company
by affiliates of INVESTCORP S.A., a company organized under the
laws of Luxembourg ("Investcorp"), other international investors
and members of the Company's management. The Company's
principal executive offices are located at 515 Houston Street,
Fort Worth, Texas 76102 and its telephone number at that
location is (817) 870-9400.
5
<PAGE>
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents summary selected consolidated financial data
derived from the audited consolidated financial statements of the predecessor
company (the "Predecessor Company") for the fiscal years ended January 1, 1989
and December 31, 1989 and for the Company for the fiscal years ended December
30, 1990, December 29, 1991 and January 3, 1993 and from the unaudited
consolidated financial statements of the Company for the nine months ended
September 27, 1992 and October 3, 1993. The selected unaudited pro forma
financial data presented below give effect to the application of the net
proceeds of the offering of its 10 3/4% Senior Notes and the acquisition of the
ABF Assets as if such offering and acquisition had been completed on either
January 3, 1993 or October 3, 1993, in the case of the balance sheet data, and
as if such offering and acquisition had occurred at the beginning of the
respective periods presented in the case of the income statement data. The
following summary data should be read in conjunction with the Consolidated
Financial Statements, "Selected Consolidated Financial Information," "Unaudited
Pro Forma Condensed Consolidated Financial Statements" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition"
included herein. The capital structure and accounting basis of assets and
liabilities of the Company subsequent to December 31, 1989 (the date of the
1989 Merger) differ from those of the Predecessor Company.
<TABLE>
<CAPTION>
Fiscal Year Ended(a)
-----------------------------------------------------------------------------------
Pro
Predecessor Company Forma
------------------------
1/1/89 12/31/89 12/30/90 12/29/91 1/3/91 1/3/93
---------- ----------- ---------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Result of Operations:
Net sales .............................. $526,604 $465,207 $525,819 $544,315 $580,385 $644,469
Operating income before
depreciation and amortization
and special charges ................... 40,633 35,853 56,077 50,561 60,221 67,469
Depreciation and amortization .......... 25,550 23,133 27,781 29,202 28,683 31,427
Special charges(c) ..................... -- -- -- -- 30,000 30,000
Gain (loss) on disposal of a line
of business(d), (e) ................... 30,814 -- -- -- 4,007 4,007
Interest expense, net .................. 43,384 37,209 50,100 51,986 25,697 38,766
Income (loss) before income taxes,
extraordinary items and cumulative
effect of changes in accounting
methods(f), (g) ....................... 2,513 (24,489) (21,804) (30,627) (20,152) (28,717)
Net income (loss) ...................... (1,432) (28,558) (22,197) (23,608) (21,993) (29,666)
Preferred dividends .................... (4,975) (4,971) (2,979) (2,979) (6,224) (6,224)
Net income (loss) applicable to
common stockholder .................... (6,407) (33,529) (25,176) (26,587) (28,217) (35,890)
Selected Data:
EBITDA(h) .............................. $ 40,633 $ 35,853 $ 56,077 $ 50,561 $ 60,221 $ 67,469
EBITDA as a percent of sales ........... 7.7% 7.7% 10.7% 9.3% 10.4% 10.5%
Cash preferred stock dividends ......... -- -- -- -- $ 2,797 $ 2,797
Capital expenditures ................... $ 21,808 $ 23,647 $ 12,133 $ 9,517 $ 13,938 $ 14,419
Ratio of EBITDA to interest
expense, net .......................... .9x 1.0x 1.1x 1.0x 2.3x 1.7x
Ratio of EBITDA to interest
expense, net and cash dividends ....... .9x 1.0x 1.1x 1.0x 2.1x 1.6x
Ratio of earnings to fixed charges ..... 1.05x (i) (i) (i) (i) (i)
Ratio of earnings to fixed charges and
preferred stock dividends ............. (j) (j) (j) (j) (j) (j)
Same store sales- % change ............. 4.7% 5.8% 6.3% (1.8%) 5.6% 5.6%
Number of Color Tile Stores ............ 696 705 769 785 806 806
Balance Sheet Data (at period end):
Current assets ......................... $182,447 $124,302 $ 92,351 $ 88,999 $ 94,085 $ 95,012
Current liabilities .................... 119,041 80,793 89,334 87,593 82,831 91,148
Total assets ........................... 469,539 402,482 525,338 504,984 462,992 564,227
Long-term debt, net of current
portion ............................... 285,174 295,966 364,440 290,475 239,689 338,491
Redeemable preferred stock ............. 44,953 46,997 23,576 26,556 82,596 82,346
Common stockholder's equity ............ 9,992 (23,537) 24,824 77,941 48,789 43,155
</TABLE>
<PAGE>
Nine Months Ended(b)
--------------------------------
Pro
Forma
9/27/92 10/3/93 10/3/93
-------- -------- --------
Result of Operations:
Net sales .............................. $436,829 $401,563 $463,328
Operating income before
depreciation and amortization
and special charges ................... 44,461 40,673 46,975
Depreciation and amortization .......... 20,758 18,034 20,112
Special charges(c) ..................... -- -- --
Gain (loss) on disposal of a line
of business(d), (e) ................... 4,007 (9,500) (9,500)
Interest expense, net ................. 20,666 14,413 24,787
Income (loss) before income taxes,
extraordinary items and cumulative
effect of changes in accounting
methods(f), (g) ...................... 7,044 (1,274) (7,424)
Net income (loss) ..................... 5,434 (1,898) (7,771)
Preferred dividends ................... (3,162) (9,162) (9,162)
Net income (loss) applicable to
common stockholders .................. 2,272 (11,060) (16,933)
Selected Data:
EBITDA(h) ............................. $ 44,461 $ 40,673 $ 46,975
EBITDA as a percent of sales .......... 10.2% 10.1% 10.1%
Cash preferred stock dividends ........ $ 894 $ 5,630 $ 5,630
Capital expenditures .................. $ 10,578 $ 9,357 $ 9,608
Ratio of EBITDA to interest
expense, net .......................... 2.2x 2.8x 1.9x
Ratio of EBITDA to interest
expense, net and cash dividends ....... 2.1x 2.0x 1.5x
Ratio of earnings to fixed charges ..... 1.27x (i) (i)
Ratio of earnings to fixed charges and
preferred stock dividends ............. 1.14x (j) (j)
Same store sales- % change ............. 6.7% (6.2%) (6.2%)
Number of Color Tile Stores ............ 799 794 794
Balance Sheet Data (at period end):
Current assets ......................... $ 96,067 $ 99,725 $101,179
Current liabilities .................... 90,461 98,630 105,252
Total assets ........................... 499,684 453,936 554,193
Long-term debt, net of current
portion ............................... 231,364 225,624 324,682
Redeemable preferred stock ............. 80,631 86,008 85,758
Common stockholder's equity ............ 80,071 37,729 32,556
6
<PAGE>
NOTES TO SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
(a) The year end of both the Predecessor Company and the Company
is the Sunday closest to December 31.
(b) The results for interim periods may not be indicative of
results for the full year. Net sales for the nine months
ended October 3, 1993 have been reduced to eliminate retail
sales of $18,343 generated by the Canadian retail operations,
which the Company elected to dispose of effective for the
quarter ended October 3, 1993. Net sales for the nine months
ended September 27, 1992 include retail sales of the Canadian
operations, which were $22,287 during this period.
(c) The special charges for the year ended January 3, 1993
relate to a provision for restructuring, store closures and
conversion of certain Company Stores to Franchised Stores and
the write-down of certain property, plant and equipment and
intangible assets (see Note 11 of the Notes to Consolidated
Financial Statements).
(d) The gain on disposal of a line of business for the year
ended January 1, 1989 relates to the sale of the Company's
wholly-owned Canadian subsidiary, Color Your World, Inc. on
December 30, 1988. Effective for the quarter ended
October 3, 1993, the Company elected to dispose of its
Canadian retail operations resulting in a $9,500 charge based
on expected losses from those operations prior to disposal
and the estimated loss on disposal of the related assets and
the business (see Note 5 of the Notes to Condensed
Consolidated Financial Statements).
(e) The gain on disposal of a line of business for the year
ended January 3, 1993 relates to the sale of the Wood Plant
located in Melbourne, Arkansas (see Note 12 of the Notes to
Consolidated Financial Statements).
(f) The extraordinary items for the years ended December 29,
1991 and January 3, 1993 relate to the gains (losses) on the
early extinguishment of certain long-term debt (see Note 6 of
the Notes to Consolidated Financial Statements).
(g) The cumulative effect of changes in accounting methods for
the year ended December 31, 1989 relates to the Company's
change in method of accounting for layaways and deposits.
The Company also changed its method for accounting for
deferred income taxes to conform to new interpretations of
Statement of Financial Accounting Standards No. 96 related to
the deferred income tax effects of amortization of certain
intangibles (see (Note (e) of the Notes to Selected
Consolidated Financial Information).
(h) EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and
incur debt. EBITDA has been calculated pursuant to the terms
of the Indenture pursuant to which the Senior Notes were
issued, except that special charges have been added back.
EBITDA does not represent net income or cash flows from
operations as those terms are defined by generally accepted
accounting principles and does not necessarily indicate
whether cash flows will be sufficient to fund cash needs.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended(a) Nine Months Ended(b)
-------------------------------------------------------- ----------------------------
Predecessor Pro Pro
Company Forma Forma
-----------------
1/1/89 12/31/89 12/30/90 12/29/91 1/3/93 1/3/93 9/27/92 10/3/93 10/3/93
------- -------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Income . . . . $15,083 $12,720 $28,296 $21,359 $ 1,538 $ 6,042 $23,703 $22,639 $26,863
Depreciation and amortization. 25,550 23,133 27,781 29,202 28,683 31,427 20,758 18,034 20,112
Special charges . . . . . - - - - 30,000 30,000 - - -
------- ------- ------- ------- ------- ------- ------- ------- -------
EBITDA $40,633 $35,853 $56,077 $50,561 $60,221 $67,469 $44,461 $40,673 $46,975
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(i) For purposes of the ratio of earnings to fixed charges,
(i) earnings include earnings before income taxes and fixed
charges (excluding capitalized interest) and (ii) fixed
charges consist of interest (including capitalized interest)
on all indebtedness, amortization of deferred financing costs
7
<PAGE>
and that portion of rental expense that the Company believes
to be representative of interest. The Company's earnings
were insufficient to cover fixed charges by $24,489, $21,804,
$30,627 and $20,152 for the years ended December 31, 1989,
December 30, 1990, December 29, 1991, January 3, 1993 and
$1,274 for the nine months ended October 3, 1993,
respectively and $28,717 and $7,424 for the pro forma year
ended January 3, 1993 and for the pro forma nine months ended
October 3, 1993, respectively. The ratio of earnings to
fixed charges before the 1992 special charges of $30,000 was
1.29x for the fiscal year ended January 3, 1993. The ratio
of earnings to fixed charges before the 1993 loss on the
disposition of Canadian operations of $9,500 was 1.36x for
the nine months ended October 3, 1993. When adjusted to
eliminate non-cash charges (depreciation and amortization
expense), the deficiency of earnings to cover fixed charges
would have been $1,356 and $1,425 for the years ended
December 31, 1989 and December 31, 1991, respectively, and
earnings would have exceeded fixed charges by $28,063,
$5,977, $8,531 and $2,710 for the years ended January 1,
1989, December 30, 1990, January 3, 1993, and for the pro
forma year ended January 3, 1993 and $27,802, $16,760 and
$12,688, respectively, for the nine months ended
September 27, 1992, October 3, 1993 and the pro forma nine
months ended October 3, 1993, respectively.
(j) Ratio of earnings to fixed charges and preferred dividends:
For purposes of the ratio of earnings to fixed charges and
preferred stock dividends, (i) earnings include earnings
before income taxes and fixed charges (excluding capitalized
interest), (ii) fixed charges consist of interest (including
capitalized interest) on all indebtedness, amortization of
deferred financing costs and that portion of rental expense
that the Company believes to be representative of interest
and (iii) preferred stock dividends includes all dividends
whether payable in cash or in kind adjusted to an amount
representing the pre-tax earnings which would be required to
cover stock dividends. The Company's earnings were
insufficient to cover fixed charges and preferred stock
dividends by $2,387, $29,389, $24,704, $33,527, $25,849 and
$34,414 for the years ended January 1, 1989, December 31,
1989, December 30, 1990, December 29, 1991, January 3, 1993
and the pro forma year ended January 3, 1993 and $9,079 and
$15,229 for the nine months ended October 3, 1993 and the pro
forma nine months ended October 3, 1993, respectively. The
ratio of earnings to fixed charges and preferred dividends
before the 1992 special charges of $30,000 was 1.11x for the
fiscal year ended January 3, 1993. When adjusted to
eliminate non-cash charges (depreciation and amortization
expense) and non-cash preferred stock dividends, the
deficiency of earnings to cover fixed charges and preferred
stock dividends would have been $4,256, $1,425 and $87 for
the years ended December 31, 1989, December 29, 1991, and the
pro forma year ended January 3, 1993, respectively, and
earnings would have exceeded fixed charges and preferred
stock dividends by $25,163, $5,977, $5,734, $26,908 and
$11,130 for the years ended January 1, 1989, December 30,
1990 and January 3, 1993 and the nine months ended
September 27, 1992 and October 3, 1993 and $7,058 for the pro
forma nine month period ended October 3, 1993, respectively.
8
<PAGE>
THE SERIES A SHARES
TITLE AND AMOUNT 2,200,000 shares of Series A Senior
OF SECURITIES: Increasing Rate Preferred Stock, $1.00 par
value per share, $25.00 liquidation
preference per share.
DIVIDENDS: The Series A Holders as of each applicable
dividend record date are entitled to
receive cash dividends quarterly in arrears
on each January 15, April 15, July 15 and
October 15, in an amount equal to the
then-prevailing dividend rate. When and as
declared by the Company's Board of
Directors, dividends are paid out of funds
legally available therefor subject to the
satisfaction of certain covenants
restricting the Company's ability to pay
dividends thereon contained in the Senior
Credit Agreement and the Indenture pursuant
to which the Senior Notes were issued (the
"Indenture"). See "Capital Structure --
Credit Facilities -- Senior Credit
Agreement" and "-- Senior Notes." The
Company also will be prevented from paying
cash dividends on the Series A Shares from
and after January 15, 1995 unless on, or
before that date, it shall have issued
certain pay-in-kind dividends accrued on
the Company's outstanding Senior Cumulative
Preferred Stock, par value $1.00 per share
(the "Redeemable Senior Preferred Stock"),
and thereafter pays cash dividends on such
shares in subsequent quarters. See
"Capital Structure -- Redeemable Senior
Preferred Stock." After January 15, 1995,
if all cumulative dividends are not paid in
full upon the Redeemable Senior Preferred
Stock, the Company may only declare
dividends on the Series A Shares, the
Redeemable Senior Preferred Stock and any
other stock ranking in parity with the
Redeemable Senior Preferred Stock and the
Series A Shares as to dividends on a pro
rata basis.
The current quarterly dividend, which will
apply to the quarters commencing on January
15, 1994 and April 15, 1994, will be equal
to $.90625 per Series A Share. The
quarterly dividend payable thereafter will
increase by $.03125 per Series A Share over
the previously prevailing quarterly
dividend on each July 15 and January 15
commencing July 15, 1994 up to a maximum
quarterly dividend of $1.0625 per Series A
Share, provided that any quarterly
dividends payable in excess of $.9375 per
Series A Share may, at the option of the
Company, be paid to Series A Holders in
whole or in part by the issuance of
additional Series A Shares at the rate of
one additional Series A Share for each
$25.00 of such dividends not paid in cash.
Each quarterly dividend will be fully
cumulative and will accrue (whether or not
declared) without accruing interest or
additional dividends. An amount equal to
any accrued but unpaid dividends must be
paid upon (i) the mandatory or optional
redemption of the Series A Shares or (ii)
any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of
the Company.
9
<PAGE>
In the event that retained earnings or
other surplus capital of the Company is
insufficient for the payment of the entire
amount of dividends payable in any
quarterly dividend period with respect to
the Redeemable Senior Preferred Stock, the
Series A Shares and any other preferred
stock ranking in parity as to dividends
with the Series A Shares, or the Company is
otherwise restricted from paying such
dividend, the amount of any available
surplus will be allocated for the payment
of dividends with respect to the Series A
Shares, the Redeemable Senior Preferred
Stock and any other preferred stock ranking
in parity with the Series A Shares as to
dividends pro rata based upon the accrued
cash dividends per share payable on the
Series A Shares, the Redeemable Senior
Preferred Stock and any other preferred
stock ranking in parity with the Series A
Shares as to dividends. However, the
Company may pay dividends in the form of
additional shares of the same series or
class of stock on which dividends are
declared; provided that such dividends are
not included in any calculation of accrued
or pro rata dividends.
VOTING RIGHTS: Except to the extent otherwise required by
the Delaware General Corporation Law
("DGCL"), Series A Holders will not have
voting rights except in the event that (i)
all or any portion of the dividends payable
on the Series A Shares shall have been in
arrears and unpaid in each quarter during
any six consecutive quarterly periods or
(ii) the Company fails to meet its
mandatory redemption obligations described
herein to redeem the Series A Shares on
January 15, 2003. In either event, Series
A Holders will thereafter have the right to
elect two additional directors to the
Company's Board of Directors and will
retain such right until all accrued but
unpaid dividends on the Series A Shares
shall have been paid in full or until the
Series A Shares are redeemed in full.
LIQUIDATION
PREFERENCE: In the event of any voluntary or
involuntary liquidation, dissolution or
winding up of the affairs of the Company,
the Series A Holders will be entitled to be
paid out of the assets of the Company
available for distribution to its
stockholders an amount in cash equal to
$25.00 for each Series A Share outstanding,
plus an amount in cash equal to all accrued
and unpaid dividends thereon to the date
fixed for liquidation, dissolution or
winding up, before any payment may be made
or any assets distributed to the holders of
the Company's equity securities ranking
junior to the Series A Shares, including
the Company's common stock, with respect to
dividend rights or rights upon liquidation,
winding up or dissolution (collectively,
the "Junior Securities"). If the assets of
the Company are insufficient to pay in full
the liquidation payments payable to the
holders of the Series A Shares, the
Redeemable Senior Preferred Stock and any
other preferred stock in parity with the
Series A Shares as to liquidation,
dissolution and winding up, the holders of
all such shares will share ratably in the
distribution of assets in proportion to the
amount that would have been payable to such
holders if sufficient funds were available.
OPTIONAL
REDEMPTION: The Series A Shares may be redeemed at any
time at the option of the Company in whole
or in part, on a pro rata basis, out of
funds legally available therefor under the
DGCL, at the following price per Series A
Share for each designated period, plus in
each case any accrued and unpaid dividends
to the redemption date:
10
<PAGE>
Period Price
------ -----
July 15, 1993 - July 14, 1994 25.50
July 15, 1994 - July 14, 1995 25.75
July 15, 1995 - July 14, 1996 26.00
July 15, 1996 - July 14, 1997 25.75
July 15, 1997 - July 14, 1998 25.50
July 15, 1998 and thereafter 25.00
provided, that, the Company makes provision
to redeem, on a pro rata basis, any
Redeemable Senior Preferred Stock or any
other preferred stock ranking in parity as
to liquidation with the Series A Shares
based upon the aggregate liquidation
preferences of such shares outstanding.
Under certain circumstances, the Indenture
restricts the Company's ability to redeem
the Series A Shares. See "Description of
the Securities."
MANDATORY To the extent not earlier redeemed and
REDEMPTION: provided that the Company is not in default
with respect to dividends payable on, or
any obligation to redeem or repurchase,
shares of Redeemable Senior Preferred
Stock, the Company will be obligated to
redeem, out of funds legally available
therefor under the DGCL all Series A
Shares then outstanding on January 15,
2003, at $25.00 per Series A Share, plus
accrued and unpaid dividends through the
redemption date.
RANKING: The Series A Shares will, with respect to
dividend rights and rights of liquidation,
winding up and dissolution, rank senior to
all Junior Securities, in parity with the
Redeemable Senior Preferred Stock, and in
parity with any other senior preferred
stock of the Company having a maturity date
on or after the maturity date of the Series
A Shares, the proceeds of which are used to
refinance in whole or in part the
Redeemable Senior Preferred Stock, but only
to the extent of the Redeemable Senior
Preferred Stock refinanced plus the fees
and expenses of such refinancing.
MARKET FOR THE Prior to the registration of the Series A
SERIES A SHARES: Shares under the Securities Act, such
Shares were eligible to trade in the PORTAL
Market, subject to the rules and
regulations governing such market.
However, upon the registration of the
Series A Shares under the Securities Act,
the Series A Shares were no longer
qualified to trade on the PORTAL Market.
Other than the PORTAL Market, there has
been no active trading market for any of
the Company's capital stock, including the
Series A Shares. The Series A Shares will
not be qualified for listing on any
exchange or authorized to be quoted on the
National Association of Securities Dealers
Automated Quotation System ("NASDAQ").
There can be no assurance that an active
trading market will develop for the Series
A Shares nor is it expected that such an
active trading market will develop.
11
<PAGE>
OTHER RIGHTS AND Pursuant to the Securities Purchase
RESTRICTIONS: Agreement, dated August 13, 1992 (the
"Purchase Agreement"), pursuant to which
the Series A Shares were issued, the
Company has agreed to repurchase the Series
A Shares at a purchase price of $25.25 per
share plus all accrued and unpaid dividends
at the option of the holders thereof, upon
the occurrence of a "Change of Control", as
defined in the Purchase Agreement. See
"Description of the Securities -- Series A
Shares." The Purchase Agreement also
obligates the Company to repurchase the
Series A Shares, the Redeemable Senior
Preferred Stock and any other preferred
stock ranking in parity with the Series A
Shares as to liquidation, with the net
proceeds of any future public offering of
common stock of the Company. If the net
proceeds of a public offering are
insufficient to permit the Company to
repurchase all of the Series A Shares, the
Redeemable Senior Preferred Stock and any
other preferred stock ranking in parity
with the Series A Shares as to liquidation,
the Company will be obligated to repurchase
the Series A Shares, the Redeemable Senior
Preferred Stock and any other preferred
stock ranking in parity with the Series A
Shares as to liquidation on a pro rata
basis. See "Description of the Securities
-- Series A Shares." Under certain
circumstances, the Company's ability to
repurchase the Series A Shares pursuant to
the Purchase Agreement will be restricted
under the terms of its Certificate of
Incorporation and the DGCL and, in the
event of a repurchase following a Change of
Control, by the terms of the Senior Credit
Agreement and the Indenture. See "Capital
Structure -- Credit Facilities -- Senior
Credit Agreement" and "-- Senior Notes."
The Purchase Agreement also provides that
the purchasers that originally acquired
Series A Shares pursuant to the Purchase
Agreement (the "Original Purchasers") have
a right of first offer to purchase
promptly a pro rata portion of any
preferred stock ("New Preferred Stock")
issued in the future by the Company ranking
in parity with the Series A Shares as to
dividend rights and rights of liquidation,
winding up and dissolution, the proceeds of
which will be used to redeem outstanding
shares of Redeemable Senior Preferred
Stock. The terms of the Purchase Agreement
provide that this right of first offer is
limited to the Original Purchasers who
acquired Series A Shares in the original
private placement of Series A Shares who
continue to hold Series A Shares at the
time the Company issues additional
preferred stock subject to such right. See
"Description of the Securities -- Series A
Shares." Accordingly, an Original
Purchaser that holds Series A Shares will
continue to be entitled to such rights.
However, a subsequent purchaser of the
Series A Shares that is not also an
Original Purchaser will not be entitled to
any right of first offer upon the future
issuance of New Preferred Stock.
The Purchase Agreement also restricts the
Company from making any advance, loan,
extension of credit or capital contribution
to, or purchasing any stock, bonds, notes,
debentures or other securities of, or
making any other investment in any
Affiliate (as defined in the Purchase
Agreement) of the Company, other than (i)
certain payments to CT Holdings and other
Affiliates of the Company specifically
permitted by the terms of the Company's
Certificate of Incorporation (See
"Description of the Securities -- Series A
Shares") and (ii) investments in any
Affiliates of the Company that the Company
controls, directly or indirectly, through
the ownership of 100% of the outstanding
common stock of such Affiliate. See
"Description of the Securities -- Series A
Shares."
12
<PAGE>
RISK FACTORS: For a discussion of certain factors that
should be considered by prospective
purchasers of the Series A Shares, see
" Risk Factors."
13
<PAGE>
RISK FACTORS
Investors should carefully consider all of the information
set forth in this Prospectus. In particular, careful
consideration should be given to the information set forth below
with respect to certain risk factors generally applicable to an
investment in the Series A Shares.
SUBSTANTIAL LEVERAGE; RISK IN REFINANCING AND REPAYMENT OF INDEBTEDNESS
The Company has, in the past and upon the recent
consummation of the offering of the Senior Notes (the "Senior
Note Offering") continues to have, substantial debt outstanding.
At October 3, 1993 the Company had total outstanding long-term
debt of $244,351,000, most of which bears interest at fluctuating
rates, as compared to common stockholder's equity of $37,729,000.
On a pro forma basis assuming consummation of the Senior Note
Offering and the application of the net proceeds therefrom on
October 3, 1993, the Company's total outstanding long-term debt
would have been $329,659,000 as compared to common stockholders'
equity of $32,556,000 at that date. In addition, the Company had
$86,008,000 of mandatory redeemable preferred stock outstanding
at that date comprised of the Series A Shares and the Redeemable
Senior Preferred Stock. Cash dividends on the Series A Shares
were approximately $7,500,000 in fiscal 1993 and will be
approximately $8,000,000 in fiscal 1994. In fiscal 1995, the
Company's Senior Cumulative Preferred Stock will begin to accrue
cash dividends in the amount of approximately $5,200,000 each
year. At October 3, 1993, on a pro forma basis giving effect to
the use of net proceeds from the Senior Note Offering, the
Company would have had approximately $36,000,000 of availability
under the Senior Credit Agreement, subject to the satisfaction of
certain conditions and covenants. The substantial leverage and
capital commitments of the Company have important consequences
for holders of the Series A Shares, including the risk that the
Company may not generate sufficient cash flow from operations to
pay principal of and interest on indebtedness and cash dividends
on the preferred stock and to meet its capital expenditure
requirements. In addition, the operating and financial
restrictions contained in the agreements governing the Company's
credit facilities and the Indenture could affect the Company in
certain ways, including the following: (i) the Company's ability
to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate purposes or
other purposes may be significantly impaired; (ii) the Company's
ability to respond quickly to increased competition and other
market forces may be limited; and (iii) the Company's
vulnerability to weak general economic conditions may be greater
than it would otherwise be absent such restrictions. See
"Management's Discussion and Analysis of Results of Operations
and Financial Condition -- Liquidity and Capital Resources,"
"Capital Structure -- Credit Facilities" and "Selected
Consolidated Financial Information."
While cash flow from operations and funds available under
the Senior Credit Agreement may be sufficient to meet anticipated
requirements, including mandatory principal installments on the
term loan portion of the Senior Credit Agreement, the Company
expects to refinance the Senior Credit Agreement upon its
maturity in 1998, which is prior to the maturity of the Senior
Notes and the mandatory redemption of the Series A Shares. While
the Company believes, based upon its historical and anticipated
performance, that it should be able to satisfy its obligations
from operations and appropriate refinancings, no assurance to
that effect can be given. Other measures to raise cash to
satisfy obligations include potential sales of assets or equity.
However, the Company's ability to raise funds by selling assets
is greatly restricted by the Senior Credit Agreement and the
Indenture and its ability to effect equity offerings is dependent
on results of operations and market conditions. In the event
that the Company is unable to refinance such indebtedness or
raise funds through asset sales, sales of equity or otherwise,
its ability to pay dividends on the Series A Shares or to
repurchase such Series A Shares would be adversely affected.
RESTRICTIONS ON PAYMENT OF DIVIDENDS ON AND REDEMPTION OF THE SERIES A SHARES
The Senior Credit Agreement, the Indenture, the Company's
Certificate of Incorporation (including provisions pertaining to
the Redeemable Senior Preferred Stock) and the Certificate of
Designation adopted by the Board of Directors of the Company
setting forth the terms of the Series A Shares (the "Certificate
of Designation") contain various restrictions and financial
covenants and ratios restricting the ability of the Company to
pay dividends on or redeem or repurchase the Series A Shares,
including a requirement under the Senior Credit Agreement that
14
<PAGE>
the Company meet specified applicable interest coverage ratios in
order to pay dividends on or redeem shares of its equity
securities, including the Series A Shares. With respect to the
Indenture, the Company is only permitted to pay dividends on the
Series A Shares to the extent the Company is not in default under
the Indenture. With respect to the terms of the Company's
Certificate of Incorporation governing the Redeemable Senior
Preferred Stock, from and after January 15, 1995, the Company may
be prohibited from paying dividends on, or redeeming or
repurchasing, the Series A Shares unless, on or before that date,
it shall have issued all dividends payable in additional shares
of Redeemable Senior Preferred Stock accrued on the Redeemable
Senior Preferred Stock and thereafter pays full cash dividends on
such shares in subsequent quarters. To the extent that the
Company fails to satisfy the conditions contained in the Senior
Credit Agreement, the Indenture or the Company's Certificate of
Incorporation for paying dividends on a current basis, the unpaid
dividends on the Series A Shares will accumulate and could
thereafter be paid only at such time as the Company satisfies
such conditions. To date, the Company has paid in full all
dividends payable on the Series A Shares. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources," "Capital Structure
- -- Credit Facilities" and "-- Redeemable Senior Preferred Stock"
and "Description of the Securities -- Series A Shares."
RESTRICTIONS ON EXERCISE OF CHANGE OF CONTROL RIGHTS
The holders of the Senior Notes and the Series A Shares have
certain rights to require the Company to repurchase such
securities upon a Change of Control (as defined in the Indenture
in respect of the Senior Notes and in the Purchase Agreement in
respect of the Series A Shares). The ability of the Company to
purchase the outstanding Series A Shares upon the exercise by a
holder of Series A Shares of such holder's rights following a
"Change of Control" as required by the Purchase Agreement is
restricted by the Company's Senior Credit Agreement, the
Indenture, its Certificate of Incorporation and the DGCL. Under
the terms of its Senior Credit Agreement, unless the Company's
lenders were to waive certain covenants contained in the Senior
Credit Agreement, a Change of Control as defined in the Purchase
Agreement in respect of the Series A Shares would constitute a
default under the Senior Credit Agreement and could result in the
acceleration of the Company's debt repayment obligations. In
such event, the Company may not have sufficient resources to
satisfy all its repayment and repurchase obligations arising from
a Change of Control. See "Capital Structure -- Credit Facilities
- -- Senior Credit Agreement." Under the Indenture, the Company
may not repurchase any Series A Shares following a Change of
Control (as defined in the Indenture) unless or until it has
repurchased all Senior Notes that may be tendered for repurchase
upon such Change of Control, except out of the proceeds from a
contemporaneous public offering of capital stock. In addition,
any exercise of the repurchase rights by holders of the Series A
Shares upon a Change of Control would be unenforceable for so
long as (i) the Company had insufficient legally available funds
(as determined under the DGCL) to effect such repurchases or
(ii) the Company was in default with respect to the obligations
to pay dividends on the Redeemable Senior Preferred Stock, which
obligations will commence in January 1995, or the obligation to
redeem or purchase shares of such stock. See "Capital
Structure -- Redeemable Senior Preferred Stock." A failure by
the Company to purchase the Series A Shares upon the exercise by
a holder of Series A Shares of such holder's rights following a
Change of Control would result in a breach of the terms of the
Purchase Agreement and may adversely affect the market value of
the Series A Shares.
SALES DECLINE AND RECENT OPERATING LOSSES
Comparable store sales for Company Stores (excluding
Canadian stores) open over one year for the nine months ended
October 3, 1993 declined 6.2% from the nine months ended
September 27, 1992. The Company believes that its sales decline
resulted primarily from a decline in retail sales of residential
flooring in the United States and the continuing weakness in the
economy generally during the nine months ended October 3, 1993,
combined with the resulting pressure exerted on selling prices.
The Company had losses applicable to its common stockholder of
approximately $26.6 million and $28.2 million in fiscal 1991 and
fiscal 1992, respectively. The Company's ability to increase
profitability is substantially dependent upon its ability to
increase sales and maintain operating margins, which management
believes is dependent upon an increase in consumer spending in
the residential remodeling market. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
15
<PAGE>
LACK OF PUBLIC MARKET
Prior to the registration of the Series A Shares under the
Securities Act, such Shares were eligible to trade in the PORTAL
Market, subject to the rules and regulations governing such
market. Other than the PORTAL Market, there has been no trading
market for any of the Company's capital stock, including the
Series A Shares. However, only restricted securities that have
not been registered pursuant to the Securities Act are qualified
for trading on the PORTAL Market. Accordingly, upon the
registration of the Series A Shares under the Securities Act, the
Series A Shares were no longer qualified to trade in the PORTAL
Market. While the Series A Shares offered hereby may be resold
by non-affiliates of the Company without registration, there can
be no assurance that an active trading market for such shares
will develop nor is it expected that such an active trading
market will develop. Accordingly, holders of Series A Shares may
be unable to sell such shares until locating a suitable
purchaser. The Series A Shares will not be qualified for listing
on any exchange or authorized to be quoted on the National
Association of Securities Dealers Automated Quotation System
("NASDAQ").
CONTROL BY INVESTCORP
Since the acquisition of the Company by CT Holdings in
connection with the 1989 Merger, Investcorp and its affiliates,
through their ownership of the outstanding common stock of CT
Holdings or through other contractual arrangements, have
indirectly controlled the power to vote the outstanding common
stock of the Company. Accordingly, Investcorp and its affiliates
are entitled indirectly to elect all directors of the Company.
See "Security Ownership of Certain Beneficial Owners and
Management" and "Management."
COMPETITION AND OTHER BUSINESS FACTORS
The Company competes with general merchandise and discount
stores, home improvement centers and specialty retailers
operating on a local, regional or national basis. During the past
several years, this competition has intensified as certain home
improvement centers have continued to expand on a nationwide
basis. Many of its competitors sell a considerably broader
variety of products than the Company does within each of the
Company's product lines and certain of its competitors have
substantially greater financial resources than the Company. The
Company believes its growth in sales and earnings depends
principally upon its ability to respond to consumer preferences
and to remain competitive with the pricing policies of its
competitors. See "Business --Competition."
GROWTH OF FRANCHISED STORES
The Company commenced operations of a franchising program in
1989 to allow the Company to expand its network of Color Tile
Stores generally in less populous markets that historically would
not support multiple locations and, therefore, would not enable
the Company to achieve satisfactory operating, administrative and
advertising efficiencies. While franchising permits the Company
to increase the geographic coverage of its store network without
substantial contributions of working capital, the operation of
Franchised Stores raises certain other risks, such as the loss of
operational control over Franchised Stores to the franchisee
(including the ability to determine products offered, retail
pricing and other operational matters). The Company does not
believe these risks are material in the aggregate. See "Business
- --Franchising."
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of
the Company at October 3, 1993 and as adjusted to give pro forma
effect to the sale of the Senior Notes and the expected
application of the net proceeds therefrom, including the
acquisition of the ABF Assets as described herein. This table
should be read in conjunction with the "Selected Consolidated
Financial Information," "Unaudited Pro Forma Condensed Combined
Financial Statements," "Management's Discussion and Analysis of
Results of Operations and Financial Condition," and the
Consolidated Financial Statements of the Company and notes
thereto appearing elsewhere in this Prospectus.
October 3, 1993
--------------------------
Actual As Adjusted
------ -----------
(dollars in thousands
except share amounts)
Long-term debt (including current
portion):
Current portion of long-term
debt . . . . . . . . . . . $ 18,727 $ 4,977 (a)
Mortgage loans . . . . . . . . . 3,005 3,005
Senior Credit Agreement . . . . 204,650 103,708 (a)(b)
Senior Notes . . . . . . . . . . ---- 200,000 (c)
Capital leases . . . . . . . . . 17,969 17,969
------- -------
Total long-term debt . . . 244,351 329,659
------- -------
Redeemable preferred stock:
Series A senior increasing rate
preferred stock ($57,795
liquidation value) . . . . . . . . 54,219 53,969 (e)
Redeemable senior preferred stock
($32,236 liquidation value). . . . 31,789 31,789
------- -------
Total redeemable preferred
stock . . . . . . . . . . . . .86,008 85,758
------- -------
Common stockholder's equity:
Common stock, $.01 par value,
1,000,000 shares authorized, 101
shares issued and outstanding . ---- ----
Additional paid-in capital . . . 108,360 108,360
Accumulated deficit . . . . . . (70,631) (75,804) (d)
------- -------
Total common stockholder's
equity . . . . . . . . . . . . . 37,729 32,556
------- -------
Total capitalization . . $368,088 $447,973
======== ========
_______________
The adjustments to the consolidated capitalization of the Company as
of October 3, 1993 reflect the following:
(a) Adjusted to reflect repayment of $86,500 of the term loan portion
of the Senior Credit Agreement, $13,750 of which is included in
current portion of long-term debt and $72,750 of which is
classified as non-current.
(b) Adjusted to reflect repayment of approximately $28,192 of
indebtedness under the revolving credit portion of the Senior
Credit Agreement. The total availability under the revolving
credit portion of the Senior Credit Agreement would have been
approximately $36,500 assuming the application of the net
proceeds of the Senior Note Offering as described herein.
(c) Adjusted to reflect the sale of $200,000 of the Senior Notes.
(d) Adjusted to reflect the $5,173 write-off of the unamortized
deferred loan costs associated with the term loan portion of the
Senior Credit Agreement.
(e) Adjusted to reflect fees and expenses of $250 from the
registration of the Series A Shares.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The Company was acquired by CT Holdings in connection with
the 1989 Merger. For financial reporting purposes, the effective
date of the 1989 Merger and certain related transactions was
January 1, 1990. As a result of the 1989 Merger, the assets and
liabilities of the Company were revalued and significant
adjustments to the assets and liabilities acquired were made to
reflect their estimated fair value at such date. Accordingly,
the presentation of financial information for the years ended
January 1, 1989 and December 31, 1989 relates to the operations
of the Predecessor Company and does not include any adjustments
related to the 1989 Merger.
The financial information of the Predecessor Company was
prepared using the Predecessor Company's historical costs. As a
result, the consolidated financial information for January 1,
1989 and December 31, 1989 is presented on a different cost basis
than for periods subsequent to December 31, 1989, and, therefore,
is not comparable.
The selected consolidated financial information presented in
the following table for the Company for the fiscal years ended
January 1, 1989, December 31, 1989 (Predecessor Company),
December 30, 1990, December 29, 1991 and January 3, 1993 have
been derived from the Company's audited consolidated financial
statements. The financial data presented for the nine months
ended September 27, 1992 and October 3, 1993 have been derived
from the Company's unaudited condensed consolidated financial
statements and reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's
results of operations for such periods. The results of
operations for any interim period are not necessarily indicative
of results of operations for a full fiscal year. All information
in the following table and related notes thereto should be read
in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and with the
Consolidated Financial Statements of the Company and related
notes thereto appearing elsewhere in this Prospectus.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE> <CAPTION>
Predecessor
Company
---------------
Fiscal Year Ended Fiscal Year Ended Nine Months Ended
----------------- ----------------- -----------------
1/1/89 12/31/89 12/30/90 12/29/91 1/3/93 9/27/92 10/3/93
------ -------- -------- -------- ------ ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Results of Operations:
Net sales . . . . . . . . . . . . . . . . . . $526,604 $465,207 $525,819 $544,315 $580,385 $436,829 $401,563
Cost of sales(a) . . . . . . . . . . . . . . 265,699 237,291 274,686 292,517 311,368 232,686 218,631
Selling, general and administrative expenses. 220,272 192,063 195,056 201,237 208,796 159,682 142,259
Depreciation and amortization . . . . . . . . 25,550 23,133 27,781 29,202 28,683 20,758 18,034
Special charges(b). . . . . . . . . . . . . . -- -- -- -- 30,000 -- --
-------- ------- ------- ------- ------- ------- -------
Operating income . . . . . . . . . . . . . . 15,083 12,720 28,296 21,359 1,538 23,703 22,639
Gain (loss) on disposal of a line of business(c) 30,814 -- -- -- 4,007 4,007 (9,500)
Interest expense, net . . . . . . . . . . . . 43,384 37,209 50,100 51,986 25,697 20,666 14,413
-------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes,
extraordinary items and cumulative effect of
changes in accounting methods. . . . . . . 2,513 (24,489) (21,804) (30,627) (20,152) 7,044 (1,274)
Provision (benefit) for income taxes. . . . . 3,945 (618) 393 (2,133) 1,240 1,009 624
Extraordinary item net of tax(d). . . . . . . -- -- -- 4,886 (601) (601) --
Cumulative effect of changes in accounting
method(e). . . . . . . . . . . . . . . . . -- (4,687) -- -- -- -- --
------ ------ ------ ------ ------- ------ -----
Net income (loss) . . . . . . . . . . . . . . (1,432) (28,558) (22,197) (23,608) (21,993) 5,434 (1,898)
Preferred dividends . . . . . . . . . . . . . (4,975) (4,971) (2,979) (2,979) (6,224) (3,162) (9,162)
------ ------ ------ ------ ------- ------ -----
Net income (loss) applicable to common
stockholder . . . . . . . . . . . . . . . $ (6,407) $(33,529) $(25,176) $(26,587) $(28,217) $ 2,272 $(11,060)
========= ========= ======== ======== ======== ====== ========
Balance Sheet Data (at period end):
Current assets(a) . . . . . . . . . . . . . $ 182,447 $124,302 $ 92,351 $ 88,999 $ 94,085 $ 96,067 $ 99,725
Current liabilities . . . . . . . . . . . . 119,041 80,793 89,334 87,593 82,831 90,461 98,630
Total assets. . . . . . . . . . . . . . . . 469,539 402,482 525,338 504,984 462,992 499,684 453,936
Long-term debt, net of current portion. . . 285,174 295,966 364,440 290,475 239,689 231,364 225,624
Redeemable preferred stock. . . . . . . . . 44,953 46,997 23,576 26,556 82,596 80,631 86,008
Common stockholder's equity (deficit) . . . 9,992 (23,537) 24,824 77,941 48,789 80,071 37,729
Selected Data:
EBITDA(g) . . . . . . . . . . . . . . . . . $ 40,633 $ 35,853 $ 56,077 $ 50,561 $ 60,221 $ 44,461 $ 40,673
Ratio of EBITDA to interest expenses, net . .9x 1.0x 1.1x 1.0x 2.3x 2.2x 2.8x
Ratio of EBITDA to interest expense, net
and cash dividends. . . . . . . . . . . . .9x 1.0x 1.1x 1.0x 2.1x 2.1x 2.0x
Ratio of earnings to fixed charges. . . . . 1.05x (f) (f) (f) (f) 1.27x (f)
Ratio of earnings to fixed charges and
preferred stock dividends . . . . . . . . (h) (h) (h) (h) (h) 1.14x (h)
Capital expenditures. . . . . . . . . . . . $ 21,808 $ 23,647 $ 12,133 $ 9,517 $ 13,938 $ 10,578 $ 9,357
Number of Company Stores. . . . . . . . . . 696 705 765 772 771 767 717
Number of Franchised Stores . . . . . . . . -- -- 4 13 35 32 77
-------- -------- -------- -------- -------- -------- --------
Total Color Tile Stores . . . . . . . . . . 696 705 769 785 806 799 794
======== ========= ======== ======== ======== ======== ========
19
</TABLE>
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL INFORMATION
(a) Inventories: Inventories are stated at the lower of cost or
market. Finished goods inventory costs are determined
principally by the first-in, first-out ("FIFO") method for
the year ended December 30, 1990 and all subsequent periods
presented.
Prior to the 1989 Merger, finished goods inventory costs were
determined principally by the last-in, first-out ("LIFO")
method.
(b) Special Charge: In December 1992, the Company recorded
special charges aggregating approximately $30,000 to record a
write-down of certain property, plant, equipment and
intangible assets and to establish provisions for
restructuring of operations, store closures and conversions
of certain stores to Franchised Stores (see Note 11 of the
Notes to the Consolidated Financial Statements).
(c) Gain (Loss) on Disposal of a Line of Business: The gain for
the year ended January 1, 1989 relates to the sale of the
Company's wholly-owned Canadian subsidiary, Color Your World,
Inc. on December 30, 1988. On May 15, 1992, the Company sold
its Wood Plant and recognized a pre-tax gain of $4,007.
Sales to unaffiliated third parties and results of operations
of this facility were not material to the overall results of
operations of the Company (see Note 12 of the Notes to the
Consolidated Financial Statements). Effective for the
quarter ended October 3, 1993, the Company elected to dispose
of its Canadian retail operations resulting in a $9,500
charge based on expected losses from those operations prior
to disposal and the estimated loss on disposal of the related
assets and the business (see Note 5 of the Notes to Condensed
Consolidated Financial Statements).
(d) Extraordinary item, net of tax: The Company recorded an
extraordinary gain on early extinguishment of debt during the
year ended December 29, 1991 amounting to $4,886, after an
income tax provision of $2,517. In fiscal 1992, the Company
recorded an extraordinary loss on early extinguishment of
debt amounting to $601, after an income tax benefit of $309
(see Note 6 of the Notes to the Consolidated Financial
Statements).
(e) Changes in Accounting Methods: On January 2, 1989, the
Predecessor Company changed its method of accounting for
deferred income taxes in order to conform with new
interpretations of Statement of Financial Accounting
Standards No. 96 by the Financial Accounting Standards Board
("FASB") related to the deferred income tax effects of
amortization of intangible assets. The adjustment of $3,029
to apply the new method for periods prior to January 1, 1989
is included in the net loss for the year ended December 31,
1989.
In addition, during 1989, the Predecessor Company began
merchandising a new product line, which increased
significantly its layaways and deposits. As a result, the
Predecessor Company changed its method of accounting for
layaways and deposits. Previously, the Predecessor Company
recognized revenue and costs on layaways and deposits to the
extent of cash collected and historical gross margins
attained. The new method of accounting defers recognition of
any revenue or costs until title to the related inventory is
transferred to the customer. The Predecessor Company
believed this new policy more conservatively matched revenue
and costs to the period in which the transactions were
consummated. The effect of the change for the year ended
December 31, 1989 was to increase the net loss by
approximately $705. The adjustment of $1,658 to apply the
new method for periods prior to January 1, 1989 is also
included in the net loss for the year ended December 31,
1989. Due to the Predecessor Company net operating loss
20
<PAGE>
carry forward position, this change in accounting method did
not have a significant income tax effect.
Effective December 31, 1990, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (see Note 8 of the Notes to the Consolidated
Financial Statements).
(f) Ratio of earnings to fixed charges: For purposes of the
ratio of earnings to fixed charges, (i) earnings include
earnings before income taxes and fixed charges (excluding
capitalized interest) and (ii) fixed charges consist of
interest (including capitalized interest) on all
indebtedness, amortization of deferred financing costs and
that portion of rental expense that the Company believes to
be representative of interest. The Company's earnings were
insufficient to cover fixed charges by $24,489, $21,804,
$30,627 and $20,152 for the years ended December 31, 1989,
December 30, 1990, December 29, 1991 and January 3, 1993 and
$1,274 for the nine months ended October 3, 1993,
respectively. The ratio of earnings to fixed charges before
the 1992 special charges of $30,000 was 1.29x for the fiscal
year ended January 3, 1993. The ratio of earnings to fixed
charges before the 1993 loss on the disposition of Canadian
operations of $9,500 was 1.36x for the nine months ended
October 3, 1993. When adjusted to eliminate non-cash charges
(depreciation and amortization expense), the deficiency of
earnings to cover fixed charges would have been $1,356 and
$1,425 for the years ended December 31, 1989 and December 29,
1991, respectively, and earnings would have exceeded fixed
charges by $28,063, $5,977, $8,531, $27,802 and $16,760 for
the years ended January 1, 1989, December 30, 1990 and
January 3, 1993, and for the nine months ended September 27,
1992 and October 3, 1993, respectively.
(g) EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service and
incur debt. EBITDA has been calculated pursuant to the terms
of the Indenture pursuant to which the Senior Notes were
issued, except that special charges have been added back.
EBITDA does not represent net income or cash flows from
operations as those terms are defined by generally accepted
accounting principles and does not necessarily indicate
whether cash flows will be sufficient to fund cash needs.
EBITDA is calculated as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------------
PREDECESSOR
COMPANY NINE MONTHS ENDED
--------------------- -----------------
1/1/89 12/31/89 12/30/90 12/29/91 1/3/93 9/27/92 10/3/93
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Income $ 15,083 $ 12,720 $ 28,296 $ 21,359 $ 1,538 $ 23,703 $ 22,639
Depreciation and
amortizaion 25,550 23,133 27,781 29,202 28,683 20,758 18,034
Special Charges - - - - 30,000 - -
-------- -------- -------- -------- -------- -------- --------
EBITDA $ 40,633 $ 35,853 $ 56,077 $ 50,561 $ 60,221 $ 44,461 $ 40,673
======== ======== ======== ======== ======== ======== ========
(h) Ratio of earnings to fixed charges and preferred stock
dividends: For purposes of the ratio of earnings to fixed
charges and preferred stock dividends, (i) earnings include
earnings before income taxes and fixed charges (excluding
capitalized interest), (ii) fixed charges consist of interest
(including capitalized interest) on all indebtedness,
amortization of deferred financing costs and that portion of
rental expense that the Company believes to be representative
of interest and (iii) preferred stock dividends includes all
dividends whether payable in cash or in kind adjusted to an
amount representing the pre-tax earnings which would be
required to cover stock dividends. The Company's earnings
were insufficient to cover fixed charges and preferred stock
dividends by $2,387, $29,389, $24,704, $33,527 and $25,849
for the years ended January 1, 1989, December 31, 1989,
December 30, 1990, December 29, 1991 and January 3, 1993 and
$9,079 for the nine months ended October 3, 1993,
respectively. The ratio of earnings to fixed
21
<PAGE>
charges and preferred stock dividends before the 1992 special charge of
$30,000 was 1.11x for the fiscal year ended January 3, 1993.
When adjusted to eliminate non-cash charges (depreciation and
amortization expense) and non-cash preferred stock dividends,
the deficiency of earnings to cover fixed charges and
preferred stock dividends would have been $4,256 and $1,425
for the years ended December 31, 1989 and December 29, 1991,
respectively, and earnings would have exceeded fixed charges
and preferred stock dividends by $25,163, $5,977, $5,734,
$26,908 and $11,130 for the years ended January 1, 1989,
December 30, 1990 and January 3, 1993, and the nine months
ended September 27, 1992 and October 3, 1993, respectively.
22
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined
Financial Statements of the Company are based on the Consolidated
Financial Statements of the Company included elsewhere in this
Prospectus, adjusted to give pro forma effect to the sale of the
Senior Notes and the application of the net proceeds therefrom as
described herein.
The Unaudited Pro Forma Condensed Combined Balance Sheet at
October 3, 1993, presents the pro forma effects of the Senior
Note Offering and the ABF Acquisition as if the contemplated
transactions had been completed on October 3, 1993. The
Unaudited Pro Forma Condensed Combined Statements of Operations
for the year ended January 3, 1993, and the nine months ended
October 3, 1993, give effect to the Senior Note Offering and the
acquisition of the ABF Assets as if the contemplated transactions
had occurred at the beginning of the respective periods
presented.
The pro forma adjustments are based upon available
information and certain assumptions that management believes are
reasonable. Actual results of the transactions may differ from
those presented. The Unaudited Pro Forma Condensed Combined
Financial Statements should be read in conjunction with Color
Tile's Consolidated Financial Statements and Notes thereto,
"Management's Discussion and Analysis of Results of Operations
and Financial Condition" and ABF's Financial Statements and Notes
thereto, all appearing elsewhere in this prospectus.
THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS ARE PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE COMPANY'S
CONSOLIDATED FINANCIAL POSITION OR RESULTS OF OPERATIONS HAD SUCH
EVENTS BEEN CONSUMMATED ON THE DATES ASSUMED AND DO NOT PROJECT
THE COMPANY'S FINANCIAL POSITION OR RESULTS OF OPERATIONS FOR ANY
FUTURE DATE OR PERIOD.
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
October 3, 1993
Color Tile, Inc. Pro Forma Color Tile, Inc.
(Historical) Adjustments Pro Forma
--------------- ----------- ----------------
(dollars in thousands)
Assets
Current assets . . . . . . . . . . . $ 99,725 $1,454 (c) $101,179
Property, plant and equipment, net . 119,412 1,356 (c) 120,768
Intangible and other assets. . . . . 234,799 6,500 (a) 332,246
(5,173) (b)
96,120 (c)
______ ------- --------
Total assets . . . . . . . . . . . . $453,936 $100,257 $554,193
======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities. . . . . . . . . $98,630 $(13,750)(a) $105,252
20,372 (c)(d)
Long-term debt . . . . . . . . . . . 225,624 200,000 (a) 324,682
(72,750)(a)
(28,192)(a)
Other noncurrent liabilities. . . . . 5,945 5,945
------ ------ ------
Total liabilities . . . . . . . . 330,199 105,680 435,879
------ ------ ------
Redeemable preferred stock. . . . . . 86,008 (250)(d) 85,758
Common stockholder's equity . . . . . 37,729 (5,173)(b) 32,556
------ ------ ------
Total Liabilities and
Stockholders' Equity. . . . . . . $453,936 $100,257 $554,193
======== ======== ========
_______________
(a) Reflects the completion of the sale of the Senior Notes and the
application of the net proceeds as described herein as follows:
Repayment of the current portion of the term loan borrowings . . $ 13,750
Repayment of long-term portion of term loan borrowings . . . . . 72,750
Repayment of long-term portion of revolving credit borrowings. . 28,192
Acquisition of ABF, net of cash acquired . . . . . . . . . . . . 78,808
Issuance costs and expenses . . . . . . . . . . . . . . . . . . 6,500
------
Gross proceeds from the Senior Note Offering . . . . . . . . . . $ 200,000
=======
(b) Reflects the write-off of $5,173 of the unamortized deferred financing
costs associated with the term loan portion of the Senior Credit
Agreement.
(c) Reflects the estimated purchase price of approximately $78,808 (subject
to adjustment) for the acquisition of the ABF Assets. The estimated
purchase price consisted of $85,000 in gross purchase price less cash
and cash equivalents acquired of $11,292, and an estimated $900
reduction resulting from a working capital adjustment and increased
by estimated fees and expenses of $6,000.
ABF Allocation of ABF
(Historical) Purchase Price Pro Forma
------------ -------------- ---------
Assets
Current assets. . . . . $ 15,832 $ (14,378)(i) $ 1,454
Property equipment. . . 1,356 1,356
Intangible assets . . . 96,120 (ii) 96,120
---------- ------------ -------------
17,188 81,742 98,930
Total liabilities . . . 13,750 6,372 (iii) 20,122
---------- ------------ -------------
Net assets. . . . . . . $ 3,438 $ 75,370 $ 78,808
========== ============ =============
The estimated allocation of the ABF purchase price may change upon the final
determination of the fair values of net assets acquired. The adjustments to the
ABF historical carrying values are as follows:
(i) Reduction in purchase price for cash and cash equivalents
acquired and other adjustments to assets acquired.
(ii) Represents excess of purchase price over the estimated fair
value of assets acquired and liabilities assumed.
(iii) Represents current liabilities acquired and additional
liabilities incurred as a result of the acquisition of the
ABF Assets and the retail properties.
(d) Reflects fees and expenses of $250 from the registration of the Series A
Shares.
</TABLE>
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
<TABLE><CAPTION>
Fiscal Year Ended January 3, 1993
--------------------------------------------------------
Color Tile, Inc. Pro Forma Color Tile, Inc.
(Historical) Adjustments Pro Forma
---------------- ----------- ----------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . $580,385 $64,084 (b) $644,469
Cost of sales. . . . . . . . . . . . 311,368 47,980 (b) 359,348
Selling, general and administrative. 208,796 8,856 (b) 217,652
Depreciation and amortization. . . . 28,683 2,744 (c) 31,427
Special charges. . . . . . . . . . . 30,000 30,000
------- ------ -------
Operating income . . . . . . . . . . 1,538 4,504 6,042
Gain on disposal of a line of business 4,007 4,007
Interest expense, net. . . . . . . . . (25,697) (13,069)(a) (38,766)
------- ------ -------
Loss before income taxes and
extraordinary item. . . . . . . . . (20,152) (8,565) (28,717)
Provision (benefit) for income taxes . 1,240 (291)(d) 949
------- ------ -------
Loss before extraordinary item . . . . (21,392) (8,274) (29,666)
Extraordinary loss(e). . . . . . . . . (601) 601 (f)
------- ------ -------
Net loss . . . . . . . . . . . . . . . (21,993) (7,673) (29,666)
Preferred dividends. . . . . . . . . . (6,224) (6,224)
------- ------ -------
Net loss applicable to common
stockholder . . . . . . . . . . . . . $(28,217) $(7,673) $(35,890)
========= ======== =========
Selected Data:
Ratio of EBITDA to interest expense, net 2.3x 1.7x
Ratio of EBITDA to interest expense, net
and cash dividends. . . . . . . . . . 2.1x 1.6x
Ratio of earnings to fixed charges. . . (g) (g)
Ratio of earnings to fixed charges and
preferred dividends. . . . . . . . . . . (h) (h)
Nine Months Ended October 3, 1993
--------------------------------------------------------
Color Tile, Inc. Pro Forma Color Tile, Inc.
(Historical) Adjustments Pro Forma
---------------- ----------- ----------------
(dollars in thousands)
Net sales . . . . . . . . . . . . . . $401,563 $61,765 (b) $463,328
Cost of sales . . . . . . . . . . . . 218,631 47,470 (b) 266,101
Selling, general and administrative.. 142,259 7,993 (b) 150,252
Depreciation and amortization . . . . 18,034 2,078 (c) 20,112
------- ------- -------
Operating income. . . . . . . . . . . 22,639 4,224 26,863
Loss on disposal of a line of business (9,500) (9,500)
Interest expense, net . . . . . . . . (14,413) (10,374)(a) (24,787)
-------- -------- --------
Income (loss) before income taxes . . (1,274) (6,150) (7,424)
Provision (benefit) for income taxes. 624 (277)(d) 347
-------- -------- --------
Net income (loss) (e) . . . . . . . . (1,898) (5,873) (7,771)
Preferred dividends . . . . . . . . . (9,162) (9,162)
-------- -------- --------
Net income (loss) applicable to
common stockholder. . . . . . . . . $(11,060) $(5,873) $(16,933)
========= ======== =========
Selected Data:
Ratio of EBITDA to interest expense, net 2.8x 1.9x
Ratio of EBITDA to interest expense, net
and cash dividends . . . . . . . . . . 2.0x 1.5x
Ratio of earnings to fixed charges. . . . (g) (g)
Ratio of earnings to fixed charges
and preferred dividends. . . . . . . . (h) (h)
</TABLE>
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENT OF OPERATIONS
(a) The table below presents the adjustments to historical interest expense
to reflect the pro forma effect on interest expense for the respective
periods presented:
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended Ended
January 3, October 3,
1993 1993
------------ ------------
<S> <C> <C>
Interest expense on the Senior Notes (at a rate of 10 3/4%) $ 21,854 $ 16,080
Amortization of deferred financing costs on the Senior Notes 812 610
Elimination of interest expense on borrowings under the Senior
Credit Agreement and other debt assumed to be refinanced by
the Senior Notes (8,616) (5,246)
Elimination of deferred financing costs amortization under
the term loan portion of the Senior Credit Agreement (615) (461)
Other (366) (609)
--------- --------
Pro forma adjustment $ 13,069 $ 10,374
========= ========
</TABLE>
(b) To include the historical operating results of ABF and to eliminate
$5,817 for fiscal 1992 and $6,766 for the nine months ended October 3,
1993 in executive compensation and administrative expenses which were
in excess of the amounts to be recognized subsequent to the ABF
Acquisition.
(c) Adjusted for the additional depreciation and amortization expense from
the allocation of the estimated purchase price of ABF to include: (i)
covenant
not to compete of $1,000 amortized over five years, (ii) goodwill of
approximately $95,120 amortized over 40 years, and (iii) property, plant
and
equipment of approximately $1,356 depreciated over periods up to 10 years.
(d) To reflect the income tax effects of the pro forma adjustments.
(e) No adjustment has been made for the extraordinary loss which would
result from the repayment of $86,500 of the term loan portion of the
Senior Credit Agreement and the write-off of deferred financing costs
associated with the repayment.
(f) To exclude extraordinary loss on the early extinguishment of debt during
fiscal 1992 of $910, net of tax benefit of $309.
(g) For purposes of the ratio of earnings to fixed charges, (i) earnings
include earnings before income taxes and fixed charges (excluding
capitalized interest) and (ii) fixed charges consist of interest
(including capitalized interest) on all indebtedness, amortization of
deferred financing costs and that portion of rental expense that the
Company believes to be representative of interest. The Company's
earnings were insufficient to cover fixed charges by $20,152 for the
year ended January 3, 1993, $28,717 for the pro forma year ended
January 3, 1993, $1,274 for the nine months ended October 3, 1993 and
$7,424 for the pro forma nine-month period ended October 3, 1993.
The ratio of earnings to fixed charges before the 1992 special
charges of $30,000 was 1.29x for the fiscal year ended January 3, 1993.
The ratio of earnings to fixed charges before the 1993 loss on the
disposition of Canadian operations of $9,500 was 1.36x for the nine
months ended October 3, 1993. When adjusted to eliminate non-cash
charges (depreciation and amortization expense), earnings would have
exceeded fixed charges by $8,531 for the year ended January 3, 1993,
$2,710 for the pro forma year ended January 3, 1993, $16,760 for the
nine months ended October 3, 1993 and $12,688 for the pro forma nine
months ended October 3, 1993.
26
<PAGE>
(h) For purposes of the ratio of earnings to fixed charges and preferred
stock dividends, (i) earnings include earnings before income taxes
and fixed charges (excluding capitalized interest), (ii) fixed charges
consist of interest (including capitalized interest) on all indebtedness,
amortization of deferred financing costs and that portion of rental
expense that the Company believes to be representative of interest and
(iii) preferred stock dividends include all dividends whether payable
in cash or in kind adjusted to an amount representing the pre-tax
earnings which would be required to cover stock dividends. The
Company's earnings were insufficient to cover fixed charges and
preferred stock dividends by $25,849 for the year ended January 3, 1993,
$34,414 for the pro forma year ended January 3, 1993, $9,079 for the
nine months ended October 3, 1993 and $15,229 for the pro forma
nine-month period ended October 3, 1993. The ratio of earnings to
fixed charges and preferred stock dividends before the 1992
special charges of $30,000 was 1.11x for the fiscal year ended
January 3, 1993. When adjusted to eliminate non-cash charges
(depreciation and amortization expense) and non-cash preferred stock
dividends, the deficiency of earnings to cover fixed charges and
preferred stock dividends would have been $87 for the pro forma year
ended January 3, 1993, and earnings would have exceeded fixed charges
and preferred stock dividends by $5,734 for the year ended
January 3, 1993, $11,130 for the nine months ended October 3, 1993 and
$7,058 for the pro forma nine months ended October 3, 1993.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General. The Company has operated in a difficult retail environment for
much of the last three years. That period of time has been characterized by a
generally weak domestic economy, uncertainty among consumers, declines in
housing values in many parts of the country and an overall weakness in
consumer demand for floor covering and related products. The Company's
management has taken a number of steps during that period in order to deal with
the adverse business environment and to minimize the adverse effects of that
environment on the Company's operating results.
Cost Reduction Efforts. Late in fiscal 1990, the Company initiated a cost-
reduction program that resulted in selling, general and administrative expenses
declining as a percentage of sales from 37.1% for fiscal 1990 to 36.0% for
fiscal 1992 and 35.4% for the nine months ended October 3, 1993. The Company
achieved that reduction through several steps, including an approximately 16%
reduction in personnel (from approximately 4,400 employees at December 31, 1990
to approximately 3,700 at October 3, 1993), a restructuring of its sales-based
commission program, an upgrade of its computer systems, which allowed the
Company to reduce both its staff and operating costs, and more aggressive
monitoring and management of medical and workers' compensation programs.
Operational Changes. The Company recently installed a new warehouse
management system in its San Benardino, California distribution center to
improve operating efficiency and to provide better service to the stores
supplied by the distribution center. The Company intends to implement this
system in its three other distribution centers in 1994. In addition, the
Company has recently developed proprietary software applications to enhance
retail store operating efficiencies and to improve inventory control and
management. The Company has also endeavored to benefit from unused capacity
at its manufacturing facilities by focusing on generating wholesale sales of
its manufactured products to third parties. The Company has entered into
discussions regarding the possible sale of its 37 retail stores comprising its
Canadian operations. In connection with these discussions, the Company
re-evaluated its Canadian operations and determined to dispose of its Canadian
operations. The Company sold its Wood Plant in May of 1992 and entered into
a supply arrangement with the purchaser of the Wood Plant to supply virtually
all of the Company's hardwood flooring requirements.
Operating Leverage. Management believes that the Company is well
positioned to take advantage of a recovery in the residential remodeling market.
Over the past two years, the Company has substantially reduced its operating
costs as a percentage of sales, which has resulted in increased operating
leverage. Management believes that the Company's operating leverage has enabled
the Company to withstand the current difficult economic environment and should
enhance the Company's operating results in the event of an increase in the
Company's sales. In addition, management believes that the Company's operating
leverage has enabled it to expand its channels of distribution by implementing
the ColorCarpet and Floors A Plenty formats and acquiring the ABF Assets with
only a modest increase in the Company's general and administrative expenses.
28
<PAGE>
The following table sets forth certain income statement data for the
Company expressed as a percentage of net sales as well as the number of Company
Stores and Franchised Stores as at the end of each period presented:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
----------------------------------------- ----------------------------
DECEMBER 30, DECEMBER 29, JANUARY 3, SEPTEMBER 27, OCTOBER 3,
1990 1991 1993 1992 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . . . . 52.2% 53.7% 53.6% 53.3% 54.4%
Selling, general and
administrative expenses . . 37.1% 37.0% 36.0% 36.6% 35.4%
Depreciation and amortization . 5.3% 5.4% 4.9% 4.7% 4.6%
Special charges . . . . . . . . -- -- 5.2% -- --
Operating income . . . . . . . 5.4% 3.9% 0.3% 5.4% 5.6%
Gain (loss) on disposal of a
line of business . . . . . -- -- 0.7% 0.9% (2.3%)
Interest expense, net . . . . . 9.5% 9.5% 4.5% 4.7% 3.6%
Income (loss) before income
taxes and extraordinary items (4.1%) (5.6%) (3.5%) 1.6% (0.3%)
Net income (loss) . . . . . . . (4.2%) (4.3%) (3.8%) 1.2% (0.5%)
Number of Company Stores. . . . 765 772 771 767 717
Number of Franchised Stores . . 4 13 35 32 77
------ ------- ------ ------ ------
Total Color Tile Stores . . . . 769 785 806 799 794
====== ======= ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 3, 1993 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 27, 1992.
Effective for the third quarter of 1993, the Company determined to dispose
of its 37-store Canadian operations. The sales, costs and expenses of the
Canadian operations have been eliminated in the condensed consolidated statement
of operations for the nine months ended October 3, 1993 but are included in the
results of operations for prior periods. The pre-tax losses of this line of
business of $849,000 and the estimated loss on disposal of this business of
$8,651,000, which together aggregated $9,500,000, have been recorded as a loss
on disposal of a line of business in the condensed consolidated statement of
operations for the nine months ended October 3, 1993.
Systemwide Sales. Systemwide sales include retail sales of all Company
Stores, retail sales of all Franchised Stores and outside sales of manufactured
products to third parties. Systemwide sales for the Company's U.S. operations
declined 1.6% for the nine months ended October 3, 1993 as compared to the
comparable prior-year period.
Net Sales. Net sales for the Company's domestic operations declined
$12,979,000 or 3.1% for the nine months ended October 3, 1993 as compared to
net sales for the comparable prior-year period. This sales decline resulted
from (i) the conversion of 20 Company Stores to Franchised Stores, (ii)
decreased sales of hard surface flooring products and installation materials
and tools and (iii) the loss of sales of products manufactured at the Wood
Plant to third parties following the sale of the facility in fiscal 1992.
These declines were only partially offset by increases in (i) sales of carpet
and related installation services, (ii) franchising fees and royalties and
(iii) sales of merchandise to franchisees.
In addition, total net sales of the Company declined as a result of the
elimination from net sales of $18,343,000 of retail sales of the Canadian retail
operations for the nine-month period ended October 3, 1993. Total net sales for
the nine-month period ended September 27, 1992 include $22,287,000 of retail
sales of the Canadian operations.
29
<PAGE>
Net sales for domestic Company Stores open over one year decreased 6.2%
for the nine months ended October 3, 1993 compared to the comparable prior-year
period. The Company believes that industry sales of floor covering products
declined in the first nine months of 1993, with particularly weak sales during
June, July and August. The Company also believes that retail sales were
adversely affected by (i) the severe winter weather during March, the Company's
peak selling period, (ii) a continued decline in consumer confidence, (iii)
generally weak economic conditions, and (iv) the extremely soft retail climate
in California and the Northeast. In addition, as part of its continuing
efforts to reduce expenses in this difficult retail environment, management
reduced advertising expenditures by approximately $2,700,000, or 8.1%, for the
first nine months of 1993 compared to the same period in the prior year, which
reductions management believes also contributed to the decline in sales.
For October 1993, net sales for Company Stores (excluding Canadian stores)
open over one year increased 9.6% as compared to October 1992. The Company
believes net sales in October 1993 benefited from improved consumer confidence
and an increase of approximately 35% in sales in carpeting and related
installation services.
At October 3, 1993, there were 794 Color Tile Stores (excluding the 37
Canadian stores) in operation, 77 of which were Franchised Stores. During the
nine months ended October 3, 1993, 15 new Company Stores were opened, 9 Company
Stores were closed, 22 new Franchised Stores were opened, and 20 Company Stores
were converted to Franchised Stores. In addition, as of October 3, 1993, there
were 63 signed franchise agreements for additional Franchised Stores that the
Company expects will open within the next 12 to 18 months.
Cost of Sales. Cost of sales decreased by $14,055,000, or 6.0%, for the
nine months ended October 3, 1993, due principally to the elimination of the
Canadian operation's cost of sales, which decreased cost of sales by
$11,185,000, and also due to lower overall domestic retail sales. As a
percentage of net sales, cost of sales increased to 54.4% for the nine months
ended October 3, 1993 as compared to 53.3% for the comparable prior-year period.
This increase in cost of sales as a percentage of net sales resulted principally
from a sales mix shift caused by (i) increased sales of carpet and related
installation services, (ii) increased sales of merchandise to franchisees
and (iii) decreased sales of hard-surface flooring products. Gross margins on
carpet and related installation services for the nine months ended
October 3, 1993 improved by 1.5% as a percentage of net sales as compared to
the same period in the prior year.
Operating Expenses. Selling, general and administrative expenses
decreased as a percentage of sales to 35.4% for the nine months ended
October 3, 1993 as compared to 36.6% for the comparable prior-year period as
the Company continued its concerted efforts to reduce operating and
administrative expenses throughout the Company. Such expenses decreased in
aggregate dollar amount by $17,423,000 for the nine months ended
October 3, 1993 as compared to the comparable prior-year period primarily due
to (i) a 6% reduction in personnel and decreases in commission-based payroll,
(ii) reductions in advertising expenditures discussed previously, (iii) lower
insurance costs due to favorable claims experience and (iv) elimination of
$7,428,000 of operating expenses of the Canadian operations.
Gain (Loss) on Disposal of a Line of Business. Effective for the third
quarter of 1993, the Company determined to dispose of its Canadian operations.
The 37 retail stores comprising the Canadian operations, which operate under the
Factory Carpet name, were acquired by the Company during 1990. The viability of
the Factory Carpet chain was adversely affected by certain significant events
that occurred subsequent to the Company's acquisition of the chain, including
(i) a severe Canadian recession that has continued into 1993, (ii) the
imposition, beginning in 1992, of a retaliatory "anti-dumping" tariff on carpets
imported into Canada from the United States, (iii) imposition of a value-added
tax (the G.S.T.) on all manufactured and imported goods sold in Canada and (iv)
a significant devaluation of the Canadian dollar during 1992 and 1993.
As a result of the effect of these events on the Canadian operations, the
Company has elected to exit the Canadian market and to sell the assets and
business of its Canadian operations. In conjunction with this anticipated
disposition, the Company recorded a loss of $9,500,000, which included pre-tax
operating losses of $849,000 for the nine months ended October 3, 1993.
During May 1992, the Company sold its Wood Plant and realized a gain of
$4,007,000.
30
<PAGE>
Interest Expense, Net. Interest expense decreased $6,253,000 for the nine
months ended October 3, 1993 as compared to the comparable prior-year period.
The lower interest expense resulted from the redemption during the second and
third quarters of 1992 of the remaining $101,045,000 in aggregate principal
amount of the Company's debt securities with the proceeds of borrowings under
the Senior Credit Agreement and proceeds from the issuance of the Series A
Shares. Borrowings under the Senior Credit Agreement bear interest at
fluctuating rates, which approximated 6.3% per annum during the nine months
ended October 3, 1993. These rates were substantially below the applicable
rates on the redeemed debt securities, which had interest rates ranging from
12-3/8% to 13 3/4% per annum. See "Liquidity and Capital Resources." The
interest
rate applicable to future borrowings under the Senior Credit Agreement is
subject to increases as well as decreases.
Pre-Tax Income (Loss). Pre-tax loss for the nine months ended
October 3, 1993 was $1,274,000 as compared to pre-tax income of $7,044,000
for the comparable prior-year period. Before the expected loss on disposal of
the Canadian business of $9,500,000, pre-tax income would have been $8,226,000
for the nine months ended October 3, 1993. Excluding the 1992 gain on the sale
of the Wood Plant of $4,007,000, pre-tax income for the nine months ended
September 27, 1992 would have been $3,037,000. This improvement in pre-tax
income resulted from lower interest expense in 1993.
Income Taxes. Income tax expense was $624,000 for the nine-month period
ended October 3, 1993 compared to $1,009,000 in the comparable prior-year
period, due to higher state income taxes in 1992 on the gain on the sale of the
Wood Plant. The Company recognized reductions in its federal income tax
provision for financial reporting purposes of $683,000 for the nine
months ended October 3, 1993 as compared to a reduction of $2,961,000 for
the nine months ended September 27, 1993 from the utilization of deductible
temporary differences.
Net Income (Loss). Net loss for the nine months ended October 3, 1993 was
$1,898,000 after the $9,500,000 pre-tax loss on the Canadian operations. This
loss compares to net income in the prior year of $5,434,000, which included
$4,007,000 pre-tax gain on sale of the Wood Plant. Excluding the loss on
disposal from the Canadian operations during 1993 and the gain on sale of the
Wood Plant during 1992, net income would have been $7,602,000 for the nine
months ended October 3, 1993 as compared to net income of $1,705,000 for the
comparable prior-year period.
FISCAL YEAR ENDED JANUARY 3, 1993 (53 WEEKS), COMPARED TO FISCAL YEAR ENDED
DECEMBER 29, 1993 (52 WEEKS).
The discussion that follows includes Canadian stores then in operation.
Accordingly, the terms "Color Tile Stores" and "Company Stores," as used in this
section, include both domestic and Canadian stores.
Net Sales. Net sales for fiscal 1992 increased $36,070,000, or 6.6%,
compared to the prior fiscal year. The increase in sales resulted primarily from
increased sales of carpet and related installation services and increased sales
of ceramic tile and resilient flooring, and increases in franchise fees and
royalties.
Net sales for Company Stores opened over one year increased 5.6% in fiscal
1992 compared to the prior year. At January 3, 1993, there were 806 Color Tile
Stores in operation, 35 of which were Franchised Stores. During 1992, 16
Company Stores were opened, 13 Company Stores were converted to Franchised
Stores and four Company Stores were closed. In addition, 23 Franchised Stores
were opened, including the 13 Franchised Stores which were previously Company
Stores, and one Franchised Store was reacquired by the Company and currently
operates as a Company Store.
Cost of Sales. Cost of sales increased by $18,851,000, or 6.4%, in fiscal
1992 compared to the prior period. As a percentage of net sales, cost of sales
declined to 53.6% during fiscal 1992 as compared to 53.7% for the prior year.
This reduction in cost of sales as a percentage of net sales resulted
principally from improved gross margins in carpet and related installation
services, as well as increased franchise fees and royalties.
Operating Expenses. Selling, general and administrative expenses for fiscal
1992 decreased as a percentage of sales to 36.0% from 37.0% in the prior year as
31
<PAGE>
the Company continued to control its operating costs and administrative
expenses. Such expenses increased in aggregate dollar amount by $7,559,000, or
3.8%, primarily due to an increase in advertising expenditures of approximately
$6,000,000 and, to a lesser extent, due to increased commission-based payroll
resulting from increased sales.
Special Charges. In early 1993, the Company undertook a detailed study of
its operations. As a result of this study, which was completed in late March
1993, the Company recorded a write-down in 1992 of (i) certain property, plant
and equipment and (ii) certain intangible assets, and established provisions for
restructuring of operations, store closures and conversion of certain Company
Stores to Franchised Stores. As a result of these write-downs and provisions,
the Company recorded special charges in the amount of $30,000,000 during the
fourth quarter of 1992.
The Company anticipates improved operating results in future periods as a
result of the special charges due to (i) lower depreciation and amortization
expense for certain intangibles and fixed assets which were either written off
or written down to net realizable value and (ii) reduced operating losses on
stores to be sold, closed or franchised. The Company does not believe there
will be any significant impact on liquidity or sources and uses of capital
resources as a result of the special charges.
Gain on Sale of Assets. On May 15, 1992, the Company completed the sale
of the Wood Plant and realized a pre-tax gain of $4,007,000. The proceeds of
the sale, before fees and expenses, included $11,809,000 in cash and the buyer's
assumption of certain liabilities, including an agreement to defease an
industrial revenue bond related to the Wood Plant, with an outstanding principal
amount of approximately $2,600,000. The Company used a portion of the proceeds
to prepay $10,000,000 of scheduled principal payments on the term loan portion
of the Credit Agreement due in fiscal 1992.
Interest Expense, Net. Interest expense decreased $26,289,000, or 50.6%, in
fiscal 1992 as compared to the prior year. The lower interest expense resulted
from the repurchase during fiscal 1991 and fiscal 1992 of $260,080,000 in
aggregate principal amount of the Company's debt securities with the proceeds of
borrowings under the Senior Credit Agreement, which borrowings bear interest at
rates substantially below the applicable rates on the repurchased debt
securities, and with net proceeds of approximately $51,000,000 from the
placement of the 2,200,000 Series A Shares.
Loss Before Income Taxes and Extraordinary Item. Pre-tax loss for fiscal
1992 was $20,152,000 (after the $30,000,000 of Special Charges) as compared
to a
pre-tax loss of $30,627,000 for the prior year. The improvement in the pre-tax
loss resulted primarily from the $26,289,000 reduction in interest expense and
improvement in operations (before the Special Charges taken in the fourth
quarter of fiscal 1992). Excluding the special charges recorded in fiscal 1992,
pre-tax income would have been $9,848,000, as compared to the $30,627,000 pre-
tax loss in fiscal 1991.
Income Tax Expense (Benefit). Income tax expense for fiscal 1992 was
$1,240,000 as compared to a $2,133,000 tax benefit in the prior year due to
higher state income taxes and alternative minimum tax on fiscal 1992 earnings.
Extraordinary Item. In fiscal 1992 the Company recognized a $910,000
pre-tax extraordinary loss on the early extinguishment of debt, before an
applicable income tax benefit of $309,000. This extraordinary loss resulted
from the redemption of the remaining outstanding 12-3/8% Senior Notes at a
premium on October 15, 1992. During fiscal 1991, the Company recorded a
pre-tax extraordinary gain on the early extinguishment of debt of $7,403,000
before applicable income taxes of $2,517,000.
Net Loss. Net loss for fiscal 1992 was $21,993,000 as compared to a net
loss in the prior year of $23,608,000. The improvement in the net loss over
the prior year resulted primarily from lower interest expense.
32
<PAGE>
FISCAL YEAR ENDED DECEMBER 29, 1991, COMPARED TO FISCAL YEAR ENDED
DECEMBER 30, 1990.
The discussion that follows includes Canadian stores then in operation.
Accordingly, the terms "Color Tile Stores" and "Company Stores," as used in this
section, include both domestic and Canadian stores. Operations of Factory
Carpet are considered to have no material effect on operating results for fiscal
1991.
Net Sales. Net sales for fiscal 1991 increased $18,496,000 or 3.5%
compared to fiscal 1990. The increase in net sales was due primarily to the
full year sales impact of the Factory Carpet stores opened late in 1990 and the
increase in carpet sales which more than offset a decline in sales of hard
surface flooring products.
Sales for Company Stores opened over one year decreased 1.8% during 1991.
The Company added 16 Company Stores, closed six Company Stores and converted
three Company Stores to Franchised Stores, bringing the total of Company Stores
to 772 at December 29, 1991, compared to 765 stores at December 30, 1990. At
December 29, 1991, there were 13 Franchised Stores in operation.
Cost of Sales. The cost of sales increased to 53.7% of net sales during
fiscal 1991 compared to 52.2% for fiscal 1990. This increase was due primarily
to a sales mix shift to increased sales of carpet, other special order product
lines and installation revenues, which carry significantly lower margins than
the Company's other product lines. Gross margin also declined as a result of the
depressed economic environment and the impact of the Gulf War, both of which had
a severe negative effect on retailers generally.
Operating Expenses. Selling, general and administrative expenses
decreased to 37.0% of sales during fiscal 1991 compared to 37.1% for fiscal
1990. This reduction as a percentage of sales results primarily from cost
reduction programs implemented by management during the year, including more
stringent control of payroll at both the store and administrative levels.
Interest Expense, Net. Net interest expense increased $1,886,000 compared
to fiscal 1990 due primarily to additional interest expense incurred as a result
of the deferral of interest payments due February 15, 1991 and August 15, 1991
on the Company's 17% Junior Subordinated Notes due 1999 (the "Junior Notes"),
the acceleration of amortization of deferred financing costs resulting from the
Company's call of the remaining 13% Senior Subordinated Notes and 13-3/4%
Subordinated Debentures, and lower interest income earned during 1991. These
increases in net interest expense were somewhat offset by the reduction in
interest expense during December 1991 that resulted from the Company's
redemption of the Junior Notes, and payment of the related deferred interest on
November 26, 1991, as well as the Company's purchase on December 5, 1991 of
$71,369,300 aggregate principal amount of the Senior Notes, $51,400,000
aggregate principal amount of the 13% Senior Subordinated Notes and $26,950,000
aggregate principal amount of the 13-3/4% Subordinated Debentures.
Pre-Tax Loss. The loss, before provision for income taxes, the cumulative
effect of changes in accounting methods and the extraordinary gain on the early
extinguishment of debt, increased $8,823,000 in 1991 when compared to fiscal
1990. This increased loss resulted from lower operating profit, increased
amortization and depreciation and higher interest expense, as discussed above.
Income Tax Expense (Benefit). The Company recognized an income tax benefit
of $2,133,000 for fiscal 1991 compared to a tax expense of $393,000 for fiscal
1990. This tax benefit offsets in part the tax expense included as a reduction
of the extraordinary item discussed above and results in a net tax expense for
the period of $384,000.
Extraordinary Item. The Company recognized a $7,403,000 pre-tax
extraordinary gain on the extinguishment of debt, before applicable income
taxes of $2,517,000, including the recognition during 1991 of $5,917,000 of
anticipated premium resulting from the Company's call for redemption on
April 15, 1992 of all outstanding 13% Senior Subordinated Notes and 13-3/4%
Subordinated Debentures and the Company's intent, during fiscal 1992, to call
for redemption all outstanding 12-3/8% Senior Notes.
33
<PAGE>
Net Loss. Net loss for 1991 was $23,608,000 as compared to a net loss in
the prior year of $22,197,000. The increased loss in 1991 resulted primarily
from lower operating profit, increased depreciation and amortization expense and
higher interest expense, partially offset by the extraordinary gain from the
early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
Commencing in November 1991, the Company implemented a recapitalization
plan to reduce the Company's interest expense and to provide the Company
additional liquidity and financial flexibility. In connection with this plan,
the Company issued additional common stock of the Company to CT Holdings and
the Series A Shares in a private placement and entered into the Senior Credit
Agreement. The Company utilized the proceeds of these financings to refinance
the Company's existing bank debt, to repurchase all of its outstanding debt
securities and to provide working capital for its operations.
At October 3, 1993, the Company had $218,400,000 in outstanding borrowings
under the Senior Credit Agreement, which bear interest at fluctuating rates, and
approximately $8,000,000 of availability under the Senior Credit Agreement. On
a pro forma basis, giving effect to the use of net proceeds from the Senior Note
Offering, the Company would have had approximately $36,000,000 of availability
under the Senior Credit Agreement. At October 3, 1993, the average fluctuating
interest rate on such borrowings approximated 6.2% per annum. The Company has
purchased an interest rate cap in a notional amount of $125,000,000 which
establishes a maximum total borrowing rate in respect of such notional amount of
9% per annum through April 20, 1994. The Company was in compliance as of
October 3, 1993 with all restrictive covenants contained in the Senior Credit
Agreement.
Upon the application of net proceeds from the Senior Note Offering, the
Company repaid $86,500,000 of indebtedness under the term loan portion of its
Senior Credit Agreement, including $2,500,000 of principal payments due in the
fourth quarter of fiscal 1993, which will reduce the Company's mandatory debt
repayment obligations on currently outstanding debt over the next five years
from approximately $150,000,000 to approximately $70,000,000. After giving
effect to the use of net proceeds from the Senior Note Offering as described
herein, the next scheduled principal payment on the term loan portion of the
Senior Credit Agreement will be $3,026,000 due in March 1996. Approximately
$8,000,000 of total cash dividends on the Series A Shares will be payable
during fiscal 1994. In fiscal 1995, the Company's Redeemable Senior Preferred
Stock will begin to accrue cash dividends in the amount approximately
$5,200,000 each year.
Capital expenditures for fiscal 1992 were $13,938,000 as compared to
$9,517,000 for the prior fiscal year. Capital expenditures for the nine months
ended October 3, 1993 were $9,357,000 as compared to $10,578,000 for the nine
months ended September 27, 1992. These capital expenditures have been funded
through cash flow from operations and the revolving credit portion of the
Senior
Credit Agreement. For the remainder of fiscal 1993, the Company made capital
expenditures of approximately $5,000,000, including expenditures for new store
openings, remodeling of existing stores, new fixtures and capitalized repairs.
In fiscal 1994, the Company anticipates total capital expenditures of
approximately $25,000,000 to $30,000,000, including approximately $10,000,000 to
$14,000,000 to open between five and seven new Floors A Plenty stores. The
Company intends to finance such expenditures from a combination of internally
generated cash flow, borrowings under the revolving credit portion of the Senior
Credit Agreement, capital lease obligations and purchase money mortgages.
The Company believes that funds generated from operations and the
revolving line of credit portion of the Senior Credit Agreement (including
additional availability provided by the application of net proceeds from the
Senior Note Offering) and from lease obligations and purchase money mortgages
will provide sufficient resources through fiscal 1995 to permit it to meet its
working capital requirements, to make all principal and interest payments due
and payable on the Senior Notes and its other existing indebtedness, to pay
all cash dividend payments payable on its Series A Shares and the Redeemable
Senior Preferred Stock and to finance planned capital expenditures. The
Company also believes that the consummation of the Senior Note Offering has
provided it with a stronger capital structure to better enable it to pursue
its business objectives by substantially reducing its mandatory debt repayment
obligations over the next five years.
34
<PAGE>
The Company will be required to refinance the Senior Notes, the Senior
Credit Agreement and the Company's Redeemable Senior Preferred Stock at or
prior to maturity in order to redeem the Series A Shares as required. The
Company's ability to refinance such Senior Notes and the Senior Credit
Agreement and to redeem such preferred stock is dependent to a considerable
degree upon the Company's results of operations. No assurance can be given
that the Company will be able to refinance the Senior Notes or the Senior
Credit Agreement or to redeem the Redeemable Senior Preferred Stock upon an
event of mandatory redemption.
In order to consummate the Senior Note Offering and apply the net proceeds
therefrom as described herein, the Company entered into an amendment to its
Senior Credit Agreement that became fully effective upon the consummation of the
Senior Note Offering. Such amendment modifies the Senior Credit Agreement to,
among other things, permit the Senior Note Offering, lower the interest coverage
tests governing the payment of dividends on its Series A Shares and Redeemable
Senior Preferred Stock and permit the acquisition of the ABF Assets. In
addition to permitting the use of the proceeds from the Senior Note Offering as
described herein, this amendment also increases the level of capital
expenditures permitted under the Senior Credit Agreement, provides the Company
with increased flexibility under its financial and other covenants and permits
the disposition of the Company's Canadian operations and certain retail stores
acquired from the former owner of ABF. See "Capital Structure -- Credit
Facilities -- Senior Credit Agreement."
IMPACT OF INFLATION AND CHANGING PRICES; SEASONALITY
Inflation and changing prices have not historically had a material effect
on the Company's overall operations. Generally, the Company has been able to
offset the effect of increases in product costs through a combination of price
increases, modifications in promotional strategies and the implementation of
operating efficiencies.
The Company's business shows some seasonal variation, with lower sales
levels generally occurring during the winter months.
35
<PAGE>
BUSINESS
RETAIL STORES
GENERAL
The Company is a nation-wide specialty retailer of floor covering products,
principally serving the do-it-yourself, buy-it-yourself residential remodeling
market and, to a lesser extent, the small contractor or commercial customer.
Management believes that the Company is the largest specialty retailer of floor
covering products in the United States based on sales. At October 3, 1993,
Color Tile sold its line of products through 794 domestic Color Tile Stores.
The Company offers a broad selection of quality floor covering, wall
covering and related products and accessories accompanied by a high level
of customer service and support at prices competitive with other floor and
wall covering retailers. The Company's product lines include glazed ceramic
tile for floor and wall covering, resilient flooring (consisting of vinyl tile
and sheet vinyl), carpeting, hardwood flooring (consisting of strip and plank
flooring and parquet tile), window treatments and wall coverings. The Company
also sells a full line of installation and maintenance materials (including
adhesives, grouts, caulks, waxes, polishes and sealers) and tools for use in
installing or maintaining the Company's principal products, and arranges
professional installation for its products through local independent
contractors. Net sales for the Company were $580.4 million for the fiscal year
ended January 3, 1993 and $401.6 million for the nine months ended October 3,
1993.
Management believes that the Company's most important competitive advantages
are its national store network, nationally recognized "Color Tile" and
"ColorCarpet" trademarks, strong vendor relationships and significant operating
leverage resulting from the Company's reduction in operating and administrative
costs over the past two years. The Company's strategy is to increase sales by
expanding its product offerings, opening new Color Tile Stores and adding new
channels of distribution, including direct-response retailing. The Company has
expanded its special-order programs in order to offer the consumer a wider
selection of products in each of the principal product categories sold in its
stores. These special-order programs generally do not require significant
additional investment in inventory. In addition, the Company intends to
penetrate the carpet market further through the introduction of two new
retailing formats and to increase its use of direct-response retailing.
Management believes that retail sales of floor covering products in the
United States during 1992 totaled approximately $10 billion. Sales of
carpeting and hard-surface flooring products were approximately $7.5 billion
and $2.5 billion, respectively, during that period. Since its founding in
1953, the Company has sold a broad selection of hard-surface flooring
products. Ceramic tile, the Company's highest-margin floor covering product
line, is offered in a variety of sizes, colors, textures and finishes.
Resilient flooring, including sheet vinyl and vinyl tile, represents the
Company's other principal hard-surface floor covering product line. Vinyl
tile, the traditional "do it yourself" floor covering product, typically
costs less per square foot and is easier to install than other types and
styles of floor covering. In addition, the Company also sells a broad
selection of wood flooring products. The Company sells it hard-surface
flooring products primarily from in-stock supplies, supplemented by
special-order programs. Total sales of hard-surface flooring products in 1992
were approximately $300 million in 1992.
The Company began exploring the possibility of marketing carpet on a
nation-wide basis in 1987. In 1989, the Company introduced a full line of
carpeting on a nation-wide basis using the trade name "ColorCarpet" as an
addition to its traditional hard-surface flooring product line. The two
principal features of the Company's carpet program are the marketing of carpet
by color, rather than by style, and marketing on a cut-to-order basis, rather
than from in-stock inventory. Domestic carpet sales and related installation
revenues have grown to approximately $115 million in 1992, representing
approximately 22% of total domestic retail sales.
In response to its successful introduction of carpeting, the Company has
developed additional retail formats to increase further its penetration of the
carpeting segment of the floor covering market. In 1992, the Company began
developing two new retailing formats: Floors A Plenty, a "super-store" format,
and ColorCarpet, a small specialty store format.
Floors A Plenty is a free-standing "super-store" that targets customers
who tend to be more value-conscious than Color Tile's existing customers and
who perceive the super-store format as offering increased value. This format
36
<PAGE>
also targets small contractors and other commercial customers. The Company
opened its first Floors A Plenty store in the Dallas-Fort Worth area in late
1992 and expects to open two additional Floors A Plenty stores during the first
quarter of 1994. Floors A Plenty stores will offer approximately 20,000 SKU's,
of which approximately 8,000 will be carpeting SKU's. The Company intends to
locate its Floors A Plenty stores adjacent to other super-store retailers, such
as Price Club, Sam's, Home Depot and Builders Square.
To capitalize further on the success of the ColorCarpet trade name, the
Company developed a format of smaller, principally franchised specialty carpet
stores operating under the "ColorCarpet" name. During 1993, the Company opened
the first two ColorCarpet stores in the Dallas-Fort Worth area. ColorCarpet
stores will offer approximately 8,000 SKU's of carpeting in approximately 3,500
square feet of retail space. Carpeting represents approximately 75% of
ColorCarpet store's total SKU's. A limited selection of hard-surface flooring
products is also available. The Company intends to open ColorCarpet stores
principally by granting franchises in smaller markets where the demographics
would not typically support a full-line Color Tile Store. The Company intends
to locate the ColorCarpet stores principally in strip malls and small retailing
centers adjacent to residential areas.
During the past four years, the Company has significantly increased both
the number of product lines and the number of products offered within each
product line through the development of its special-order business. A typical
Color Tile Store currently offers for sale approximately 15,000 SKU's, 12,000
of which are devoted to special-order products (8,000 of which relate to
carpeting and 4,000 of which relate to other products). The Company's
special-order programs have grown significantly over the past four years,
principally through the introduction of carpet in 1989. In 1990, the Company
began selling window treatments on a special-order basis. Special-order
programs generally do not require the Company to maintain inventory and
therefore do not require significant working capital investment.
The Company recently acquired the assets of ABF and certain related
entities and assumed certain liabilities in connection therewith. ABF is a
direct-response marketing company engaged in the sale, on a special-order
basis, of name-brand and private-label window treatments (blinds and similar
products), and wall coverings at significant discounts from average retail
prices. ABF is a leader in the rapidly growing direct-response distribution
channel of window treatments and wall coverings.
Management believes that the acquisition of ABF will afford the Company an
opportunity to realize certain synergies between ABF and Color Tile, including
the possibility of selling Color Tile's floor covering products to the ABF
customer base. The Company's research has shown that one-third of purchasers of
wall covering or window treatment products are likely to purchase floor covering
products within six months. In addition, the Company believes that the
acquisition of ABF will enable Color Tile to enjoy certain economies of scale in
purchasing window treatments and wall coverings.
Net sales for ABF have grown from approximately $5.9 million for the twelve
months ended December 31, 1988 to approximately $12.6 million for the twelve
months ended December 31, 1989 (representing an annual growth rate of 113.6%),
approximately $24.7 million for the fiscal year ended December 31, 1990
(representing an annual growth rate of 96.0%), approximately $44.3 million for
the fiscal year ended December 31, 1991 (representing an annual growth rate of
79.4%) and approximately $64.1 million for the fiscal year ended December 31,
1992 (representing an annual growth rate of 44.7%). Over the past four years,
net sales for ABF have grown at a compound annual growth rate of 82% (i.e.,
representing the percentage change in net sales of ABF compounded each year).
Net sales for ABF were approximately $46.6 million for the nine months ended
September 30, 1992 and approximately $61.8 million for the nine months ended
September 30, 1993, representing an increase of 32.6%. Over the past five
years, earnings before interest, taxes, depreciation and amortization of ABF,
adjusted for compensation paid to certain members of management, grew to
approximately $7.2 million for the fiscal year ended December 31, 1992, or 11.2%
of net sales. Earnings before interest, taxes, depreciation and amortization of
ABF (calculated on the same basis) were approximately $4.7 million for the nine
months ended September 30, 1992, or 10.1% of net sales, and approximately $6.3
million for the nine months ended September 30, 1993, or 10.2% of net sales.
While management believes that sales generated by the ABF Assets will continue
to grow in the future, no assurance can be given that such growth will continue
or that any future growth will occur at rates comparable to those experienced
over the past four years.
37
<PAGE>
PRODUCTS
The Company's principal product lines are ceramic tile, resilient flooring,
carpeting and installation, and installation materials and tools. The table
below indicates the approximate percentages of Company Store sales derived from
each of these classes of products, and all other classes of products offered by
the Company (including product installation) during the periods shown.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Nine Months
December 30, December 29, January 3, Ended October 3,
Class of Products 1990 1991 1993 1993
- ----------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Ceramic Tile 29% 25% 25% 25%
Resilient Flooring 28 26 26% 26%
Carpet and Installation 16 23 26% 25%
Installation Materials and
Tools 19 16 14% 15%
Other(1) 8 10 9% 9%
----- ----- ----- -----
100% 100% 100% 100%
===== ===== ===== =====
</TABLE>
__________________
(1) Includes sales of window treatments and wood flooring.
CERAMIC TILE
Since its founding, the Company has sold a broad selection of glazed
ceramic tile used for floor covering and wall covering in a variety of sizes,
colors, textures and finishes. In addition, the Company offers ceramic tile
accent pieces and accessories to complement its basic ceramic tile products.
Color Tile Stores sell ceramic tile primarily from in-stock supplies,
supplemented by a special-order service for certain ceramic tile, marble and
granite products that are targeted at a more affluent segment of the market
than its in-stock ceramic tile products.
The Company merchandises its ceramic tile products by offering its
customers a high level of assistance in the selection and installation of its
ceramic tile products, including advice from trained sales personnel (including
"how to" clinics) and printed instructional materials for installation of the
products.
During fiscal 1992, approximately 20% of the ceramic tile products sold
by the Company was manufactured at the Company's tile manufacturing facility
located in Cleveland, Mississippi (the "Tile Facility"). See "Manufacturing."
Approximately 33% of the ceramic tile products sold by the Company during this
period was purchased from domestic suppliers and approximately 47% was imported
from suppliers in Italy, Spain, Brazil and countries in the Far East, including
Japan, Thailand and Korea.
RESILIENT FLOORING
Resilient flooring represents the Company's other traditional line of floor
covering products and is available in either vinyl tile or sheet vinyl. Vinyl
tile is the traditional "do-it-yourself" floor covering. Vinyl tile typically
costs less per square foot and is easier to install than other types and styles
of floor covering. Most of the Company's vinyl tile sales are made from a broad
selection of patterns that are maintained in stock. Color Tile Stores also stock
a limited assortment of sheet vinyl supplied by nationally recognized
manufacturers. A more extensive selection of vinyl tile and sheet vinyl is
available by special order.
CARPET
The Company added carpeting to its line of products in April 1989. Color
Tile Stores offer a full line of carpeting under the "ColorCarpet" trade name.
Approximately 7,500 different styles and colors of carpet are offered at a broad
range of prices. The Company's carpet products include DuPont "Stainmaster"
38
<PAGE>
carpet. DuPont is one of the largest carpet fiber manufacturers in the
industry. Color Tile has negotiated with DuPont to include tags at the end of
DuPont's extensive national carpet advertisements and to designate Color Tile's
ColorCarpet stores as "DuPont Master Stores." The Company's sales personnel
sell carpet principally by color rather than price. See "Advertising, Marketing
and Merchandising." The Company does not inventory carpet, but orders directly
from its suppliers on a "cut-to-order" basis upon receipt of a customer order
and a deposit on the purchase price. Payment in full is due at the time of
installation. The Company provides installation for its carpeting and other
product lines through local independent contractors.
INSTALLATION MATERIALS AND TOOLS
Color Tile Stores generally carry a full line of tools, kits, installation
materials and product care materials for use primarily in the installation and
maintenance of floor covering and wall covering products. These products are
generally sold in conjunction with the Company's principal floor and wall
covering products.
Over 90% of the installation and maintenance items sold in fiscal 1992,
including adhesives, grouts, caulks, waxes, polishes and sealers, were
manufactured at the Company's adhesives facility located in West Chicago,
Illinois (the "Adhesives Facility"). See "Manufacturing." Other accessories,
including brushes, rollers and other tools for product application or
installation, are made to the Company's specifications and are generally sold
under the Color Tile brand name.
OTHER PRODUCTS
In addition to the products described above, the Company also sells window
treatments under the "Window Colors" trade name and wood flooring. Window
treatments consist of window shades, blinds, wooden window coverings and related
products. Window treatments are only stocked on a limited basis by Color Tile
Stores and are generally purchased from domestic suppliers upon receipt of
customer orders and are shipped directly to the customer.
Color Tile Stores also offer a broad selection of wood flooring (both
strip and plank flooring and parquet tile) in a variety of colors, widths
and finishes. These products are generally targeted to a more affluent segment
of the market than the Company's other floor covering products. During fiscal
1992, the Company obtained a substantial majority of the parquet tile and strip
and plank wood flooring sold by the Company from its formerly owned Wood Plant
located in Melbourne, Arkansas. The Company sold the Wood Plant in May 1992
and entered into a Supply Agreement with the purchaser pursuant to which the
Company, subject to certain exceptions and minimum annual purchase
requirements, agreed to purchase virtually all of its hardwood flooring
requirements, and the purchaser agreed to supply the Company with such
requirements, through 1998. See "Suppliers."
FRANCHISING
In 1989, the Company commenced operations of a franchising program
designed to allow the Company to expand its network of Color Tile Stores
geographically without substantial increases in its capital spending and
working capital requirements. The Company's franchising program is focused
generally in less populous markets (e.g., 100,000 or less population) which
historically would not support multiple locations and, therefore, do not enable
the Company to achieve satisfactory operating, administrative and
advertising efficiencies. In these smaller markets, the Company may either
convert existing Company Stores to Franchised Stores or open new Franchised
Stores, thus reducing the Company's capital investment while allowing the
Company to receive the franchise fees and royalties provided by the sales and
operation of such Franchised Stores. The Company made a strategic decision to
commence franchising operations as an effective means of expanding the
network of Color Tile Stores principally in less populous markets rather
than in response to the Company's limited liquidity resulting from the
indebtedness incurred in the 1989 Merger. While franchising permits the
Company to increase the geographic coverage of its store network without
substantial contributions of working capital, the operation of
Franchised Stores raises certain other risks such as the loss of operational
control over Franchised Stores to the franchisee (including the ability to
determine products offered, retail pricing and other operational matters). The
Company does not believe any of those risks are material in the aggregate.
39
<PAGE>
At October 3, 1993, 77 Franchised Stores were in operation (including eight
Franchised Stores operating under the name "Factory Carpet" in Canada). During
fiscal 1992, 23 Franchised Stores were opened (including 12 Franchised Stores
that were previously Company Stores) and one Franchised Store was reacquired by
the Company and is currently operated as a Company Store. In April 1993, the
Company introduced a new franchise program to offer prospective franchisees the
opportunity to open a "ColorCarpet" store, which devotes substantially more of
its sales area to sales and marketing of carpeting than a full line Color Tile
Store.
The typical Franchised Store is substantially identical to a Company Store.
The Company generally obtains a lease for the Franchised Store, which it then
subleases to the franchisee. The franchisee purchases leasehold improvements,
fixtures and inventory. The Company provides its expertise in site selection,
interior design, training, marketing and certain financing and accounting
functions in return for an initial fee of $22,500. Thereafter, the Company
receives royalties and an advertising fee based on gross sales of the Franchised
Store.
ADVERTISING, MARKETING AND MERCHANDISING
Sales promotions and advertising are developed centrally by the Company's
in-house advertising department for use on a national basis. The Company creates
and produces most of its own print advertising. An independent advertising firm
produces television advertisements for the Company. The Company's advertising
program includes network television, print advertising (including pre-printed
newspaper inserts and print ads) and in-store displays.
Expenditures for advertising and promotion purposes were approximately
8.0%, 7.4% and 6.8% of net sales for fiscal years 1992, 1991 and 1990,
respectively. The Company also receives cooperative advertising contributions
primarily from certain of its suppliers of resilient flooring and carpet.
Each Color Tile Store is arranged to provide a broad selection of SKU's
for each product line. In ceramic tile, the Company has developed a display
format known as the "Great Wall of Tile" that presents many of the wall tile
products sold in Color Tile Stores in a space-saving, easy-to-view display.
The Company has also developed a similar merchandising approach for carpeting
through in-store displays of samples of its "ColorCarpet" product lines
arranged by color group. By utilizing this approach, Color Tile Stores are able
to offer carpeting customers a wider range of carpeting products than would be
possible if the Company were to offer carpeting for sale from in-stock
inventory.
STORE OPERATIONS
General. The Company operates a network of stores throughout the
continental United States and Canada. The Company generally seeks to locate
Color Tile Stores on heavily traveled streets in locations where homes are at
least five years old, the age at which the Company believes the first
renovations or remodeling of homes often occurs. In selecting locations for
Color Tile Stores, the Company also attempts to obtain locations that are in
proximity to other nationally recognized, high-volume retailers, which tend to
generate substantial customer traffic for the shopping centers in which they
are located. The Company also seeks to cluster Company Stores in populated
areas to allow for greater operational, administrative and advertising
efficiencies.
40
<PAGE>
The Company operates stores in each of the 48 contiguous states of the
United States and in seven provinces of Canada. At October 3, 1993, the
geographic distribution of the 794 Color Tile Stores was as follows:
NUMBER OF COLOR TILE STORES (INCLUDING FRANCHISED STORES)
Alabama 7
Arizona 12
Arkansas 4
California 85
Colorado 18
Connecticut 14
Delaware 5
Florida 46
Georgia 17
Idaho 3
Illinois 44
Indiana 22
Iowa 10
Kansas 6
Kentucky 11
Louisiana 10
Maine 4
Maryland 18
Massachusetts 21
Michigan 32
Minnesota 14
Mississippi 2
Missouri 18
Montana 5
Nebraska 3
Nevada 4
New Hampshire 5
New Jersey 28
New Mexico 3
New York 41
North Carolina 14
North Dakota 1
Ohio 43
Oklahoma 6
Oregon 10
Pennsylvania 54
Rhode Island 4
South Carolina 8
South Dakota 1
Tennessee 15
Texas 63
Utah 5
Vermont 1
Virginia 21
Washington 17
West Virginia 3
Wisconsin 15
Wyoming 1
---
TOTAL 794
===
NUMBER OF CANADIAN STORES (INCLUDING FRANCHISED STORES)
Alberta 3
British Columbia 5
Manitoba 2
Nova Scotia 1
Ontario 19
Quebec 5
Saskatchewan 2
--
TOTAL 37
==
41
<PAGE>
A summary of Color Tile's Store openings and closings since 1990 is
provided below:
HISTORICAL STORE OPENINGS AND CLOSINGS
<TABLE>
<CAPTION>
1990 1991 1992 1993(2)
------- ------- ------- -------
Company Stores:(1)
- --------------
<S> <C> <C> <C> <C>
Beginning of period . . . . . . . . 705 765 772 771
Opened . . . . . . . . . . . . . . 63 16 16 16
Converted to Franchised Store . . . (2) (3) (13) (28)
Closed . . . . . . . . . . . . . . (1) (6) (4) (13)
Canadian operations to be disposed(3) ---- ---- ---- (29)
------- ------- ------- -------
End of period . . . . . . . . . . . 765 772 771 717
Franchised Stores:
- -----------------
Beginning of period . . . . . . . . --- 4 13 35
Opened . . . . . . . . . . . . . . 2 7 11 22
Converted from Company Store. . . . 2 3 13 28
Closed . . . . . . . . . . . . . . --- (1) (1) ---
Converted to Company Store . . . . --- --- (1) ---
Canadian operations to be disposed(3) --- --- --- (8)
------- ------- ------- -------
End of period . . . . . . . . . . . 4 13 35 77
Total Color Tile:
- ----------------
Beginning of period . . . . . . . . 705 769 785 806
Opened . . . . . . . . . . . . . . 65 23 26 38
Closed . . . . . . . . . . . . . . (1) (7) (5) (13)
Canadian operations to be disposed(3) --- --- --- (37)
------- ------- ------- -------
End of period 769 785 806 794
======= ======= ======= =======
(1) Includes owned stores operated under the names Color Tile, Factory
Carpet, Peerless, Floors A Plenty or ColorCarpet.
(2) Includes store openings and closing through October 3, 1993.
(3) The Company will operate these stores pending their disposition.
Individual Store Operations. The typical Color Tile Store consists of
approximately 5,000 square feet, has approximately 20 parking spaces and is
located in a strip shopping center or is a free-standing store. The Company
frequently updates the product displays and placement of products within Color
Tile Stores. Each year the Company also identifies Company Stores for
renovation and remodeling. A typical Color Tile Store currently offers
approximately 15,000 SKU's, approximately 12,000 of which are devoted to
special-order products.
Each Company Store typically employs approximately five people, including a
store manager. Twenty-eight regional managers supervise the store managers and
three divisional vice presidents supervise the regional managers. Sales
personnel are compensated on a commission basis, with compensation for regional
managers and divisional vice presidents determined on the basis of sales
development and profitability of the stores for which they are responsible.
Canadian Stores. Factory Carpet stores are approximately 8,000-10,000
square feet in size. Although Factory Carpet stores offer a full line of
hard-surface flooring products and window treatments, carpet sales have
42
<PAGE>
historically accounted for, and are expected to continue to account for, a
substantial majority of the sales of these stores.
Effective for the quarter ended October 3, 1993, the Company decided to
dispose of its Canadian operations. The Canadian stores were acquired by the
Company in 1990. The viability of the Canadian operations was adversely
affected by certain significant events that occurred subsequent to the
acquisition, including (i) a severe Canadian recession that has continued into
1993, (ii) the imposition, beginning in 1992, of a retaliatory "anti-dumping"
tariff on carpets imported into Canada from the United States, (iii) imposition
of a value-added tax (the G.S.T.) on all manufactured and imported goods sold
into Canada, and (iv) a significant devaluation of the Canadian dollar during
1992 and 1993.
As a result of the effect of these events on the Canadian operations, the
Company has elected to exit the Canadian market and to dispose of its Canadian
stores. In conjunction with this anticipated disposition, the Company recorded
a loss of $9,500,000, which included pre-tax operating losses of $849,000 for
the nine months ended October 3, 1993.
Floors A Plenty. Floors A Plenty is a free-standing "super-store" that
targets customers who tend to be more value-conscious than Color Tile's
existing customers and who perceive the super-store format as offering
increased value. This format also targets small contractors and other
commercial customers. The Company opened its first Floors A Plenty store in
the Dallas-Fort Worth area in late 1992 and expects to open two additional
Floors A Plenty stores during the first quarter of 1994. Floors A Plenty
stores will offer approximately 20,000 SKU's of which approximately 8,000
will be carpeting SKU's. The Company intends to locate its Floors A Plenty
stores adjacent to other super-store retailers, such as Price Club, Sam's,
Home Depot and Builders Square.
ColorCarpet. To capitalize on the success of the ColorCarpet trade name,
the Company developed a chain of smaller,principally franchised specialty
carpet stores operating under the "ColorCarpet" name. During 1993, the
Company opened the first two ColorCarpet stores in the Dallas-Fort Worth area.
ColorCarpet stores will offer approximately 8,000 SKU's of carpeting in
approximately 3,500 square feet of retail space. Carpeting represents
approximately 75% of a ColorCarpet store's total SKU's. A limited
selection of hard-surface flooring products is also available. The
Company intends to locate ColorCarpet franchises in smaller markets
where the demographics would not typically support a full-line Color
Tile Store. The Company intends to locate ColorCarpet stores
principally in strip malls and small retailing centers adjacent to
residential areas.
SUPPLIERS
The Company believes that one of its competitive advantages is its strong
relationship with its vendors. The Company continues to have good relations
with suppliers of its traditional product lines and has developed strong
relationships with new vendors in its new product lines, such as carpet.
During fiscal 1992, the Company manufactured approximately 15% of the
products sold in Color Tile Stores (which excludes all purchases from the Wood
Plant), with the balance supplied by unaffiliated domestic (approximately 74%,
which includes all purchases from the Wood Plant) and foreign (approximately
11%) manufacturers. See "Manufacturing." Approximately 48% of the Company's
products are manufactured for the Company by third-party vendors under the
"Color Tile" or other Company-owned names. Three unaffiliated suppliers, in
the aggregate, accounted for approximately 30% of the products purchased by the
Company during fiscal 1992.
The Company has no long-term purchase commitments other than a supply
agreement for wood flooring between the Company and the purchaser of the Wood
Plant. This agreement provides for the Company, subject to certain exceptions
and a minimum annual purchase requirement, to purchase virtually all of its
requirements for hardwood flooring from the purchaser of the Wood Plant
through May 1998. The purchase prices for such products are generally fixed
for periods of up to 24 months from May 1992. Thereafter, the purchase prices
are subject to negotiation and adjustment.
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<PAGE>
Management believes that the Company could find alternative sources of
supply should any of the Company's major suppliers cease doing business with it
or should the Company be restricted by governmental action from purchasing
products manufactured in other countries. The principal materials utilized by
the Company in its manufacturing operations include sand, petrochemicals and
clay, all of which are available from a variety of sources.
DISTRIBUTION
The Company has four regional distribution centers located as follows:
Distribution Center Square Footage
------------------- --------------
San Bernardino, California 116,000
Houston, Texas 82,000
University Park, Illinois 187,000
Baltimore, Maryland 138,000
-------
Total Square Footage 523,000
=======
The Company seeks to locate its distribution centers in areas that maximize
transportation and organizational efficiencies and minimize freight and other
costs of supplying Color Tile Stores.
The Company typically supplies Color Tile Stores from its distribution
centers weekly using both Company-operated vehicles and outside contract
carriers. The Company seeks to maintain inventory levels and a distribution
network permitting it to supply customers with merchandise purchased in the
Color Tile Stores either immediately from in-stock goods or within 10 working
days after the sale. During fiscal 1992, the Company relocated its Baltimore,
Maryland facility to a larger facility in Baltimore to service more efficiently
the Color Tile Stores.
MANUFACTURING
Approximately 15% of the products sold in Color Tile Stores during fiscal
1992 were manufactured by the Company at its Tile Facility in Cleveland,
Mississippi and its Adhesives Facility in West Chicago, Illinois. The Company
believes that its manufacturing facilities are generally adequate for their
intended purposes and in good condition. The Adhesives Facility has capacity
in excess of that necessary to supply Color Tile Stores and sells its products
to outside distributors under private label and "North American" brand names.
The Tile Facility also has limited capacity in excess of that necessary to
supply Color Tile Stores and sells its products to unaffiliated entities.
During fiscal 1992, the Company sold approximately 28% and 3%, respectively, of
the products manufactured at the Adhesives Facility and the Tile Facility to
unaffiliated entities.
The Adhesives Facility. The Adhesives Facility was built to the Company's
specifications and completed in 1982. The Company designed and constructed the
Adhesives Facility for the purpose of formulating products for use in
connection with installation and maintenance of other product lines sold by the
Company. In fiscal 1992, this facility produced approximately 93% of the
Company's adhesives, grouts and other surface-preparation products, which
collectively represented approximately 10% of the Company's total product sales.
During fiscal 1992, the Adhesives Facility on average operated at approximately
55% of capacity.
The Adhesives Facility is situated on approximately 9.2 acres of land and
contains approximately 163,000 square feet of office, production, warehouse and
research laboratory space. The Company also produces color coordinating grouts
at the Adhesives Facility to add a design element to this product category.
The Tile Facility. In August 1980, the Company acquired the Tile Facility,
which is situated on a 15-acre tract of land and contains approximately 115,000
square feet of production, office and warehouse space. Since the acquisition of
the Tile Facility, the Company has made various renovations and equipment
44
<PAGE>
installations to increase production and operating efficiency. Tile produced at
this facility accounted for approximately 20% of the sales of ceramic tile by
Color Tile Stores and approximately 5% of total product sales during fiscal
1992. The Company also manufactures trim pieces and decorated tiles at this
facility. The Tile Facility on average operated at approximately 96% of
capacity during fiscal 1992.
TRADEMARKS AND COPYRIGHTS
The Company owns a number of trademarks and copyrights relating to the
operation of its business. These have been of value to the Company in the past
and are expected to be of value in the future. The loss of a single trademark
or copyright, other than the "Color Tile" trademarks and logos, would not,in the
opinion of management, materially adversely affect the conduct of its business.
The Company has granted a security interest in its trademarks and copyrights to
secure its indebtedness under the Senior Credit Agreement.
COMPETITION
The Company competes with general merchandise and discount stores, home
improvement centers and specialty retailers operating on a local, regional or
national basis. Many of such competitors sell a considerably broader variety of
products than the Company within each of the Company's product lines and certain
of such competitors have substantially greater financial resources than the
Company. The Company believes its principal chain store competitors for certain
of its product lines in some markets are regional home improvement centers (such
as Hechinger's, Home Depot, Payless Cashways and Lowe's), regional specialty
chains (such as New York Carpetworld, Carpeteria, Carpetland USA and Carpet
Exchange and regional tile chains in certain metropolitan markets) and national
department stores and specialty retailers (such as Sears, JC Penney, Standard
Brands and Sherwin Williams).
Expansion by certain regional home improvement center chains has led to
increased price competition for certain of the Company's products in some
markets. In addition, the existence of certain regional specialty chains, with
established market shares in residential carpet sales, has also led to increased
price competition for carpet in the markets where these competitors operate.
EMPLOYEES
At October 3, 1993, the Company employed approximately 3,700 persons,
including approximately 200 employees of the Company's Canadian subsidiary.
Substantially all of these employees are employed on a full-time basis.
Thirteen of the Company's Canadian employees are covered by a collective
bargaining agreement. The Company believes that its working relationship with
its employees is good.
PROPERTIES
At October 3, 1993, 138 of the 794 Color Tile Stores were owned by the
Company and 656 were leased by the Company. Of the leased Company Stores, 44
are leased from the Color Tile Employees Investment Plan (the "Investment
Plan"). Pursuant to the Senior Credit Agreement, substantially all of the
Company-owned properties are mortgaged to secure the indebtedness incurred
thereunder.
Store leases, other than those entered into in connection with sale and
leaseback transactions, normally have initial terms ranging from 10 to 20 years.
Many of these leases have renewal options at increased rents. Leases under the
Company's sale and leaseback transactions have initial terms ranging principally
from 20 to 25 years, generally with renewal options at increased rents. Of the
approximately 198 leases expiring within the next three fiscal years,
approximately 145 have renewal options. Leases generally are "triple-net",
which obligates the Company to pay real estate taxes, insurance and common area
and other operating and maintenance costs in addition to a specified rental
amount. Leases for approximately 75% of the leased Company Stores provide for
periodic rental increases based on increases in cost of living indices or other
mechanisms and/or contingent rentals payable generally on the basis of a
percentage of gross sales revenues in excess of stipulated amounts.
45
<PAGE>
The Company currently operates two manufacturing facilities. See
"Manufacturing." The Company distributes merchandise to Color Tile Stores
through four distribution centers. See "Distribution."
The total space owned and leased by the Company as of October 3, 1993
was as follows:
Approximate Square Footage
Owned Leased Total
<S> <C> <C> <C>
Retail, net of subleases 676,000 2,512,000(1) 3,188,000
Manufacturing 163,000 115,000 278,000
Distribution Centers -- 523,000 523,000
Office -- 108,000 108,000
--------- --------- ---------
Totals 839,000 3,258,000 4,097,000
========= ========= =========
</TABLE>
_______________
(1) The Company was subleasing approximately 696,000 square feet of retail
space to other tenants as of such date.
During fiscal 1992, aggregate rental payments were approximately
$28,000,000 (exclusive of sublease rental income for such space of
approximately $4,500,000).
The Company's executive offices and principal administrative offices are
located in Fort Worth, Texas, in a leased office building containing
approximately 100,000 square feet. The lease for such space expires in October
1997.
46
<PAGE>
BUSINESS
AMERICAN BLIND FACTORY
GENERAL
ABF is a direct-response marketing organization engaged in the sale of
name-brand and private-label horizontal, vertical, pleated and wood blinds and
name-brand wall coverings at significant discounts from average retail prices.
ABF offers a broad range of major name brands of window treatments and wall
coverings and is a leader in the rapidly growing direct-response distribution
segment of the window-treatment and wall-covering industry. ABF advertises in
women's and home-related magazines and receives sales orders through a toll-free
telephone number. Customer orders are shipped directly to the customer by the
vendor. ABF believes that a majority of its sales are derived from repeat and
referral business.
Net sales for ABF have grown from approximately $5.9 million for the twelve
months ended December 31, 1988 to approximately $12.6 million for the twelve
months ended December 31, 1989 (representing an annual growth rate of 113.6%),
approximately $24.7 million for the fiscal year ended December 31, 1990
(representing an annual growth rate of 96.0%), approximately $44.3 million for
the fiscal year ended December 31, 1991 (representing an annual growth rate of
79.4%) and approximately $64.1 million for the fiscal year ended December 31,
1992 (representing an annual growth rate of 44.7%). Over the past four years,
net sales have grown at a compound annual growth rate of 82% (i.e., representing
the percentage change in net sales of ABF compounded each year). Net sales for
ABF were approximately $46.6 million for the nine months ended September 30,
1992 and approximately $61.8 million for the nine months ended September 30,
1993, representing an increase of 32.6%. Over the past five years, earnings
before interest, taxes, depreciation and amortization of ABF, adjusted for
compensation paid to certain members of management, grew to approximately $7.2
million for the fiscal year ended December 31, 1992, or 11.2% of net sales.
Earnings before interest, taxes, depreciation and amortization of ABF
(calculated on the same basis) were approximately $4.7 million for the nine
months ended September 30, 1992, or 10.1% of net sales, and approximately $6.3
million for the nine months ended September 30, 1993, or 10.2% of net sales.
While management believes that sales generated by the ABF Assets will continue
to grow in the future, no assurance can be given that such growth will continue
or that any future growth will occur at rates comparable to those experienced
over the past four years.
In addition to low prices, ABF believes it distinguishes itself by
offering (i) delivery times which are faster than most retailers, (ii) a broad
selection of brand names, and (iii) a commitment to customer service and
satisfaction. ABF has developed proprietary software and systems that allow
ABF's telephone sales representatives to access pricing information
automatically for over 100,000 SKU's and that also provide on-line billing
capabilities. ABF's objective is to continue to grow through increased
marketing initiatives. ABF intends to expand advertising to a broader range of
magazines and to explore new advertising media such as cable television. In
addition, ABF is taking steps to increase sales to professional decorators.
Management believes that the acquisition of the ABF Assets will afford
Color Tile the opportunity to realize certain synergies between ABF and Color
Tile, including the possibility of selling Color Tile's floor covering products
to the ABF customer base. Color Tile's research has shown that one-third of
purchasers of wall covering and window treatment products are likely to
purchase floor covering products within six months. Management plans to
develop direct mail or similar marketing plans focusing on the ABF customer
base to specifically develop flooring purchases from these customers. Color
Tile also believes that there are opportunities to leverage existing overhead,
to take advantage of economies of scale and to introduce additional products
through ABF through the direct-response distribution channel.
In addition to the acquisition of the ABF Assets, the Company has also
acquired from the former owner of ABF 24 retail stores in metropolitan Detroit
and Chicago by assuming certain liabilities associated with such retail
operations. These retail stores operate under the names "Mrs. Kay's" and "Kay &
Kay Tile Depot." The Company is currently evaluating these operations and
intends to convert approximately five of the eight Kay & Kay Tile Depot Stores
to Color Tile Stores, and to dispose of the remaining stores (including through
either closing, franchising or selling such stores). Pending the orderly
disposition of these stores, the Company will operate such stores.
47
<PAGE>
OPERATIONS
Prospective customers contact ABF by dialing toll-free 1-800-735-5300 and
are greeted by a trained sales representative who follows a scripted dialogue to
determine quickly what item and specifications the customer desires. The sales
representative keys the critical information (color, size, book number, pattern
number, etc.) into a computer which immediately generates a price quote for the
item ordered and, where applicable, identifies the lowest cost vendor to ABF for
a particular brand name product based on size, quantity and special vendor
discounts and promotions.
Completed orders are immediately transmitted to the manufacturer or
distributor identified by the vendor optimization program. Orders are sent
directly to the customer by United Parcel Service or similar carrier, and
arrive three to seven working days after shipment. ABF's management estimates
that the order-to-delivery timetable is shortened by seven to 14 days for blind
orders and five to 10 days for wallpaper orders through its direct-response
system.
The internally developed proprietary software ABF utilizes ensures that
the most recent vendor pricing is reflected in a quote given to a customer and
that the order is accurately transmitted to the appropriate lowest cost
vendor. The system currently tracks more than 30,000 individual wallpaper
patterns and more than 300 blind products, each of which has a matrix of prices
based on dimensions available. Increasingly, ABF is utilizing electronic data
interchange to transmit orders, conform shipment and pay invoices directly with
vendors.
PRODUCTS
Since its inception in 1986, ABF's principal product lines have been
horizontal, vertical, pleated and wood blinds and wallpaper. Sales of blinds
comprised approximately 47% of ABF's total sales in 1992, with wallpaper sales
accounting for the remaining 53%.
ABF features a broad range of name brands of vertical, horizontal, pleated
and wood blinds, including Levelor, Hunter Douglas, Del Mar, Bali, Kirsch,
Louver Drape and Graber, as well as a complete line of private-label blinds.
Private-label blinds are manufactured by the brand-name product vendors and are
of identical quality. As all products are custom-made to customer
specifications, ABF deals directly with the manufacturers and/or distributors.
If the customer does not specify a particular brand, the sales representative
attempts to identify an ABF private-label product that meets the customer's
requirements. ABF also features a broad selection of major name brands of
wallpaper, including Kinney, Sunwall, Seabrook, Wall-Tex, Imperial, Eisenhart
and York. Wallpaper is ordered by specific pattern number and book name and
is available both directly from manufacturers or through a network of wholesale
distributors. ABF maintains a database of more than 30,000 wallpaper patterns,
the majority of which has multiple vendor sources. The two-tiered distribution
system for wallpaper provides ABF with the opportunity to maximize its gross
margins by selecting the lowest cost vendor for each individual product ordered
by a customer.
ADVERTISING, MARKETING AND MERCHANDISING
ABF's primary means of generating new customers for blinds and wallpaper is
through advertisements in women's and home-related magazines including Better
Homes & Gardens, Country Living, Good Housekeeping, Home, Metropolitan Home and
Southern Living. In addition to regular insertions in monthly or bi-monthly
magazines, ABF selectively advertises in special interest publications devoted
to home improvement such as Home Decorating and Kitchens & Baths.
ABF spent approximately $1.1 million in 1992 on advertising. Based on ABF's
high rates of repeat and referral business, ABF continually analyzes its
advertising program and source of consumer awareness to optimize the cost
benefit of special magazines. In addition, ABF continually tests new magazines
to increase consumer awareness of ABF. In an effort to expand its customer
awareness beyond the home improvement market, ABF has recently begun advertising
in three parent/child magazines to reach expecting or recent parents intending
to remodel or redecorate upon a child's birth. ABF expects that this market
will result in both referral customers among expecting parents as well as repeat
business as customers have additional children.
48
<PAGE>
ABF's primary means of generating new customers for blinds and
wallpaper is through advertisements in women's and home-related
magazines including Better Homes & Gardens, Country Living, Good
Housekeeping, Home, Metropolitan Home and Southern Living. In
addition to regular insertions in monthly or bi-monthly magazines, ABF
selectively advertises in special interest publications devoted to
home improvement such as Home Decorating and Kitchens & Baths.
ABF spent approximately $1.1 million in 1992 on advertising. Based on
ABF's high rates of repeat and referral business, ABF continually
analyzes its advertising program and source of consumer awareness to
optimize the cost benefit of special magazines. In addition, ABF
continually tests new magazines to increase consumer awareness of ABF.
In an effort to expand its customer awareness beyond the home
improvement market, ABF has recently begun advertising in three
parent/child magazines to reach expecting or recent parents intending
to remodel or redecorate upon a child's birth. ABF expects that this
market will result in both referral customers among expecting parents
as well as repeat business as customers have additional children.
ABF has identified several additional media sources and marketing
strategies. Among these sources and strategies are coupons enclosed
with credit card billings, private-label credit cards, promotional
coupons, advertisements in mail order catalogues sold by Complete Home
and Shopper Advantage to consumers seeking deep discounts on products
sold by mail order vendors, local newspaper ads in large metropolitan
areas, specifically in the women's and home sections, targeted cable
television advertising and direct mail advertising.
Additionally, ABF is commencing a marketing initiative designed to
reach professional decorators. ABF believes that among its customers
are decorators purchasing window treatments and wall coverings for
their clients. To increase sales among customers who are decorators,
ABF intends to distribute sample cases that contain private-label wall
covering and window treatment merchandise samples to decorators.
INDUSTRY AND COMPETITION
The window treatments market includes horizontal, vertical, pleated
and wood blinds. The market is highly fragmented and several distinct
distribution channels exist. Department stores are responsible for a
substantial portion of industry sales and are the largest distribution
channel. Of the department stores, JC Penney, Sears and Montgomery
Ward are believed to be the largest competitors. Most full-service
department stores also offer a limited range of window treatments.
Other distribution channels include drapery and upholstery stores,
home centers, home furnishing stores, mail order and direct-response
marketing.
Like the window treatments market, the wall covering market is highly
fragmented with numerous distribution channels. Wall covering is
generally ordered from manufacturer sample books. While a typical
retailer will offer wall covering from 100 to 300 of these books,
there are over one thousand books currently available. Paint and wall
covering stores represent the largest distribution channel with a
majority of all wall covering sales. Sherwin Williams and Standard
Brands are the largest of such competitors. Other distribution
channels include department stores, building material stores, home
centers, floor covering stores, mail order and direct-response
marketing. In addition to other distribution channels, ABF competes
directly with a number of other direct-response and mail order
businesses in both window treatments and wall coverings.
EMPLOYEES
As of September 30, 1993, ABF had approximately 300 full-time and
part-time employees. None of the employees is represented by a union,
and ABF management considers its relations with its employees to be good.
The ABF telephone sales force consists of approximately 140 part-time
sales representatives who typically work six-hour shifts, five days a
week. The sales representatives receive extensive training in the
multiple product offerings of ABF, which allows them to better respond
to customers' questions and orders. This training includes both
window treatments and wall covering product knowledge, allowing ABF to
use one sales force to sell both product lines. Following the
acquisition, certain senior management remain involved in the
management of ABF.
PRIVATE-LABEL CREDIT CARD
ABF has established a revolving credit program for its customers
through a financial institution (the "ABF Credit Program"). Under the
program, ABF's customers are provided with a credit limit for the
purchase of products from ABF by the financial institution subject to
its credit policies. The financial institution assumes all of the
credit risk with respect to these receivables.
49
<PAGE>
LEGAL PROCEEDINGS
The Company is a party to various legal proceedings. Management
believes that the outcome of all pending legal proceedings will not,
in the aggregate, have a material adverse effect on the financial
condition of the Company.
50
<PAGE>
MANAGEMENT
DIRECTOR AND EXECUTIVE OFFICERS
Certain information with respect to the directors and executive
officers of the Company is set forth below:
Name Age Position
- ---- --- --------
Eddie M. Lesok 46 Chairman of the Board, Chief Executive Officer
and Director
N. Laurence Nagle 65 President, Chief Operating Officer and Director
Daniel J. Gilmartin 49 Vice President, Treasurer, Chief
Financial Officer and Director
Alan J. Bethscheider 35 Vice President-Legal, Secretary and General Counsel
Paul W. Soldatos 43 Director
Walter F. Loeb 68 Director
Eddie M. Lesok has been Chairman of the Board since January 1989,
Chief Executive Officer of the Company since January 1988 and a
director of the Company since November 1981. He was President and
Chief Operating Officer of the Company from December 1986 through
December 1988. Mr. Lesok has been a director of Texas Commerce Bank,
a commercial bank, since November 1988. Mr. Lesok has been with the
Company since 1972.
N. Laurence Nagle has been President and Chief Operating Officer of
the Company since January 1989 and a director of the Company since
December 1989. He was Executive Vice President of the Company from
January 1988 through December 1988. Mr. Nagle was a managing director
and Vice President of "21" Holdings, Inc. (formerly known as Knoll
International Holdings, Inc.), from May 1987 to January 1988, during
which time he also served as a consultant to the Company.
Daniel J. Gilmartin has been Vice President, Treasurer, Chief
Financial Officer and a director of the Company since September 1991.
Prior to joining the Company, Mr. Gilmartin was President and Chief
Operating Officer of Frank's Nursery and Crafts, Inc., a wholly owned
subsidiary of General Host Corporation, from October 1988 to August
1991. He was Director of Planning of General Host Corporation from
February 1982 to October 1988.
Alan J. Bethscheider has been the Secretary of the Company since
January 1992 and Vice President-Legal and General Counsel since
February 1992. Previously, Mr. Bethscheider was associated with the
law firm of Gibson, Dunn & Crutcher from June 1984 to February 1992
and acted as outside counsel to the Company from January 1990 to
February 1992.
Paul W. Soldatos has been a director of the Company since 1989 and an
executive of Investcorp S.A., its predecessor or one or more of its
wholly-owned subsidiaries since March 1988.
Walter F. Loeb has been a director of the Company since August 1991.
Since February 1990, Mr. Loeb has been President of Loeb Associates,
Inc., a New York based domestic and international retail consulting
firm. In addition, he is the publisher of the "Loeb Retail Letter".
From 1984 to 1990 Mr. Loeb was Senior Retail Analyst and a Principal
of Morgan Stanley & Co. Incorporated.
CT Holdings has agreed to elect Mr. Lesok and Mr. Nagle to the
Company's Board of Directors as long as they are employed by the
Company. In connection with his employment, the Company appointed Mr.
Gilmartin to the Company's Board of Directors. All directors serve
until their respective successors are elected at the next annual
meeting of stockholders, and all executive officers serve at the
discretion of the Board of Directors.
51
<PAGE>
DIRECTOR COMPENSATION
Mr. Loeb receives a director's fee of $15,000 annually and a fee of
$2,000 for each meeting attended. The Company pays no additional
remuneration to its employees or to executives of Investcorp S.A. or
any of its wholly-owned subsidiaries for serving as directors.
Pursuant to the terms of their employment agreements, Mr. Lesok and
Mr. Nagle are to serve as executive officers of the Company. (See
"Employment Contracts; Termination and Change-in Control Agreements.")
There are no family relationships among any of the directors or
executive officers.
52
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in fiscal
1992 by the Company's Chief Executive Officer and each of the other
three most highly compensated executive officers, whose remuneration
exceeded $100,000.
SUMMARY COMPENSATION TABLE
- --------------------------
<TABLE>
<CAPTION>
Annual Compensation Long Term Compen
-sation
Awards Other
(a) (b) (c) (d) (e) (g) (i)
CT
Name Other Annual Holdings All Other
and Salary Compensation Options Compensation($)
Principal Position ($) Bonus ($) (#)(E) (C,F,G)
(A) Year (B) ($) (C,D)
<S> <C> <C> <C> <C> <C> <C>
Eddie M. Lesok 1992 358,100 296,000 - - 4,364
Chief Executive Officer 1991 358,100 - - - -
1990 322,290 - - - -
N. Laurence Nagle 1992 282,500 256,000 - - 4,364
President 1991 282,500 - - - -
1990 247,930 - - - -
Daniel J. Gilmartin 1992 207,500 192,000 - - 26,696
Chief Financial Officer 1991 107,836 - - 4,240 -
Alan J. Bethscheider 1992 115,053 65,262 - 6,375 -
Vice President-Legal
</TABLE>
_______________________
(A) Mr. Gilmartin joined the Company in September 1991. Mr.
Bethscheider joined the Company in February 1992.
(B) Salary for fiscal 1991 for Messrs. Lesok and Nagle includes
$39,942 and $30,673, respectively, for payments made in 1992 as
retroactive salary adjustments for fiscal 1991.
(C) Note: Information for years ending prior to December 15, 1992
is not required to be disclosed in columns (e) and (i).
(D) Non-cash personal benefits payable to executive officers
during fiscal 1992 did not exceed, in the aggregate, the lesser of
$50,000 or 10% of the cash compensation of any individual officer.
(E) All of the Company's issued and outstanding common stock is
owned by CT Holdings. All references to common stock in the Executive
Compensation tables and discussion contained in this Section refer to
common stock of CT Holdings.
(F) Note: See " -- Employment Contracts and Termination and
Change-in-Control Arrangements."
(G) The amounts shown in this column for fiscal 1992 are derived
from the following figures: (i) Mr. Lesok, $4,364 Company payment to
the Investment Plan ($4,364 of which is vested), and (ii) Mr. Nagle,
$4,364 Company payment to the Investment Plan ($3,491 of which is
vested), and (iii) Mr. Gilmartin, $1,696 Company payment to the
Investment Plan ($339 of which is vested), and $25,000 relocation
allowance.
53
<PAGE>
CT HOLDINGS OPTION GRANTS TABLES
OPTION GRANTS - FISCAL 1992
<TABLE><CAPTION>
Individual Grants
(a) (b) (c) (d) (e) Potential Realizable Value
as Assumed Annual Rates of
Stock Price Appreciation
CT %of Total for Option Term (E)
Holdings Options Exercise or
Options Granted to Base Price
Name Granted Employees in ($/sh) (D)
(#) Fiscal Year Expiration
Date
(f) (g)
5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Eddie M. Lesok - - - - - -
N. Laurence Nagle - - - - - -
Daniel J. Gilmartin - - - - - -
Alan J. Bethscheider 6,375 37.44% 58.91 Nov. 2, 2002 617,500 992,500
</TABLE>
____________________________
(A) During fiscal 1992, the Company granted options for 17,025
shares. Options granted in 1992 are exercisable upon vesting. See
note (C) below.
(B) Under the terms of CT Holdings' Senior Management Stock
Incentive Plan, the board of directors of CT Holdings retains
discretion, subject to certain limits, to modify the terms of
outstanding options, including discretion to reprise the options.
(C) The options were granted for a term of 10 years, subject to
earlier termination in certain events related to death or disability
and termination of employment. The options vest (a) 20% per year over
five years based on the achievement of annual or cumulative earning
targets for the Company, (b) in full upon the occurrence of (i) an
initial public Secondary Offering, as defined therein, prior to the
end of the Company's 1994 fiscal year, or (ii) the tenth anniversary
of the effective date, as defined therein, of the options and (c) in
full or in part, subject to satisfaction of certain conditions, in the
event of an approved sale of the Company, as defined therein, prior to
the end of the Company's 1994 fiscal year. The Company achieved its
annual earnings target for vesting in fiscal 1992.
(D) The exercise price of the options may be paid by delivery of
already owned shares, subject to certain conditions.
(E) The figures appearing in these columns were calculated on the
assumption, used solely for the purposes of this table, that the
market price of the underlying security would appreciate in value from
the date of grant to the end of the option term at annualized rates of
5% for column (f) and 10% for column (g). There can be no assurance
that the market price of the underlying security will appreciate at
such rates. These rates are used for illustrative and comparative
purposes only and do not reflect the views of management.
54
<PAGE>
Option Exercises and Value Table -Fiscal 1992
Aggregated Option Exercises in Fiscal 1992, and FY-End Option Value
<TABLE><CAPTION>
(a) (b) (c) (d) (e)
Value of Un-
Number of exercised "In-
Unexercised the-Money"
CT Holdings CT Holdings
CT Holdings Options at FY-End Options at FY-End
Shares (#)Exercisable/ ($)Exercisable/
Acquired on Value Realized Unexercisable Unexercisable(A)
Name Exercise(#) ($)
<S> <C> <C> <C> <C>
Eddie M. Lesok - - 7,091.8/28,367.2 -
N. Laurence Nagle - - 3,636.8/14,627.2 -
Daniel J. Gilmartin - - 848/3,392 -
Alan J. Bethscheider - - 1,275/5,100 -
</TABLE>
____________________________
(A) Underlying shares are not publicly traded and are subject to
repurchase by CT Holdings at the employee's cost or at the then
current value of the underlying shares as determined by the Company's
Board of Directors upon the termination of the employee's employment
with the Company; therefore, options have not been categorized as "in-
the-money." The Company has not established any recent valuations for
such shares.
EMPLOYMENT CONTRACTS; TERMINATION AND CHANGE-IN-CONTROL AGREEMENTS
In connection with the 1989 Merger, the Company entered into an
employment agreement with Eddie M. Lesok to serve as Chairman of the
Board and Chief Executive Officer and an employment agreement with N.
Laurence Nagle to serve as President and Chief Operating Officer. The
agreements have stated terms of five years and, among other things,
entitle Mr. Lesok and Mr. Nagle to participate in the fringe benefit
programs maintained by the Company and made available to its executive
officers generally. Mr. Lesok will receive, under his agreement, an
annual base salary of $350,000 (subject to upward adjustment) during
the term of the agreement. Mr. Nagle will receive, under his
agreement, an annual base salary of $275,000 (subject to upward
adjustment) during the term of his employment. If the employment of
Mr. Lesok or Mr. Nagle is terminated as a result of death or Permanent
Disability (as defined in the respective agreements), Mr. Lesok or Mr.
Nagle (or their respective estates), as the case may be, will be
entitled to receive a lump sum amount equal to two times his annual
base salary. If the employment of either such executive is terminated
by the Company other than for Cause (as defined in the respective
agreements) or by such executive for Good Reason (as defined in the
respective agreements), such executive will be entitled to an amount
equal to his annual base salary, payable over the lesser of two years
or the remaining stated term of his employment.
The Company has agreed that if, prior to December 31, 1994, Mr.
Gilmartin's employment is terminated on a non-voluntary basis without
cause or, in certain cases, upon a change of control of the Company,
Mr. Gilmartin will be entitled to up to one year's base salary. Mr.
Gilmartin's current base salary is $200,000. Additionally, the
Company has agreed that if Mr. Bethscheider's employment is
terminated, in certain cases, upon a change of control of the
Company, Mr. Bethscheider will be entitled to six months' base salary
if such event occurs prior to February 15, 1994, or twelve months'
base salary if such event occurs thereafter. Mr. Bethscheider's
current base salary is $125,000.
55
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CT Holdings owns all of the Company's issued and outstanding shares of
common stock. CT Holdings has pledged all such shares to secure the
Company's obligations under its Senior Credit Agreement. See "Capital
Structure". The mailing address of CT Holdings is 280 Park Avenue,
37th Floor, New York, New York 10017.
CT HOLDINGS' PRINCIPAL STOCKHOLDERS
Class D Stock, par value $.01 per share, is the only class of CT
Holdings' stock that currently possesses voting rights. At October 3,
1993, there were 5,000 shares of CT Holdings' Class D Stock issued and
outstanding. Members of the Company's management own Class C Stock,
par value $.01 per share, which stock has no voting rights except in
certain limited circumstances. The following tables set forth as of
October 3, 1993 the number of such shares beneficially owned and the
percentage of such shares of the total issued and outstanding shares
of Class D Stock and Class C Stock of CT Holdings owned (i) by each
person or entity known to the Company to beneficially own five percent
or more of the outstanding shares of such stock and (ii) by the
directors and executive officers of the Company:
CLASS D VOTING STOCK:
<TABLE>
Percent of
Number of Outstanding Shares
Shares of CT Holdings' of CT Holdings'
Class D Voting Stock Class D Voting Stock
Name and Address of Beneficial Owner Beneficially Owned(1) Beneficially Owned(1)
- ------------------------------------ --------------------- ---------------------
<S> <C> <C>
INVESTCORP S.A. (2)(3) 2,600 52%
37 rue Notre-Dame
Luxembourg
CIP Limited (4) 2,600 52%
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Corporate Equity Limited (4) (5) 350 7%
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Acquisition Equity Limited (4) (6) 350 7%
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Funding Equity Limited (4) (7) 350 7%
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
Planning Equity Limited (4) (8) 350 7%
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Elias N. Hallack (9) 1,200 24%
Tile Capital Limited
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Nemir A. Kirdar (3) 1,200 24%
Tile Equity Limited
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Michael L. Merritt (10) 1,200 24%
Tile International Limited
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
</TABLE>
_______________________
(1) As used in this table, beneficial ownership means the sole or
shared power to vote, or direct the voting of a security, or the sole
or shared power to dispose, or direct the disposition of, a security.
(2) Investcorp owns no stock in any of Corporate Equity Limited,
Acquisition Equity Limited, Funding Equity Limited, Planning Equity
Limited, or the beneficial owners of these entities (see (5)-(8)
below). Investcorp may be deemed to be the beneficial owner of the
shares of voting stock held by such entities because the beneficial
owners of each of those entities have entered into revocable
management agreements with a wholly-owned subsidiary of Investcorp
pursuant to which these shareholders have granted such subsidiary the
authority to direct the disposition of the stock owned by such
entities for so long as such agreements are in effect. Investcorp is
a Luxembourg corporation, with its registered address at 37 rue Notre-
Dame, Luxembourg.
(3) Mr. Kirdar, the President and Chief Executive Officer of
Investcorp, owns more than 99% of the stock of Tile Equity Limited, a
Cayman Islands corporation. Its registered office is P. O. Box 1111,
West Wind Building, George Town, Grand Cayman, Cayman Islands, British
West Indies. Mr. Kirdar has granted a revocable proxy in Tile Equity
Limited to Investcorp. Mr. Kirdar's address of record is INVESTCORP
BANK E.C., Investcorp House, P. O. Box 5240, Manama Bahrain.
(4) CIP Limited ("CIP") is a less than 1% indirect beneficial
owner of stock of Corporate Equity Limited, Acquisition Equity
Limited, Funding Equity Limited, Planning Equity Limited. CIP may be
deemed to be the beneficial owner of the shares of voting stock held
by such entities because the ultimate beneficial shareholders of each
of those entities have granted to CIP revocable proxies in companies
that own those entities' stock. CIP also may be deemed to indirectly
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<PAGE>
control Investcorp through proxies that it holds. The address of CIP
Limited is P. O. Box 1111, West Wind Building, George Town, Grand
Cayman, Cayman Islands, British West Indies.
(5) Corporate Equity Limited is a Cayman Islands corporation.
(6) Acquisition Equity Limited is a Cayman Islands corporation.
(7) Funding Equity Limited is a Cayman Islands corporation.
(8) Planning Equity Limited is a Cayman Islands corporation.
(9) Mr. Hallack, the Co-Chief Operating Officer of Investcorp,
owns more than 99% of Tile Capital Limited, a Cayman Islands
corporation. Its registered office is P. O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands, British West
Indies. Mr. Hallack's address of record is INVESTCORP BANK E.C.,
Investcorp House, P. O. Box 5240, Manama Bahrain.
(10) Mr. Merritt, the Co-Chief Operating Officer of Investcorp,
owns more than 99% of Tile International Limited, a Cayman Islands
corporation. Its registered office is P. O. Box 1111, West Wind
Building, George Town, Grand Cayman, Cayman Islands, British West
Indies. Mr. Merritt's address of record is INVESTCORP BANK E.C.,
Investcorp House, P. O. Box 5240, Manama Bahrain.
CLASS C NON-VOTING STOCK:
<TABLE> <CAPTION>
Percent of
Number of Outstanding Shares
Shares of CT Holdings' of CT Holdings'
Class C Non-Voting Stock Class C Non-Voting Stock
Name and Address of Beneficial Owner Beneficially Owned(1) Beneficially Owned(1)
- ------------------------------------ --------------------- ---------------------
<S> <C> <C>
All directors and executive officers 66,357 25.2%
of the Company as a group (16 persons)
Eddie M. Lesok 38,198 14.5%
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102
N. Laurence Nagle 18,729 7.1%
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102
Daniel J. Gilmartin 848 0.3%
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102
Alan J. Bethscheider 850 0.3%
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102
</TABLE>
_______________________
(1) As used in this table, beneficial ownership means the sole or
shared power to vote, or direct the voting of a security, or the sole
or shared power to dispose, or direct the disposition of, a security.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CT Holdings acquired the Company in the 1989 Merger pursuant to the
Agreement of Merger, dated as of October 16, 1989, as amended as of
December 17, 1989 (the "Merger Agreement"), by and among CT Holdings,
CT Acquisition Corp. ("CTA"), the Company, Knoll International
Holdings, Inc. ("KIHI") and NEAC, Inc. ("NEAC") (the sole common and
junior cumulative preferred stockholder of the Company immediately
prior to the 1989 Merger). CT Holdings was formed to acquire the
Company by affiliates of Investcorp, other international investors and
members of the Company's management. No entity participating in the
1989 Merger or any affiliates thereof own any of the Series A Shares.
In connection with the 1989 Merger, the Company paid to Drexel Burnham
Lambert Incorporated (as advisors to Investcorp) advisory fees of
$3,740,000 and to Investcorp International, Inc. ("International")
advisory fees of $3,700,000. As a result of the 1989 Merger, NEAC
received approximately $114,221,000, $8,000,000 of which was placed in
escrow pending an audit of the Company's financial statements and
related purchase price adjustment. Following settlement of post
closing adjustments resulting from the acquisition audit, the Company
received $8,500,000, excluding interest, as a reduction of the merger
consideration. $8,000,000 of this settlement was received from the
escrow account and $500,000 was received directly from KIHI. No
material changes in the nature of the Company's business were made
following the 1989 Merger.
The sources of the consideration for the 1989 Merger and related costs
and fees consisted of $50 million of common equity contributed by an
affiliate of Investcorp, other international investors and senior
management of the Company, $60 million in the form of junior
subordinated indebtedness (the "Junior Notes") provided by an
affiliate of Investcorp and the Company's working capital, including
borrowings under its $50,000,000 secured revolving loan facility
provided by a commercial bank. The Company paid International
$1,900,000 for arranging the commercial bank financing and for
services rendered in connection with obtaining waivers and consents
from the holders of debt securities of the Company. The Company paid
banking fees of $1,050,000 to the lender under its revolving loan
facility. The Company paid $1,800,000 of deferred financing fees to
the affiliates of Investcorp in connection with the $60 million of
Junior Notes.
During fiscal 1991 and fiscal 1990, the Company incurred interest
expense on the Junior Notes totaling approximately $10,291,000 and
$10,342,000, respectively, of which approximately $6,860,000 and
$3,825,000, respectively, was deferred. On November 27, 1991,
Holdings contributed to the Company additional common equity of
$79,704,110. These funds were utilized by the Company to redeem
$60,000,000 aggregate principal amount of the Junior Notes, together
with deferred interest of $10,684,500 plus accrued interest of
$3,431,210 , at a premium of $5,588,400.
Subsequent to the 1989 Merger, the Company paid International
$3,750,000 for financing advisory fees for its assistance in arranging
the Company's Senior Credit Agreement and a $50,000,000 senior
subordinated debt commitment with a commercial bank. Additionally, an
affiliate of Investcorp was paid $6,000,000 in connection with the
repurchase of debt securities of the Company. These transactions were
reviewed by the independent member of the Company's Board of
Directors, and an independent, nationally known investment banking
firm, who determined that the terms and conditions associated with
these transactions were as favorable to the Company as the Company
could have reasonably obtained from an independent third party.
In April 1992, prior to the termination of a commitment by the
Company's principal lender under its Senior Credit Agreement to
provide up to $50,000,000 of subordinated debt (the "Senior
Subordinated Loan Commitment") in connection with the issuance of the
Series A Shares, the Company agreed to reduce the lender's commitment
under the Senior Subordinated Loan Commitment from $50,000,000 to
$25,000,000. At that time, an affiliate of Investcorp entered into a
standby commitment to subscribe for $25,000,000 of a new class of
preferred stock (the "Preferred Stock Commitment"). Neither
Investcorp nor its affiliate received any separate fees or other
compensation in connection with the Preferred Stock Commitment. Upon
completion of the placement of Series A Shares on August 13, 1992, the
commitments of the lender pursuant to the Senior Subordinated Loan
Commitment and the Investcorp affiliate pursuant to the Preferred
Stock Commitment terminated.
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<PAGE>
In connection with the 1989 Merger, the Company entered into an
agreement for management advisory and consulting services with
International pursuant to which the Company has agreed to pay
International $500,000 per annum for a five-year term.
During fiscal 1992, the Company paid the Investment Plan aggregate
rentals of approximately $3,100,000 with respect to 44 properties
leased to the Company by the Investment Plan. During fiscal 1991 and
fiscal 1990, the Company paid the Investment Plan aggregate rentals of
approximately $3,100,000 with respect to 43 properties and
approximately $2,900,000 with respect to 43 properties, respectively.
These leases were originally between the Company and third parties and
reflect arm's-length terms.
On October 5, 1993, ABF Acquisition Corp. ("ABF Acquisition"), an
affiliate of Investcorp, entered into an agreement (the "ABF
Acquisition Agreement") to acquire the ABF Assets and assume certain
liabilities in connection therewith. ABF Acquisition agreed to
acquire the ABF Assets to facilitate the acquisition of such assets by
the Company pending the receipt of proceeds from the Senior Note
Offering, the execution of an amendment to the Senior Credit Agreement
permitting, among other things, the acquisition of the ABF Assets, and
the receipt of certain required governmental consents. The ABF
Acquisition Agreement provided for the acquisition of the ABF Assets
and certain related entities in exchange for the assumption of certain
specified liabilities and the payment of a purchase price of
approximately $73,000,000 after giving effect to the anticipated
effect of certain adjustments pursuant to the ABF Acquisition
Agreement. In connection with such acquisition, affiliates of
Investcorp received approximately $4,300,000 million from ABF
Acquisition in respect of a bridge loan commitment, a guarantee of the
bridge loan provided by Chemical Bank to finance the acquisition of
the ABF Assets by ABF Acquisition and the payment of fees for merger
advisory services. A portion of the fees payable to affiliates of
Investcorp was intended to compensate such affiliates for committing
to provide additional funds in the event that the Company was unable
to consummate the acquisition of the ABF Assets as described below.
The Company entered into an option (the "Option Agreement") to acquire
the ABF Assets and assumed the liabilities associated therewith from
ABF Acquisition at a price of approximately $78,800,000, which
reflects the same price paid by ABF Acquisition for the ABF Assets,
adjusted to reflect amounts payable to certain Investcorp affiliates,
as described above, and the reimbursement of transaction costs
incurred in connection with such acquisition. The Company exercised
its option and acquired the ABF Assets contemporaneously with the
completion of the Senior Note Offering on December 17, 1993.
In connection with the Option Agreement, the Company and ABF
Acquisition have entered into a Management Services Agreement dated
November 4, 1993 pursuant to which the Company agreed to provide
management services to ABF Acquisition until the earlier to occur of
the closing of the exercise of the Company's option to purchase the
assets of ABF Acquisition under the Option Agreement or November 4,
1994. The Management Services Agreement provides for the Company to
receive a fee in an amount equal to $500,000 per month during the term
of the agreement, except to the extent that such fee would cause the
taxable income of ABF Acquisition for the current year to be a
negative number, in which event the fee payable to the Company for
that period shall be reduced to the extent required to cause such
taxable income to be equal to zero. As ABF Acquisition generated no
taxable income during the term of this agreement, the Company will
receive no fees pursuant to this agreement.
Pursuant to the ABF Acquisition Agreement, the parties made customary
representations, warranties and covenants typically contained in
agreements of this type and entered into customary indemnities for
breaches of such representations, warranties and covenants set forth
in the ABF Acquisition Agreement. Upon the acquisition of the ABF
Assets, ABF Acquisition assigned all its rights under the ABF
Acquisition Agreement to the Company.
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CAPITAL STRUCTURE
CREDIT FACILITIES
Senior Credit Agreement.
The Senior Credit Agreement provides for a $132,500,000 (originally
$150,000,000 reduced by mandatory principal payments) term loan
facility and a $100,000,000 revolving credit facility as of October 3,
1993. In connection with the Senior Note Offering, the Company
partially repaid the term loan facility and applied approximately
$27,100,000 to reduce the outstanding amount under the revolving
credit facility, thereby increasing the availability thereunder for
future borrowings. After giving effect to such repayment, the Company
had approximately $32,000,000 of undrawn availability under the
revolving credit facility. The revolving credit facility may be
utilized to meet the Company's current working capital requirements,
including issuance of stand-by and trade letters of credit. The
Company's obligations under the Senior Credit Agreement are secured by
substantially all the assets of the Company and its subsidiaries. In
connection with the Senior Note Offering, the Company and the lenders
under the Senior Credit Agreement have entered into an amendment to
the Senior Credit Agreement, which became effective upon the
completion of the Senior Note Offering.
At October 3, 1993, the Company had utilized all of the proceeds of
the $150,000,000 term loan facility and a portion of the $100,000,000
revolving credit facility to purchase $88,225,000 principal amount of
the 12-3/8% Senior Notes, $75,000,000 principal amount of the 13%
Senior Subordinated Notes and $50,000,000 principal amount of the 13-
3/4% Subordinated Debentures. All remaining 13% Senior Subordinated
Notes and 13-3/4% Subordinated Debentures were redeemed or repurchased
by April 15, 1992.
Borrowings under the Senior Credit Agreement, at the option of the
Company, accrue interest at (i) the greater of the rate equal to (x)
Chemical Bank's announced reference rate or (y) the federal funds
rate, plus 1/2%, in each case plus 1 1/2%, or (ii) the London Interbank
Offered Rate (LIBOR), plus 2 3/4%. As of October 3, 1993, the Company
has elected a LIBOR-based interest rate with respect to $208,000,000
of its outstanding borrowings. Pursuant to this election, the rate of
interest for this portion of the borrowings will be approximately 6.2%
through May 23, 1994. The remainder of the outstanding borrowings
bears interest at fluctuating rates for varying interest periods. At
October 3, 1993, this rate was approximately 7.5%. The Company has
also purchased an interest rate cap in a notional amount of
$125,000,000 establishing a maximum total borrowing rate of 9% in
respect of such notional amount through April 20, 1994.
The Senior Credit Agreement requires the Company to repay the
principal amount of the term loan in 26 consecutive quarterly
installments commencing in the third quarter of 1992 and continuing
each quarter thereafter through December 31, 1998 in an aggregate
amount of $10,000,000 in fiscal 1993 increasing $5,000,000 each year
thereafter to $30,000,000 in fiscal 1997 and $40,000,000 in fiscal
1998. On March 31, 1993, June 30, 1993 and September 30, 1993, the
Company paid $2,500,000 in satisfaction of its scheduled repayment
obligations for the first, second and third quarters of fiscal 1993.
Upon the application of the net proceeds of the Senior Note Offering,
the Company repaid $86,500,000 of indebtedness (including $2,500,000
of principal payments due in the fourth quarter of fiscal 1993) under
the term loan portion of the Senior Credit Agreement, which eliminated
the Company's mandatory repayment obligations on the term loan portion
of the Senior Credit Agreement until March 30, 1996 and reduced pro
rata the Company's remaining repayment obligations thereafter.
The Senior Credit Agreement contains certain customary covenants and
restrictions that, among other things, restrict the Company's ability
to incur additional indebtedness or issue redeemable preferred stock
requiring mandatory redemption prior to December 1, 2002, enter into
transactions with affiliates, pay dividends, redeem or make payments
in respect of its capital stock, make capital expenditures, sell
assets and grant liens with respect to its assets. Such covenants also
require the Company to maintain certain financial ratios, including
interest coverage and earnings ratios, and to maintain a minimum
consolidated net worth.
In connection with the Senior Note Offering, the Company and its
lenders have entered into an amendment to the Senior Credit Agreement
that became fully effective upon the consummation of the Senior Note
61
<PAGE>
Offering. In addition to permitting the use of the proceeds from the
Senior Note Offering as described herein, this amendment, among other
things, also increases the level of capital expenditures permitted,
reduces the interest coverage ratios required to be maintained,
provides the Company with increased flexibility under its other
covenants and permits the Company to dispose of the Company's Canadian
operations and certain retail stores acquired from the former owner of
ABF.
As amended, the Senior Credit Agreement permits the Company to pay
dividends on the Series A Shares and, after January 15, 1995, on the
Redeemable Senior Preferred Stock, to the extent that, after giving
effect to such payment, the Company's Interest Coverage Ratio (as
defined in the Senior Credit Agreement) as of the last day of the
Company's fiscal quarter immediately preceding the date of such
dividend payment would not be less than the ratio specified in the
Senior Credit Agreement (calculated on a pro forma basis, with such
dividend being treated as though it were a cash interest payment made
during such preceding fiscal quarter). The applicable Interest
Coverage Ratio under the Senior Credit Agreement is as follows for
each of the fiscal quarters within each fiscal year identified:
Interest
Fiscal Year Coverage Ratio
----------- --------------
1994 1.35 to 1
1995 1.60 to 1
1996 1.70 to 1
1997 2.00 to 1
1998 2.30 to 1
Calculated on the basis set forth in the Senior Credit Agreement, the
Company's Interest Coverage Ratio as of October 3, 1993 was 2.22 to 1.
On a pro forma basis, assuming the completion of the Senior Note
Offering and the application of the proceeds thereof occurred on
October 3, 1993, the Company's Interest Coverage Ratio would have been
1.85 to 1.
The Senior Credit Agreement would also prohibit the Company from
repurchasing the Series A Shares upon a Change of Control as provided
by the terms of the Purchase Agreement, except to the extent that the
repurchase were effected with the proceeds of the issuance of
additional common stock. If the Company were for any reason unable to
issue additional common stock in an amount sufficient to repurchase
the Series A Shares upon a Change of Control, a waiver from the
lenders under the Senior Credit Agreement would be required for the
Company to repurchase the Series A Shares as required by the Purchase
Agreement. There can be no assurance that such waiver, if required,
could be obtained. The Company is not obligated to purchase the
Redeemable Senior Preferred Stock upon a Change of Control.
Senior Notes
The Senior Notes were issued pursuant to an Indenture, dated December
15, 1993 (the "Indenture") between the Company and U.S. Trust Company
of Texas, N.A., as trustee (the "Trustee"). The terms of the Notes
include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), as in effect on the date of the
Indenture.
Principal, Maturity and Interest. The Senior Notes are limited in
aggregate principal amount to $200,000,000 and mature on December 15,
2001. Interest on the Senior Notes accrues at the rate of 10 3/4% per
annum and will be payable semi-annually on June 15 and December 15.
Ranking. The Senior Notes are senior unsecured obligations of the
Company ranking pari passu with all other present and future senior
indebtedness of the Company and prior in right of payment to all
present subordinated indebtedness of the Company and any future
indebtedness of the Company that by its terms is subordinated in right
of payment to the Senior Notes. The Company's obligations under the
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Senior Credit Agreement are secured by substantially all the Company's
assets and, as a consequence thereof, the holders of such indebtedness
will have a prior claim upon those assets to the extent of the lesser
of the value of the collateral or the amount of the obligations
secured thereby.
Optional Redemption. Commencing December 15, 1997, the Senior Notes
will be subject to redemption at the option of the Company, in whole
or in part, at any time and from time to time, upon not less than 30
nor more than 60 days' notice, at the redemption prices (expressed as
a percentage of principal amount) set forth below plus accrued and
unpaid interest to the redemption date, if redeemed during the twelve-
month period beginning on December 15 of the years indicated below:
Year Percentage
---- ----------
1997 104.61%
1998 103.07%
1999 101.54%
2000 and thereafter 100.000%
Notwithstanding the foregoing, if the Company or CT Holdings
consummates one or more public offerings of its common stock on or
prior to December 15, 1996, the Company may, at its option, within 60
days of the consummation of any such offering, use all or any portion
of the net proceeds of such offering available to the Company to
redeem up to 35% of the initially outstanding aggregate principal
amount of Senior Notes at a redemption price equal to 110% of the
principal amount thereof plus accrued and unpaid interest to the date
of redemption, provided that immediately following such redemption at
least 65% of the aggregate principal amount of Senior Notes originally
issued under the Indenture remain outstanding.
Change of Control. Upon the occurrence of a Change of Control (as
defined in the Indenture), each holder of Senior Notes will have the
right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such holder's Senior Notes
at a purchase price equal to 101% of the aggregate principal amount
thereof plus accrued and unpaid interest, if any, to the date of
purchase.
The Indenture defines a "Change of Control" as the occurrence of any
of the following events:
(i) prior to the first public offering of stock of the
Company or CT Holdings entitled to vote under ordinary circumstances
in the election of directors, managers or trustees ("Voting Stock"),
as the case may be, Investcorp, its affiliates, members of Company
management and any person acting in the capacity of an underwriter in
connection with a public or private offering of the Company's or CT
Holdings' capital stock (collectively, the "Permitted Holders"), cease
to be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act), directly or indirectly, of majority voting
power of the Voting Stock of the Company or CT Holdings, as the case
may be, whether as a result of issuance of securities of the Company
or CT Holdings, as the case may be, any merger, consolidation,
liquidation or dissolution of the Company or CT Holdings, as the case
may be, any direct or indirect transfer of securities by any Permitted
Holder or otherwise (for purposes of this clause (i) and clause (ii)
below, the Permitted Holders shall be deemed to beneficially own any
Voting Stock of a corporation (the "specified corporation") held by
any other corporation (the "parent corporation") so long as the
Permitted Holders beneficially own (as so defined), directly or
indirectly, a majority of the Voting Stock of the parent corporation);
(ii) following the first public offering of Voting Stock of
the Company or CT Holdings, as the case may be, any "Person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange Act), other
than one or more Permitted Holders, is or becomes the beneficial owner
(as defined in clause (i) above, except that a Person shall be deemed
to have "beneficial ownership" of all shares that any such Person has
the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than
35% of the Voting Stock of the Company or CT Holdings, as the case may
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<PAGE>
be; provided that the Permitted Holders beneficially own (as defined
in clause (i) above), directly or indirectly, in the aggregate a
lesser percentage of the Voting Stock of the Company or CT Holdings,
as the case may be, than such other Person and do not have the right
or ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors of the
Company or CT Holdings, as the case may be; or
(iii) following the first public offering of Voting Stock of
the Company or CT Holdings, as the case may be, any Person (other than
Investcorp, its affiliates and members of Company management) (a)
nominates one or more individuals for election to the board of
directors of the Company or CT Holdings, as the case may be, (b)
solicits proxies, authorizations or consents in connection therewith,
and (c) such number of nominees elected to serve on the board of
directors represents a majority of the board of directors of the
Company or CT Holdings, as the case may be, following such election.
The definition of "Change of Control" in the Indenture differs in
certain respects from the definition of "Change of Control" contained
in the Purchase Agreement in respect of the Series A Shares. See
"Description of the Securities -- Change of Control Rights."
Accordingly, certain events (such as a public offering of common stock
of the Company or CT Holdings after which Investcorp and its
affiliates cease to own at least 50% of the Voting Stock) may occur
that trigger a Change of Control under the Purchase Agreement but that
do not trigger a Change of Control under the Indenture. In such a
case, the Indenture provides that the Company may not repurchase the
Series A Shares (except out of the proceeds of a contemporaneous
public offering of capital stock) unless (a) at the time of such
repurchase, no Default or Event of Default (as defined in the
Indenture) has occurred and is continuing or would occur as a
consequence thereof; (b) immediately after giving effect to such
repurchase, the aggregate amount of all repurchase and other
Restricted Payments (as defined in the Indenture) declared or made
since the date of the Indenture will not exceed the sum of (i) 50% of
Consolidated Net Income (as defined in the Indenture) for the period
(taken as one accounting period) from the beginning of the first full
fiscal quarter commencing immediately after the date of initial
issuance of the Senior Notes to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or if Consolidated
Net Income will be a deficit, minus 100% of such deficit), plus (ii)
to the extent not used to purchase, redeem or otherwise acquire for
value capital stock and indebtedness from the net proceeds of a
contemporaneous issuance and sale for cash of shares of capital stock
or subordinated indebtedness of the Company or CT Holdings (as
permitted under the Indenture), 100% of the aggregate net cash
proceeds received after the date of initial issuance of the Senior
Notes by the Company as capital contributions to the Company or from
the issuance and sale of capital stock (other than redeemable stock or
capital stock that is exchangeable for indebtedness) or indebtedness
that is convertible into capital stock (other than redeemable stock),
to the extent such indebtedness is actually so converted; and (c) the
Company could, at the time of such repurchase and after giving effect
thereto, have incurred at least $1.00 of additional indebtedness under
the Indenture. However, if an event occurs that would constitute a
Change of Control under both the Indenture and the Purchase Agreement,
the Indenture provides that the Company must first repurchase all
Senior Notes tendered prior to repurchasing any Series A Shares. In
such a case, the Company need not meet the restrictions described
above to effect the repurchase.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the
Senior Notes to require that the Company repurchase or redeem the
Senior Notes in the event of a takeover, recapitalization or similar
restructuring. The Company's ability to purchase the Senior Notes
will be limited by the Company's then available financial resources
and, if such financial resources are insufficient, its ability to
arrange financing to effect such purchases. There can be no assurance
that the Company will have sufficient funds to repurchase the Senior
Notes upon a Change of Control or that the Company will be able to
arrange financing for such purpose.
Unless the Company's lenders waive certain covenants contained in the
Senior Credit Agreement, a Change of Control would constitute an event
of default thereunder and could result in the acceleration of the
Company's debt repayment obligations. In such event, the Company may
not have sufficient resources to satisfy all its repayment and
repurchase obligations.
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<PAGE>
Certain Covenants. The Indenture restricts, among other things, (i)
the incurrence of additional indebtedness by the Company and its
subsidiaries; (ii) the payment of dividends (other than dividends
payable on the Series A Shares and the Redeemable Senior Preferred
Stock), the repurchase of capital stock and the making of other
restricted payments (as defined in the Indenture); (iii) the making of
certain investments by the Company and its subsidiaries; (iv) the
making of certain loans to, investments in or guarantees on behalf of,
franchisees; (v) the creation of liens; (vi) certain sale and
leaseback transactions by the Company or its subsidiaries; (vii)
certain transactions between the Company or its subsidiaries and their
respective affiliates; (viii) certain mergers, consolidations and
sales of assets; and (ix) engaging in any business other than the
building materials and home decorating and remodeling products
business and the direct-marketing business. The Indenture also
restricts the ability of the Company or its subsidiaries to create or
enter into any restriction on the ability of such subsidiaries to take
certain actions, including without limitation (i) paying dividends or
other distributions to the Company or any subsidiary, (ii) paying any
indebtedness owed to the Company or any subsidiary, (iii) making loans
or advances to the Company or any subsidiary, (iv) transferring
property or assets to the Company or any subsidiary, (v) granting
liens or security on the Company's or any of its subsidiaries' assets
in favor of the holders of the Senior Notes or (vi) guaranteeing the
Senior Notes or any renewals or refinancings thereof. Upon certain
sales of assets, the Company will be required to offer to purchase, at
100% of their principal amount together with accrued and unpaid
interest, Senior Notes in an aggregate principal amount equal to Net
Cash Proceeds (as defined in the Indenture), except to the extent such
Net Cash Proceeds are used to permanently reduce senior indebtedness
or are invested in properties and assets in the same line of business.
Consumer Credit Card Facility.
Pursuant to a Credit Card Program Agreement between the Company and a
bank (the "Color Credit Agreement"), the Company's customers may
finance purchases of goods and services through the bank on a
revolving credit basis. At its discretion, the bank extends credit to
customers in an amount based upon its credit policies for the program.
Once it has approved and assigned a credit line to the account, the
bank forwards a customized credit card ("Color Credit") to the
customer. Subject to certain chargeback rights retained by the bank,
the credit risks associated with nonpayment of such charge accounts
are borne by the bank. The Company is subject to a $35,000,000
minimum annual volume guaranty under the Color Credit Agreement.
The Color Credit Agreement requires the Company to allocate an amount
equal to .035% of its total sales each year to promote the program.
The bank supplies the form and content of all necessary documentation
for the program, which documentation is then printed at the Company's
expense. All sales on the "Color Credit" program must receive a
credit authorization to be made on the approved form of documentation.
At October 3, 1993, there was approximately $30,000,000 outstanding
from all customers under the Color Credit Agreement. During fiscal
1992, approximately $38,000,000 in sales were made through the
program. The bank maintains a reserve for doubtful accounts, which it
funds by discounting the amounts paid to the Company from sales
generated under the "Color Credit" program. The Company is entitled
to receive 50% of the remaining aggregate balance of such reserve, if
any, after all outstanding balances on the "Color Credit" accounts
have been liquidated, or charged off by the bank, and the Company has
discharged all of its liabilities and obligations under the Color
Credit Agreement.
The Color Credit Agreement is subject to termination by either party
for any reason upon 180 days' notice prior to the end of the term or,
upon material default by either party, upon 30 days' notice. Upon
termination of the Color Credit Agreement, the Company has a right of
first refusal to repurchase outstanding "Color Credit" accounts at
103% of the aggregate amount of unpaid principal indebtedness plus
finance and other charges if terminated by the Company or 100% if
terminated by the bank pursuant to the terms of the Color Credit
Agreement.
Commercial Credit Card Facility.
Pursuant to a program agreement between the Company and a financial
institution (the "Color Pro Agreement"), the Company's commercial
customers may finance purchases of goods and services on a revolving
credit basis. At its discretion, the financial institution extends
credit to the Company's commercial customers in an amount based upon
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its credit policies for the program up to a maximum aggregate
outstanding balance of $10,000,000. Once it has approved and assigned
a credit line to the account, the financial institution forwards a
customized credit card ("Color Pro Credit") to the customer. The
credit risks associated with nonpayment of such charge accounts are
borne by the Company and, subject to certain obligations to make
collection efforts, may be charged back by the bank to the Company.
The bank supplies the form and content of all necessary documentation
for the program, which is then printed at the Company's expense. All
sales on the "Color Pro Credit" program must receive a credit
authorization and be made on the approved form of documentation.
At October 3, 1993, there was approximately $2,400,000 outstanding
from all commercial customers under the Color Pro Agreement. The
Color Credit Agreement is subject to termination by either party for
any reason upon 180 days' notice prior to the end of the term or, upon
material default by either party, upon 30 days' notice. The financial
institution maintains a reserve for doubtful accounts, which it funds
by discounting the amounts paid to the Company for purchased accounts.
Upon termination of the Color Credit Agreement, the Company has a
right of first refusal to repurchase outstanding Color Pro accounts at
100% of the aggregate amount of unpaid principal indebtedness plus
finance charges or not to purchase such accounts and pay a monthly
liquidation fee to the financial institution equal to the reasonable
servicing expenses per account.
COMMON STOCK
The authorized common stock of the Company consists of 1,000,000
shares of common stock, par value $.01 per share. At October 3, 1993
there were 101 shares of Common Stock issued and outstanding, all of
which are held of record by CT Holdings. All outstanding shares of
common stock are pledged to secure the Company's obligations under the
Senior Credit Agreement. Each share of common stock entitles the
holder thereof to one vote on all matters to be voted on by
stockholders of the Company. Pursuant to the restrictions contained
in the Senior Credit Agreement, the Indenture, the Company's
Certificate of Incorporation and the Company's Certificate of
Designation, the Company is not expected to be able to pay dividends
on its common stock for the foreseeable future other than certain
limited dividends permitted by the Senior Credit Agreement, the
Indenture, the Certificate of Incorporation and the Company's
Certificate of Designation. In the event of a liquidation,
dissolution or winding up of the Company, the holders of the common
stock are entitled to share in the remaining assets of the Company
after payment of all liabilities and after satisfaction of all
liquidation preferences payable to the holders of the Series A Shares,
the Redeemable Senior Preferred Stock and all other shares of stock
ranking senior to the common stock in respect of any distribution upon
the liquidation, dissolution or winding up of the Company. The common
stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable
to the common stock. All outstanding shares of the common stock are
fully paid and nonassessable.
DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the DGCL ("Section 203"),
which restricts the Company from engaging in "business combinations"
with an "interested stockholder" for a period of three years from the
date the stockholder becomes an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is
approved by the board of directors of the corporation, (ii) upon
consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owns at
least 85% of the outstanding voting stock, or (iii) on or after such
date the business combination is approved by the board and by the
affirmative vote of holders of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder. A
"business combination" includes mergers, asset sales, and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person, who together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock.
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PREFERRED STOCK
The Company is authorized to issue 585,000 shares of preferred stock,
par value $1.00 per share, of which 385,000 shares are designated as
Senior Cumulative Preferred Stock, referred to herein as the
Redeemable Senior Preferred Stock and 200,000 shares are designated
Junior Cumulative Preferred Stock. At October 3, 1993, there were no
shares of Junior Cumulative Preferred Stock outstanding, 200,000
shares of Redeemable Senior Preferred Stock were issued and
outstanding and an additional 122,435 shares were accrued as payment-
in-kind dividends issuable on January 15, 1995. The Company is also
authorized to issue 7,500,000 shares of Class B Preferred Stock, par
value $1.00 per share, of which 2,750,000 shares are designated as
Series A Senior Increasing Rate Preferred Stock and, 2,750,000 shares
are designated as Series B Senior Increasing Rate Preferred Stock
("Series B Shares"). At October 3, 1993, there were 2,200,000 Series
A Shares and no Series B Shares issued and outstanding. The terms of
the Series A Shares are described herein. See "Description of the
Securities." The Series B Shares have terms identical in all material
respects to the Series A Shares. The Company has no current intent to
issue any Series B Shares.
Redeemable Senior Preferred Stock
Dividends. Holders of the Redeemable Senior Preferred Stock are
entitled to receive, when, as and if declared by the Company's Board
of Directors, out of funds legally available therefor and subject to
certain restrictions in the Senior Credit Agreement, cumulative
dividends at the annual rate of $14.50 per share, which dividends are
payable on January 15, 1995 in additional shares of Redeemable Senior
Preferred Stock (with each share being valued at $100) and thereafter
quarterly in cash. In the event the Company does not issue such
additional shares of Redeemable Senior Preferred Stock on January 15,
1995 or subsequent to January 15, 1995 pay each dividend due in cash,
such accrued but unpaid dividends will accrue additional cash
dividends at a rate of 14.5% per annum compounded quarterly. No cash
dividends are payable on payment-in-kind shares of Redeemable Senior
Preferred Stock prior to January 15, 1995.
Subsequent to January 15, 1995, if all cumulative dividends are not
paid in full upon the Redeemable Senior Preferred Stock, the Series A
Shares and any other preferred stock ranking in parity as to dividends
with the Redeemable Senior Preferred Stock, all such dividends
declared upon the shares of Redeemable Senior Preferred Stock, the
Series A Shares and any preferred stock ranking in parity as to
dividends with the Redeemable Senior Preferred Stock will be declared
pro rata so that in all cases the amount of such dividends declared
per share on the Redeemable Senior Preferred Stock, the Series A
Shares and such other preferred stock will bear to each other the same
ratio that such accrued dividends per share on the shares of
Redeemable Senior Preferred Stock, the Series A Shares and such other
preferred stock bear to each other. In addition, the Company may not
declare or pay any cash dividends on or redeem or purchase its common
stock or any other class of capital stock ranking, as to dividends or
upon liquidation, dissolution or winding up, junior to or on a parity
with the Redeemable Senior Preferred Stock if, at the time of making
such dividend, redemption or purchase, the Company is in default with
respect to any dividends payable on, or any obligation to redeem or
purchase, shares of Redeemable Senior Preferred Stock. The Company
may not redeem any class of capital stock ranking, as to dividends,
upon liquidation, dissolution or winding up, junior to the Redeemable
Senior Preferred Stock, except in exchange for, or out of proceeds of
a substantially concurrent sale of, such junior stock.
Voting. Except as otherwise provided by the DGCL, holders of the
Redeemable Senior Preferred Stock have only those voting rights
provided in the Company's Certificate of Incorporation. The Company's
Certificate of Incorporation provides that the holders of the
Redeemable Senior Preferred Stock will have the exclusive right,
voting separately as a class, to elect two new directors (and the
Board of Directors will be increased by such number of new directors)
if (i)(a) dividends payable on the Redeemable Senior Preferred Stock
are in arrears and unpaid in an aggregate amount equal to at least the
amount of dividends payable thereon for six quarterly periods, whether
or not consecutive, or (b) pay-in-kind dividends for the period of
July 15, 1989 through January 15, 1995 have not been issued as of July
15, 1996 in an amount equal to at least 43,500 shares of Redeemable
Senior Preferred Stock or (ii) the Company fails to meet the mandatory
redemption or purchase obligations in respect of the Redeemable Senior
Preferred Stock. Without the written consent of the holders of at
least a majority of the shares of the Redeemable Senior Preferred
Stock, the Company may not create any series or class of preferred
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stock that is (i) senior to the Redeemable Senior Preferred Stock as
to dividends or upon liquidation, dissolution or winding up or (ii)
mandatorily redeemable on or prior to October 15, 1999.
Liquidation, Dissolution, Winding Up. In the event of any involuntary
or voluntary liquidation, dissolution or winding up of the affairs of
the Company, the holders of Redeemable Senior Preferred Stock are
entitled to be paid out of the assets of the Company available for
distribution an amount equal to $100, plus an amount equal to accrued
and unpaid dividends thereon, for each share outstanding before any
distribution may be made to any holder of the Junior Securities. The
sale, lease or conveyance of all or substantially all of the Company's
assets or a merger or consolidation of the Company which results in
holders of Junior Securities receiving in exchange therefor cash or
notes, debentures or other evidences of indebtedness or obligations to
pay cash or preferred stock of the surviving entity which ranks senior
to or on a parity with the Redeemable Senior Preferred Stock will be
deemed to be a voluntary liquidation, dissolution or winding up of the
affairs of the Company. If the assets of the Company are insufficient
to pay in full the liquidation payments payable to the holders of the
Redeemable Senior Preferred Stock and the Series A Shares, the holders
of all such shares will share ratably in the distribution of assets.
In the event of a sale, lease or conveyance of all or substantially
all of the Company's assets or a merger or consolidation of the
Company that results in holders of Junior Securities receiving in
exchange therefor common stock or preferred stock (the "Exchanged
Preferred Stock") of the surviving entity that ranks junior to the
Redeemable Senior Preferred Stock, the Redeemable Senior Preferred
Stock will be deemed to be preferred stock of such entity, with the
same annual dividend rate and rights as the Redeemable Senior
Preferred Stock. If the Exchanged Preferred Stock is to be
mandatorily redeemed in whole or in part on or prior to October 15,
1999, the mandatory redemption provisions of the Redeemable Senior
Preferred Stock will be deemed to be amended to provide that all
shares of Redeemable Senior Preferred Stock will be mandatorily
redeemed prior to any mandatory redemption of the Exchanged Preferred
Stock. If the Company or any affiliate of the Company optionally
redeems or otherwise acquires any or all of the then outstanding
shares of Exchanged Preferred Stock, the Company is required to redeem
a proportionate number of shares of Senior Preferred Stock.
Redemption. Beginning October 15, 1991, the Company may redeem the
Redeemable Senior Preferred Stock at any time in whole or in part at a
redemption price equal to $100 per share plus an amount equal to any
accrued but unpaid dividends due thereon. To the extent not earlier
redeemed, the Company is required to redeem, out of funds legally
available therefor under the DGCL, all of the outstanding shares of
Redeemable Senior Preferred Stock in two equal installments on each of
October 15, 1998 and October 15, 1999 at a redemption price of $100
per share, plus an amount equal to all dividends accrued and unpaid
thereon through the redemption date.
JUNIOR CUMULATIVE PREFERRED STOCK
The Company has designated 200,000 shares of its preferred stock as
Junior Cumulative Preferred Stock ("Junior Preferred Stock"), none of
which are outstanding. The Company currently has not adopted any
rights, preferences or privileges in respect of its Junior Preferred
Stock. The Board of Directors is authorized to adopt by resolution
the rights, preferences and privileges for such Junior Preferred
Stock.
DESCRIPTION OF THE SECURITIES
SERIES A SHARES
The Company is authorized to issue 2,750,000 shares of Series A Senior
Increasing Rate Preferred Stock, par value $1.00 per share, with a
liquidation preference of $25.00 per share. The Series A Shares rank,
with respect to dividends and upon liquidation, in parity with the
Redeemable Senior Preferred Stock and any other senior preferred stock
of the Company having a maturity date on or after the maturity date of
the Series A Shares and used to refinance the Redeemable Senior
Preferred Stock, but only to the extent of the Redeemable Senior
Preferred Stock refinanced plus the fees and expenses of such
refinancing, and rank senior to all Junior Securities.
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Dividends. Holders of record of the Series A Shares will be entitled
to receive, when and as declared by the Company's Board of Directors,
out of funds legally available therefor after taking into account any
permitted reevaluation of the assets of the Company (the "Legally
Available Funds"), cumulative dividends payable on the Series A Shares
for each quarterly dividend period (a "Quarterly Dividend Period"),
which Quarterly Dividend Periods commence on October 15, January 15,
April 15 and July 15 of each year and end on and include the day next
preceding the first day of the next Quarterly Dividend Period. The
current quarterly dividend, which applies to the Quarterly Dividend
Periods commencing on January 15, 1994 and April 15, 1994, is equal to
$.90625 per Series A Share. The quarterly dividend will increase by
$.03125 to $.9375 per Series A Shares for the Quarterly Dividend
Periods beginning on July 15, 1994 and October 15, 1994 and will
increase by $.03125 per Series A Share for each two consecutive
Quarterly Dividend Periods thereafter, up to a maximum quarterly
dividend of $1.0625 per Series A Share. All dividends that are
payable on the same dates as dividends payable in respect of the
Redeemable Senior Preferred Stock or any other preferred stock ranking
in parity with the Series A Shares with respect to the payment of
dividends, must be declared on the same date as, and the record date
in respect of such dividends must be identical to, that set for the
Redeemable Senior Preferred Stock or any other preferred stock ranking
on parity with the Series A Shares in respect of the payment of
dividends, as the case may be. The Company may, at its election, pay
dividends on the Series A Shares, in whole or in part, with respect to
such portion of the quarterly dividend in excess of $.9375 per Series
A Share by means of the issuance of additional Series A Shares at the
rate of one Series A Share for each $25.00 of dividends.
All dividends are payable on each October 15, January 15, April 15 and
July 15 next succeeding the applicable Quarterly Dividend Period (each
of such dates being a "Dividend Payment Date"). Such dividends are
paid to the holder of record at the close of business on the date
specified by the Company's Board of Directors at the time such
dividend is declared, provided that such date shall be between 60 and
10 days prior to the respective Dividend Payment Date. Each of such
quarterly dividends is fully cumulative and accrues (whether or not
declared), without interest or additional dividends, from the first
day of the Quarterly Dividend Period. Dividends shall accrue on a
daily basis without regard to the occurrence of a Dividend Payment
Date or the declaration of any dividend. The Company has paid in full
all dividends on the Series A Shares accrued and payable prior to the
date hereof. The Company's ability to pay dividends on the Series A
Shares is subject to certain restrictions contained in the Senior
Credit Agreement, the Indenture and the Company's Certificate of
Incorporation, as amended. See "Capital Structure."
In the event that retained earnings or other surplus capital of the
Company is insufficient for the payment of the entire amount of
dividends payable in any Quarterly Dividend Period with respect to the
Redeemable Senior Preferred Stock, the Series A Shares and any other
preferred stock ranking in parity as to dividends, or the Company is
otherwise restricted from paying such dividend, the amount of any
available surplus will be allocated for the payment of dividends with
respect to the Series A Shares, the Redeemable Senior Preferred Stock
and any other preferred stock ranking in parity with the Series A
Shares as to dividends pro rata based upon the accrued cash dividends
per share payable on the Series A Shares, the Redeemable Senior
Preferred Stock and any other preferred stock ranking in parity with
the Series A Shares as to dividends. However, the Company may pay
dividends payable in the form of additional shares of the same series
or class of stock on which dividends are declared; provided that such
dividends are not included in any calculation of accrued or pro rata
dividends.
So long as any Series A Shares are outstanding, the Company may not
declare, pay or set apart for payment any dividend on Junior
Securities (other than dividends and distributions payable in shares
of its Junior Securities), and the Company may not purchase, redeem or
otherwise acquire or retire for value any Junior Securities, or any
warrants, rights, calls or options exercisable for or convertible into
any of the Junior Securities (other than certain redemptions of the
Junior Securities previously issued to the Company's employees
pursuant to any employee benefit or bonus plan) or set apart for
payment money to do any of the foregoing (collectively, "Junior
Securities Payments"), if, after giving effect to such payment, the
aggregate amount expended for all such payments subsequent to the date
the Series A Shares are first issued exceeds the sum of (a) 25% of
Adjusted Net Income or 100% of the net loss (Adjusted Net Income is
defined for purposes of this formula as net income of the Company from
and including the fiscal quarter of the date of such issuance through
the fiscal quarter ending immediately prior to the date of such
proposed payment, less the sum of (i) all dividends and other payments
made, accrued, or cumulated in respect of the Series A Shares, the
Redeemable Senior Preferred Stock and all other preferred stock or
series thereof ranking in parity with the Series A Shares, (ii) any
gain on sale of assets
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(other than in the ordinary course) or other
extraordinary income as determined in accordance with generally
accepted accounting principles and (iii) earnings of any subsidiary of
the Company to the extent that such subsidiary is restricted by
agreement, applicable law or otherwise from distributing such earnings
to the Company), plus (b) the aggregate net cash proceeds and the fair
market value of any marketable securities received by the Company from
the issuance or sale (other than any issuance or sale to an entity
controlled by the Company), subsequent to August 13, 1992, of any
Junior Securities or any warrants, rights, or options to purchase or
acquire any Junior Securities. The Company is also restricted from
making any Junior Securities Payment and from redeeming shares of
Redeemable Senior Preferred Stock (other than pursuant to the
mandatory redemption described above and under other limited
circumstances), or of any other preferred stock ranking in parity with
the Series A Shares, unless prior to or concurrently with any such
payment, all accrued and unpaid dividends on the Series A Shares have
been or will be paid or declared or set aside for payment. The
Company is however permitted to pay certain dividends to CT Holdings
in respect of the Company's outstanding common stock (i) to pay or
reimburse CT Holdings for its ongoing fees and expenses associated
with the ownership of the Company and (ii) to permit CT Holdings to
repurchase shares of its capital stock held by management. The Company
is also specifically permitted to incur additional indebtedness and
repay outstanding indebtedness under the Senior Credit Agreement, pay
certain fees pursuant to the management agreement with an affiliate of
Investcorp and make any payment required under the Company's
employment agreements with senior management.
Liquidation, Dissolution, Winding Up. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs
of the Company, the Series A Holders are entitled to be paid out of
the assets of the Company available for distribution to its
stockholders an amount in cash equal to $25.00 for each Series A Share
outstanding (the "Liquidation Preference"), plus an amount in cash
equal to all accrued but unpaid dividends thereon to the date fixed
for liquidation, dissolution or winding up before any payment will be
made or assets distributed to the holders of the Junior Securities. If
the assets of the Company are insufficient to pay in full the
liquidation payments payable to the holders of the Series A Shares,
the Redeemable Senior Preferred Stock and any other preferred stock
ranking in parity with the Series A Shares as to liquidation,
dissolution and winding up, the holders of the Series A Shares, the
Redeemable Senior Preferred Stock and any other preferred stock
ranking in parity with the Series A Shares as to liquidation,
dissolution and winding up will share ratably in such distribution of
assets in proportion to the amount that would be payable on such
distribution if the amounts to which the holders of the Series A
Shares, the Redeemable Senior Preferred Stock and any other preferred
stock ranking in parity with the Series A Shares as to liquidation,
dissolution and winding up are entitled if paid in full. A sale,
lease or conveyance of all or substantially all the Company's assets
or a merger or consolidation of the Company will not be deemed to be a
liquidation, dissolution or winding up unless such sale, lease or
conveyance shall be in connection with a plan of dissolution or
winding up of the Company's business or a distribution of all or
substantially all of the Company's assets. Notwithstanding the
foregoing, at any time when the Company is prohibited pursuant to the
terms of the Redeemable Senior Preferred Stock from making any
distribution in cash with respect to, or redeeming or purchasing
Junior Securities, a sale, lease or conveyance of all or substantially
all of the Company's assets or a merger or consolidation of the
Company that results in the holders of Junior Securities receiving any
of (i) cash, (ii) notes, debentures or other evidences of indebtedness
or obligations to pay cash or (iii) preferred stock of the surviving
entity that ranks in parity with or senior to the Series A Shares in
liquidation or dividends will, at the election of the holders of the
Series A Shares, be deemed to be a liquidation, dissolution or winding
up of the affairs of the Company.
Redemption. On January 15, 2003, to the extent that the Company has
Legally Available Funds and provided that the Company is not in
default with respect to dividends payable on, or any obligation to
redeem or repurchase, shares of the Redeemable Senior Preferred Stock,
the Company will be required to redeem the remaining outstanding
Series A Shares at a redemption price of $25.00 per Share, together
with accrued and unpaid dividends thereon to the redemption date, in
cash without interest. If the Company is unable to redeem the Series A
Shares on such date due to a lack of Legally Available Funds or for
any other reason, the Company is required to discharge its mandatory
redemption obligations as soon thereafter as it is able and such
discharge shall be effected pro rata among holders of the Series A
Shares and, to the extent not previously redeemed, the Redeemable
Senior Preferred Stock, and any other preferred stock ranking in
parity as to liquidation as to which the obligation to redeem shall
have arisen based upon the aggregate liquidation preferences of such
shares outstanding; provided that, until the Series A Shares are
redeemed, the Company is restricted from taking certain
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actions, including the purchase or redemption of fewer than all of the Series A
Shares then outstanding (other than on a pro rata basis) and the
declaration of dividends on any Junior Securities.
The Series A Shares may be redeemed at the option of the Company, in
whole or in part, at any time or from time to time, together with
accrued and unpaid dividends thereon to the date fixed for redemption,
at the following price per share for each designated period:
Period Price
------ -----
July 15, 1993 - July 14, 1994 25.50
July 15, 1994 - July 14, 1995 25.75
July 15, 1995 - July 14, 1996 26.00
July 15, 1996 - July 14, 1997 25.75
July 15, 1997 - July 14, 1998 25.50
July 15, 1998 and thereafter 25.00
The Company may not redeem the Series A Shares at any time that it is
in default with respect to dividends payable on, or any obligation to
redeem or repurchase, shares of Redeemable Senior Preferred Stock.
The Company is also prohibited from optionally redeeming the Series A
Shares under the Indenture unless (a) at the time of such redemption,
no Default or Event of Default (as defined in the Indenture) has
occurred and is continuing or would occur as a consequence thereof;
(b) immediately after giving effect to such redemption, the aggregate
amount of all redemption and other Restricted Payments (as defined in
the Indenture) declared or made since the date of the Indenture will
not exceed the sum of (i) 50% of Consolidated Net Income (as defined
in the Indenture) for the period (taken as one accounting period) from
the beginning of the first full fiscal quarter commencing immediately
after the date of initial issuance of the Senior Notes to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or if Consolidated Net Income will be a deficit, minus 100%
of such deficit), plus (ii) to the extent not used to purchase, redeem
or otherwise acquire for value capital stock and indebtedness from the
net proceeds of a contemporaneous issuance and sale for cash of shares
of capital stock or subordinated indebtedness of the Company or CT
Holdings (as permitted under the Indenture), 100% of the aggregate net
cash proceeds received after the date of initial issuance of the
Senior Notes by the Company as capital contributions to the Company or
from the issuance and sale of capital stock (other than redeemable
stock or capital stock that is exchangeable for indebtedness) or
indebtedness that is convertible into capital stock (other than
redeemable stock), to the extent such indebtedness is actually so
converted; and (c) the Company could, at the time of such redemption
and after giving effect thereto, have incurred at least $1.00 of
additional indebtedness under the Indenture.
Prior to any optional redemption of the Series A Shares, the
Redeemable Senior Preferred Stock or any other preferred stock ranking
in parity as to liquidation, the Company must make provision such that
the Company will redeem on a pro rata basis between the Series A
Shares, the Redeemable Senior Preferred Stock and such other preferred
stock allocated among such classes of stock based upon the aggregate
liquidation preferences of such shares outstanding. With respect to
the redemption of fewer than all of the outstanding Series A Shares,
the number of Series A Shares to be redeemed will be determined by
the Board of Directors of the Company and the Series A Shares to be
redeemed will be selected (i) pro rata as between outstanding Series A
Shares that are Restricted Securities (defined as Series A Shares
acquired by the holder thereof other than pursuant to an effective
registration statement under the Securities Act or Rule 144 (or any
successor rule thereunder)) and outstanding Series A Shares that are
not Restricted Securities, (ii) pro rata among the holders of
outstanding shares of Restricted Securities, and (iii) with respect to
the shares to be redeemed that are not Restricted Securities, by lot
or pro rata as may be determined by the Board of Directors, except
that in any redemption of fewer than all of the outstanding shares the
Company may first redeem all Series A Shares held by any holder of
fewer than 100 shares, as may be specified by the Company. Notice of
any redemption of the Series A Shares will be given by first class
mail, postage prepaid, mailed not less than 30 days nor more than 60
days prior to the redemption date, to each holder of record of the
Series A Shares to be redeemed.
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Merger. The Company may not consolidate with or merge with or into
any person unless either the Company is the resulting or surviving
entity or, if such other person is the resulting or surviving entity,
such person is a corporation organized and existing under the laws of
the United States, a State thereof or the District of Columbia, and
such person expressly assumes all the obligations of the Company to
the holders of the Series A Shares. Additionally, immediately before
and immediately after giving effect to such transaction and treating
any indebtedness which becomes an obligation of the Company as a
result of such transaction as having been incurred by the Company at
the time of such transaction, no default or event of default (or with
notice or passage of time or both) will have occurred and be
continuing under the Company's indebtedness, the obligations of the
Company with respect to the Series A Shares and any material
contracts, agreements or arrangements to which the Company is a party.
Moreover, immediately after giving effect to such transaction, (i)
the consolidated net worth (defined as common stockholders' equity as
determined in accordance with generally accepted accounting
principles) of such surviving entity must be equal to or greater than
that of the Company immediately prior to giving effect to such
transaction and (ii) the Company must be able to borrow at least $1.00
and such borrowing will not create an event of default under any of
the Company's then existing mortgages, indentures, credit agreements
or other instruments evidencing indebtedness of the Company.
Voting Rights. The holders of record of Series A Shares are not
entitled to any voting rights, except as otherwise provided by the
DGCL or as described under the heading "Other Restrictions" below, and
except if and whenever (i) all or any portion of the dividends payable
on the Series A Shares have been in arrears and unpaid in each quarter
during six consecutive quarterly periods or (ii) the Company has
failed to meet any mandatory redemption obligation to redeem the
Series A Shares on January 15, 2003. At such time, the number of
directors constituting the Board of Directors will be increased by two
and the Series A Holders will have the exclusive right to elect two
representatives to the Board of Directors to fill the newly created
vacancies. The Series A Holders will retain this right until all
accrued but unpaid dividends are paid in full or until the Series A
Shares are redeemed in full, at which time such directors' terms will
cease.
Change of Control Rights. Under the Purchase Agreement, if, at any
time while any Series A Shares remain outstanding, there shall occur a
Change of Control (as defined in the Purchase Agreement), then each
holder of the Series A Shares will have the option to require the
Company to purchase all, but not less than all, of such holder's
shares on the date (the "Repurchase Date") that is no earlier than 20
days after the date of the Company's notice of such Change of Control
or such longer period as may be prescribed by applicable law. Subject
to certain restrictions described herein, the Company will purchase
the Series A Shares at a purchase price per share equal to the sum of
$25.25 per share, plus an amount equal to all accrued and unpaid
dividends to the Repurchase Date.
For purposes of the Purchase Agreement, the term "Change of Control"
means any of the following: (i) Investcorp or any of its affiliates
cease to own, directly or indirectly, individually or in the
aggregate, securities of the Company having at least 50% of the
ordinary voting power for the election of directors of the Company or
(ii) all or substantially all of the Company's assets are sold or
leased as an entirety to any person or related group of persons or
(iii) the Company engages in any merger, consolidation, sale of
capital stock, reclassification, recapitalization, sale of beneficial
ownership interests or any other transactions with any other person or
related group of persons with the effect that after such transactions,
Investcorp and affiliates of Investcorp do not own or control,
directly or indirectly, individually or in the aggregate, securities
of the Company having at least 50% of the total ordinary voting power
entitled to vote in the election (a) of directors of the Company, if
the Company is the surviving entity, or (b) of directors, managers or
trustees of such other person, if the Company is not the surviving
entity.
The performance by the Company of its repurchase obligations pursuant
to these Change of Control provisions is restricted by the terms of
its Senior Credit Agreement, the Indenture, its Certificate of
Incorporation and the DGCL. Under the terms of its Senior Credit
Agreement, the Company would be prohibited from repurchasing the
Series A Shares upon a Change of Control without obtaining a waiver of
certain covenants from its lenders. See "Capital Structure -- Credit
Facilities -- Senior Credit Agreement." Under the terms of the
Indenture, the Company is also obligated to repurchase Senior Notes
from the holders thereof upon a Change of Control, as defined in the
Indenture. While the definition of "Change of Control" in the
Indenture differs from that contained in the Purchase Agreement, if an
event that would constitute a Change of Control under both the
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Indenture and the Purchase Agreement occurs, the Indenture provides
that the Company must first repurchase all Senior Notes tendered prior
to repurchasing any Series A Shares. If an event occurs that
constitutes a Change of Control only under the Purchase Agreement, the
Indenture provides that the Company may not repurchase the Series A
Shares (except out of the proceeds from a contemporaneous public
offering of capital stock) unless (a) at the time of such repurchase,
no Default or Event of Default (as defined in the Indenture) has
occurred and is continuing or would occur as a consequence thereof;
(b) immediately after giving effect to such repurchase, the aggregate
amount of all repurchase and other Restricted Payments (as defined in
the Indenture) declared or made since the date of the Indenture will
not exceed the sum of (i) 50% of Consolidated Net Income (as defined
in the Indenture) for the period (taken as one accounting period) from
the beginning of the first full fiscal quarter commencing immediately
after the date of initial issuance of the Senior Notes to the end of
the Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or if Consolidated Net Income will be a deficit, minus 100%
of such deficit), plus (ii) to the extent not used to purchase, redeem
or otherwise acquire for value capital stock and indebtedness from the
net proceeds of a contemporaneous issuance and sale for cash of shares
of capital stock or subordinated indebtedness of the Company or CT
Holdings (as permitted under the Indenture), 100% of the aggregate net
cash proceeds received after the date of initial issuance of the
Senior Notes by the Company as capital contributions to the Company or
from the issuance and sale of capital stock (other than redeemable
stock or capital stock that is exchangeable for indebtedness) or
indebtedness that is convertible into capital stock (other than
redeemable stock), to the extent such indebtedness is actually so
converted; and (c) the Company could, at the time of such repurchase
and after giving effect thereto, have incurred at least $1.00 of
additional indebtedness under the Indenture. In addition, any
exercise of the repurchase rights upon a Change of Control would be
unenforceable for so long as, (i) the Company has insufficient legally
available funds (as determined under the DGCL to effect such
repurchases), or (ii) the Company is in default with respect to
dividends payable on the Redeemable Senior Preferred Stock, which
obligations will commence in January 1995, or the obligation to redeem
or purchase shares of such stock. See "Capital Structure --
Redeemable Senior Preferred Stock."
Other Rights. The Purchase Agreement also provides that the Company
will repurchase the Series A Shares, the Redeemable Senior Preferred
Stock and any other preferred stock ranking in parity with the Series
A Shares as to liquidation, with the net proceeds of any future public
offering of common stock of the Company within 90 days of receiving
such proceeds. The Company will purchase the Series A Shares, and the
outstanding shares of Senior Redeemable Preferred Stock at a purchase
price per share equal to the optional redemption price (as set forth
in its Certificate of Incorporation) prevailing on the date the
Company applies the proceeds of the public offering to purchase such
shares, together with accrued and unpaid dividends thereon to the date
of purchase, in cash without interest. If the net proceeds of a
public offering are insufficient to permit the Company to purchase all
of the Series A Shares the Redeemable Senior Preferred Stock and any
other preferred stock ranking in parity with the Series A Shares as to
liquidation, the Company will discharge its obligations to purchase
such shares pro rata among the holders of the Series A Shares, the
Redeemable Senior Preferred Stock and any other preferred stock
ranking in parity with the Series A Shares as to liquidation pro rata
based upon the aggregate liquidation preferences of all such shares
outstanding. While neither the Senior Credit Agreement nor the
Indenture would restrict the performance by the Company of its
repurchase obligations following a public offering of its common
stock, any exercise of the repurchase rights following such a public
offering would be unenforceable for so long as, (i) the Company has
insufficient Legally Available Funds to effect such repurchases, or
(ii) the Company is in default with respect to dividends payable on
the Redeemable Senior Preferred Stock, which obligations will commence
in January 1995, or the obligation to redeem or repurchase shares of
Redeemable Senior Preferred Stock.
The Purchase Agreement also provides that the purchasers that
originally acquired Series A Shares pursuant to the Purchase Agreement
(the "Original Purchasers") have a right of first offer to purchase
promptly a pro rata portion of any preferred stock ("New Preferred
Stock") issued in the future by the Company ranking in parity with the
Series A Shares as to dividend rights and rights of liquidation,
winding up and dissolution, the proceeds of which are to be used to
redeem outstanding shares of Redeemable Senior Preferred Stock. The
terms of the Purchase Agreement provide that this right of first offer
is limited to the Original Purchasers acquiring Series A Shares
pursuant to the Purchase Agreement who hold Series A Shares at the
time the Company issues additional preferred stock subject to such
right. Accordingly, an Original Purchaser that continues to hold
Series A Shares will be entitled to such rights. However, a
subsequent purchaser of the Series A Shares that is not also
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an Original Purchaser will not be entitled to any right of first offer
upon the future issuance of New Preferred Stock. In the event that
the Company intends to issue and sell New Preferred Stock, it will
notify each eligible Original Purchaser of its intention, describing
the type of New Preferred Stock to be issued, the price and the
aggregate number of shares to be offered, the number of shares to be
offered to such Original Purchaser and the general terms upon which
the Company proposes to effect the issuance and offering of a pro rata
portion of such shares of New Preferred Stock to such Original
Purchaser. Each Original Purchaser will have 10 business days from
the date of the Company's offer to accept such offer. To the extent
that any or all Original Purchasers do not elect to exercise their
right to purchase any New Preferred Stock or do not complete such
purchase in a timely manner, the Company may sell to any other person
any shares of the New Preferred Stock not allocated to Original
Purchasers exercising their rights under the Purchase Agreement.
Other Restrictions. Without the approval of the holders of two-thirds
of the then outstanding Series A Shares, the Company may not (i) amend
the Company's Certificate of Incorporation so as to adversely affect
the voting powers or other rights or preferences of the Series A
Shares or (ii) authorize, issue or create any shares that are in
parity with or senior in right of payment to the Series A Shares other
than additional Series A Shares issued in payment of dividends on the
Series A Shares, and additional shares of Redeemable Senior Preferred
Stock issued in payment of dividends thereon. The Company also may
not amend its Certificate of Incorporation to change the rate at which
dividends are payable on the Series A Shares or the method, manner or
form of consideration in which such dividends are paid without the
affirmative vote of all holders of outstanding Series A Shares. The
Company also may not issue any Junior Securities, or any warrants,
rights, calls or options exercisable for or convertible into any such
Junior Securities, that have a maturity date or require any sinking
fund payment prior to or on the maturity date of the Series A Shares.
The Purchase Agreement also restricts the Company from making any
advance, loan, extension of credit or capital contribution to, or
purchasing any stock, bonds, notes, debentures or other securities of,
or making any other investment in any Affiliate of the Company, other
than (i) certain payments to CT Holdings and other affiliates of the
Company specifically permitted by the terms of the Company's
Certificate of Incorporation and (ii) investments in any Affiliates of
the Company that the Company controls, directly or indirectly, through
the ownership of 100% of the outstanding common stock of such
affiliate.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth all of the material anticipated
Federal income tax consequences of the ownership and disposition of
the Series A Shares. The discussion assumes that the holder of the
Series A Shares is a citizen or resident of the United States for
federal income tax purposes.
The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated thereunder (the
"Regulations"), Internal Revenue Service ("IRS") rulings and judicial
decisions now in effect, all of which are subject to change at any
time by legislative, judicial or administrative action, and any such
changes may be retroactively applied in a manner that could adversely
affect a holder of the Series A Shares. However, because of the lack
of relevant Regulations, court decisions or other authoritative
pronouncements, the federal income tax consequences of the ownership
and disposition of the Series A Shares are uncertain. No ruling from
the IRS will be applied for, and no opinion of counsel will be sought,
with respect to the federal income tax consequences of the ownership
and disposition of the Series A Shares, and there can be no assurance
that the IRS will agree with the conclusions set forth herein.
Moreover, the discussion does not purport to be a complete analysis of
all the potential tax effects that may be relevant to a particular
investor and does not address the federal income tax consequences
relevant to particular categories of holders subject to special
treatment under federal income tax laws, such as dealers in
securities, banks, insurance companies, tax-exempt entities and
foreign individuals and entities. In addition, it does not describe
any tax consequences arising out of the laws of any state, locality,
or foreign jurisdiction. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER,
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR
CONCERNING THE TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF
THE SERIES A SHARES.
DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO THE SERIES A SHARES
Distributions on the Series A Shares will be characterized as
dividends taxable as ordinary income to the extent such distributions
are made out of the current or accumulated earnings and profits as
determined for Federal income tax purposes. This will be true
regardless of whether such distributions are paid in cash or in
additional Series A Shares. The amount taxable as ordinary income to
a holder on receipt of a dividend paid in additional Series A Shares
will be equal to the fair market value of such Series A Shares on the
dividend payment date (to the extent of the Company's current or
accumulated earnings and profits).
Any Series A Holder that (a) is taxed as a corporation for Federal
income tax purposes, (b) meets the applicable holding period
requirements of the Code, (c) is not subject to the "debt financed
portfolio stock" rules of Section 246A of the Code with respect to
such holder's investment in the Series A Shares, and (d) otherwise is
entitled to the 70% dividends received deduction (taking into account,
among others, the limitations imposed by Sections 243 through 246 of
the Code, each such factor depending upon each holder's own particular
facts and circumstances), will be entitled to claim a deduction in an
amount equal to 70% of the dividends received with respect to the
Series A Shares. Furthermore, a corporate holder should be aware that
dividend income that is not subject to regular tax as a consequence of
the dividends-received-deduction may be subject to the alternative
minimum tax. Each prospective Series A Holder is advised to consult
its own tax advisor regarding the effect that indebtedness or other
positions in such prospective holder's portfolio may have on the tax
consequences of holding the Series A Shares.
Section 1059 of the Code requires a corporate holder to reduce its
basis in stock if an "extraordinary dividend" is paid and if the
holder has not held such stock for more than two years before the
dividend is declared, announced or agreed to. The basis reduction is
made effective immediately before any future sale or disposition of
the stock, whenever that occurs. Generally, the amount of such basis
reduction is equal to 70% of the amount of any extraordinary dividend
(i.e., the portion of the dividend that otherwise is not subject to
tax pursuant to the dividends received deduction provisions of the
Code). An extraordinary dividend is a dividend that (a) equals or
exceeds 5% of the holder's basis in the stock, treating all dividends
having ex-dividend dates within an 85-day period as one dividend, or
(b) exceeds 20% of the holder's basis in the stock, treating all
dividends having ex-dividend dates within a 365-day period as one
dividend. A holder at its election may determine the status of
distributions as extraordinary dividends by reference to the fair
market value of the
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Series A Shares as of the date before the ex-dividend date rather than
by reference to the adjusted basis of such shares, provided the holder
establishes such fair market value to the satisfaction of the IRS.
In addition, any redemption of Series A Shares that is treated as a dividend
under Code Section 301 and is not pro rata as to all of the
shareholders of the Company, and any dividend with respect to "disqualified
preferred stock" (i.e., preferred stock the issue price of which exceeds
its liquidation rights or its stated redemption price), is required to be
treated as an extraordinary dividend without regard to the two year holding
period referred to above. The Company currently does not anticipate
that any such redemptions or that any distribution of Series A Shares
constituting disqualified preferred stock will be made.
Distributions with respect to the Series A Shares in excess of both
current and accumulated earnings and profits will be treated in the
following manner: first, as a return of capital up to the amount of
the holder's tax basis in its Series A Shares (with a corresponding
reduction in such basis); and second, as an amount received in
exchange for such Series A Shares. The Company believes that it will
generate sufficient earnings and profits in fiscal 1994 for Federal
income tax purposes to permit all distributions made with respect to
the Series A Shares for fiscal 1994 to qualify as dividends for
Federal income tax purposes. However, the Company does not have
accumulated earnings and profits equal to the dividends requirements
on the Series A Shares, and, due in part to extraordinary deductions generated
in connection with the Senior Note Offering, the Company did not have
sufficient current earnings and profits for the dividends made with
respect to the Series A Shares for fiscal 1993 to qualify as dividends
for Federal income tax purposes. Accordingly, there can be no
assurance that the future earnings of the Company will be sufficient
for such distributions to so qualify.
SALE OR EXCHANGE TO THIRD PARTIES
Upon the sale or exchange of Series A Shares to a party other than the
Company, a holder that has held its Series A Shares as a capital asset
will realize capital gain or loss on the difference between its
adjusted tax basis in the Series A Shares and the amount realized.
Such gain or loss will be treated as long-term or short-term depending
upon whether or not the Series A Shares had been held for more than
one year prior to the time of the sale or exchange.
REDEMPTION BY THE COMPANY
In general, a Series A Holder that has held such Series A Shares as a
capital asset and that owns no common stock of the Company actually or
constructively under Section 318 of the Code immediately after the
redemption should recognize capital gain or loss upon redemption
measured by the difference between the amount received by the holder
upon the redemption and such holder's adjusted tax basis in the Series
A Shares redeemed.
REDEMPTION PREMIUM
Section 305(c) of the Code provides that, if there is a difference
between the issue price and the redemption price of stock (i.e., the
stock is issued with a redemption premium), such redemption premium
may be treated as a distribution for tax purposes, unless it
represents a "reasonable" redemption premium. The Omnibus Budget
Reconciliation Act of 1990 (the "1990 Act") amended Section 305(c) of
the Code to expand the taxation of redemption premium on preferred
stock issued after October 9, 1990. Under the 1990 Act's amendments,
holders of Series A Shares that possess more than a de minimis amount
of redemption premium will be required to treat such amount as a
distribution constructively received on an economic accrual basis over
the period such Series A Shares are outstanding. A share of preferred
stock has a de minimis amount of redemption premium unless its
redemption price at maturity exceeds its issue price by an amount that
equals or exceeds one-fourth of 1% of the redemption price multiplied
by the number of complete years to maturity. The Company believes
that the Series A Shares should not be treated as having an
unreasonable, or more than a de minimis amount of, redemption premium,
and that, while no regulations have been issued and the matter
accordingly is not free from doubt, it is possible that whether any
Series A Shares received as a stock dividend are treated as having an
unreasonable, or more than a de minimis amount of, redemption premium
will depend upon the value of such Series A Shares on the dividend
payment date. However, many of the rules regarding the applicability
of amended Section 305 are to be set forth in Regulations to be issued
in the future. Thus, due to the lack of directly applicable precedent
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interpreting the 1990 Act's amendments to Section 305(c) of the Code,
the application of such rules is unclear. Moreover, other positions
could reasonably be taken concerning the treatment of these items, and
there can be no assurance of the positions that the IRS might take.
Series A Holders are encouraged to consult their own tax advisors
regarding the application of the redemption premium rules to the
Series A Shares.
BACKUP WITHHOLDING
Under the Code, a holder of the Series A Shares may be subject, under
certain circumstances, to "back-up withholding" at a 31% rate with
respect to dividends received on, or the proceeds of a sale, exchange
or redemption of, the Series A Shares. This withholding generally
applies only if such holder (i) fails to furnish his or her social
security or other taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) is notified by the IRS that he or
she has failed to report properly payments of interest and dividends
and the IRS has notified the Company that he or she is subject to
back-up withholding, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that
the TIN provided is its correct number and that it is not subject to
backup withholding. Any amount withheld from a payment to a holder
under the backup withholding rules is allowable as a credit against
such holder's federal income tax liability, provided that the required
information is provided to the IRS. Holders of the Series A Shares
should consult their tax advisors as to their qualification for
exemption from backup withholding and the procedure for obtaining such
an exemption.
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PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale by the
Selling Stockholders of the Series A Shares offered hereby. Any or
all of the Series A Shares may be sold from time to time to purchasers
directly by any of the Selling Stockholders. Alternatively, the
Selling Stockholders may from time to time offer their Series A Shares
through underwriters, dealers or agents who may receive compensation
in the form of underwriting discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers of the Series A Shares
for whom they may act as agents. The Selling Stockholders and any
such underwriters, dealers or agents that participate in the
distribution of the Series A Shares may be deemed to be underwriters
within the meaning of the Securities Act, and any profit on the sale
of the Series A Shares by them and any discounts, commissions or
concessions received by them may be deemed to be underwriting
discounts and commissions under the Securities Act. The Series A
Shares may be sold from time to time in one or more transactions at a
fixed offering price, which may be changed, or at varying prices
determined at the time of sale or at negotiated prices. Such prices
will be determined by the Selling Stockholders or by an agreement
between the Selling Stockholders and underwriters or dealers. Brokers
or dealers acting in connection with the sale of Series A Shares
contemplated by this Prospectus may receive fees or commissions in
connection therewith.
At the time a particular offer of Series A Shares is made, to the
extent required, a supplement to this Prospectus will be distributed
which will identify and set forth the aggregate number of Series A
Shares being offered and the terms of the offering, including the name
or names of any underwriters, dealers or agents, the purchase price
paid by any underwriter for Series A Shares purchased from the Selling
Stockholders, any discounts, commissions and other items constituting
compensation from the Selling Stockholders and/or the Company and any
discounts, commissions or concessions allowed or reallowed or paid to
dealers, including the proposed selling price to the public. Such
supplement to this Prospectus and, if necessary, a post-effective
amendment to the Registration Statement of which this Prospectus is a
part, will be filed with the Commission to reflect the disclosure of
additional information with respect to the distribution of the Series
A Shares.
The Series A Shares are not listed on any exchange or authorized for
quotation on NASDAQ.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the Series A Shares may not
simultaneously engage in market making activities with respect to the
Series A Shares for a period of nine business days prior to the
commencement of such distribution. In addition and without limiting
the foregoing, the Selling Stockholders and any person participating
in the distribution of the Series A Shares will be subject to
applicable provisions of the Exchange Act and the rules and
regulations thereunder, including without limitation rules 10b-6 and
10b-7, which provisions may limit the timing of purchases and sales of
the Series A Shares by the Selling Stockholders or any such other
person.
In order to comply with certain states' securities laws, if
applicable, the Series A Shares will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In certain
states the Series A Shares may not be sold unless they have been
registered or qualified for sale in such state, or unless an exemption
from registration or qualification is available.
REGISTRATION RIGHTS AGREEMENT. Pursuant to the Registration Rights
Agreement, the Company agreed to file the Registration Statement of
which this Prospectus is a part with the Commission and use its best
efforts to have it declared effective, and to indemnify the Selling
Stockholders and certain other persons against certain liabilities,
including liabilities arising under the Securities Act. Under the
terms of such Registration Rights Agreement, the Company has agreed to
keep such Registration Statement continuously effective for a period
of two years from the date the Registration Statement is first
declared effective by the Commission.
Pursuant to the Registration Rights Agreement, the Company has paid or
will pay any and all expenses incident to the performance of or
compliance with such agreement including registration and filing fees,
fees and expenses incurred in connection with compliance with
securities or blue sky laws of the applicable states, fees and
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disbursements of counsel and independent public accountants for the
Company and the fees and expenses of counsel to the Selling
Stockholders.
In the Registration Rights Agreement, the Company agreed to indemnify
and hold harmless, to the extent permitted by law, the Selling
Stockholders and their officers, directors, agents and employees and
each person who controls a Selling Stockholder and the officers,
directors, agents and employees of such controlling person, and any
financial or investment adviser thereof, against all losses, claims,
damages, liabilities and reasonable costs and expenses (collectively
"Losses"), arising out of or based upon any untrue or alleged untrue
statement of material fact contained in this Prospectus or the
Registration Statement of which it is a part, any amendment of
supplement hereto or thereto, or any omission or alleged omission of a
material fact required to be stated herein or therein or necessary to
make the statements herein or therein not misleading, except to the
extent that the same arise out of or are based upon information
furnished in writing to the Company by such Selling Stockholders
expressly for use herein or therein. The Selling Stockholders also
have agreed to indemnify, to the extent permitted by law, the Company
and its officers, directors, agents and employees, and each person who
controls the Company and the officers, directors, agents and employees
of such controlling persons against Losses arising out of or based
upon any untrue statement of material fact contained in this
Prospectus or the Registration Statement of which it is a part, any
amendment or supplement hereto or thereto or any omission or alleged
omission to state herein or therein a material fact required to be
stated herein or therein or necessary to make the statements herein or
therein not misleading to the extent such statement or omission is
contained in information provided by such Selling Stockholder for
inclusion herein or therein.
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SELLING STOCKHOLDERS
The following table provides certain information as of the date of
this Prospectus with respect to each Selling Stockholder for whose
account Series A Shares may be sold pursuant to this Prospectus, which
information has been furnished to the Company by the Selling
Stockholders and other sources that the Company has not verified.
Because the Selling Stockholders may sell all or some part of the
Series A Shares that they hold pursuant to this Prospectus, no
estimate can be given as to the amount of Series A Shares that will be
held by the Selling Stockholders at any time subsequent to the date of
this Prospectus. See "Plan of Distribution." Other than Bear,
Stearns & Co. Inc., none of the Selling Stockholders has had a
material relationship within the past three years with the Company or
any of its subsidiaries, other than as a result of the ownership of
the securities of the Company. Bear Stearns & Co. Inc. and its
affiliates have previously performed investment banking and other
financial and financial advisory services for the Company for which
they have received compensation during the past three years, including
acting as placement agent in connection with the initial private
placement of the Series A Shares in August of 1992 and acting as
underwriter in connection with the Senior Note Offering in December of
1993.
The Series A Shares offered by this Prospectus may be offered from
time to time in whole or in part by the persons named below or by
their transferees, as to whom applicable information will, to the
extent required, be set forth in a prospectus supplement.
Name Number of Shares
Bear, Stearns & Co. Inc. 55,000
Blackstone Family Investment Fund L.P. 20,000
The Brinson Trust Company, as Trustee of the
Brinson Trust Company Collective Investment
Trust for Pension and Profit Sharing Trusts --
The High Yield U.S. Bond Fund 50,000
General Motors Corp. High Yield 80,000
Hoechst Celanese Corp. Employee Benefit Trust 70,000
IDS Extra Income Fund 200,000
Jerome Kohlberg, Jr. 10,000
Elise B. Lufkin 80,000
Metropolitan Life State Street High Income Fund 120,000
Morgan Guaranty Trust Company
of New York, as Trustee of a Commingled
Pension Trust Fund 400,000
Northeast Investors Trust 95,000
The Northern Trust Company,
as Trustee for Allied Corporation 200,000
North Broward Radiologists P.A. Profit Sharing
Trust 10,000
Prudential High Yield Fund 200,000
Pru-Series High Yield 40,000
Reliance Insurance Company 540,000
Siemens Capital Corporation 30,000
---------
2,200,000
=========
LEGAL MATTERS
The validity of the Series A Shares will be passed upon for the
Company by Gibson, Dunn & Crutcher, New York, New York.
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EXPERTS
The financial statements of the Company as of January 3, 1993 and
December 29, 1991 and December 30, 1990 appearing in this Prospectus
and Registration Statement have been audited by Coopers & Lybrand,
independent auditors as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of ABF as of December 31, 1992 and December
31, 1991 appearing in this Prospectus and Registration Statement have
been included herein in reliance on the report of Grant Thorton,
independent accountants, given the authority of that firm as experts
in accounting and auditing.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE> <CAPTION>
PAGE
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COLOR TILE, INC.
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Report of Independent Accountants....................................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheet as of January 3, 1993 and December 29, 1991............................... F-3
Consolidated Statement of Operations for the years ended January 3, 1993,
December 29, 1991 and December 30, 1990............................................................ F-4
Consolidated Statement of Common Stockholder's Equity for the years ended
January 3, 1993, December 29, 1991 and December 30, 1990........................................... F-5
Consolidated Statement of Cash Flows for the years ended January 3, 1993,
December 29, 1991 and December 30, 1990............................................................ F-6
Notes to Consolidated Financial Statements........................................................... F-7
Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet as of October 3, 1993 and January 3, 1993....................... F-21
Condensed Consolidated Statement of Operations for the nine months ended October 3, 1993 and
September 27, 1992........................................................................................ F-22
Condensed Consolidated Statement of Common Stockholder's Equity for
the nine months ended October 3, 1993.............................................................. F-23
Condensed Consolidated Statement of Cash Flows for the nine months ended
October 3, 1993 and September 27, 1992............................................................. F-24
Notes to Condensed Consolidated Financial Statements................................................. F-25
AMERICAN BLIND FACTORY, INC.
- ----------------------------------------------------------------------------------------------------------
Report of Independent Certified Public Accountants...................................................... F-27
Financial Statements:
Balance Sheets as of December 31, 1992 and December 31, 1991......................................... F-28
Statement of Earnings and Retained Earnings for the years ended December 31, 1992, December 31, 1991
and December 31, 1990..................................................................................... F-29
Statements of Cash Flows for the years ended December 31, 1992, December 31, 1991 and December 31,
1990...................................................................................................... F-30
Notes to Financial Statements........................................................................ F-31
Interim Condensed Financial Statements (Unaudited):
Condensed Balance Sheets as of September 30, 1993 and December 31, 1992.............................. F-33
Condensed Statements of Earnings and Retained Earnings for the nine months ended September 30, 1993
and September 30, 1992.................................................................................... F-34
Condensed Statements of Cash Flows for the nine months ended September 30, 1993 and September 30,
1992...................................................................................................... F-35
Notes to Condensed Financial Statements.............................................................. F-36
COLOR TILE, INC.
- ----------------------------------------------------------------------------------------------------------
Consolidated Financial Statement Schedules for the years ended January 3, 1993, December 29, 1991 and
December 30, 1990:
Schedule V -- Property, Plant and Equipment.................................................... S-1
Schedule VI -- Accumulated Depreciation and Amortization of Property, S-2
Plant and Equipment..............................................................
Schedule VIII -- Valuation and Qualifying Accounts................................................ S-3
Schedule X -- Supplementary Statement of Operations Information................................ S-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
COLOR TILE, INC.
Fort Worth, Texas
We have audited the consolidated financial statements and the financial
statement schedules of Color Tile, Inc. listed in the index on page F-1 of this
Prospectus. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Color Tile,
Inc. as of January 3, 1993 and December 29, 1991 and the consolidated results of
its operations and its cash flows for the years ended January 3, 1993, December
29, 1991 and December 30, 1990 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND
Fort Worth, Texas
April 1, 1993
F-2
<PAGE>
COLOR TILE, INC.
CONSOLIDATED BALANCE SHEET
JANUARY 3, 1993 AND DECEMBER 29, 1991
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE> <CAPTION>
JANUARY 3, 1993 DECEMBER 29, 1991
--------------- ------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................. $ $ 73
Accounts and notes receivable, net of allowance for bad debts of $415 and
$305........................................................................ 12,643 7,939
Inventories............................................................... 74,045 75,507
Deferred income taxes..................................................... 3,830 2,337
Other current assets...................................................... 3,567 3,143
--------------- ------------------
Total Current Assets.............................................. 94,085 88,999
--------------- ------------------
Property, plant and equipment, net.......................................... 121,949 142,234
Goodwill, net............................................................... 173,847 181,836
Other intangible assets, net................................................ 45,377 63,291
Deferred financing costs, net............................................... 13,891 18,296
Deferred income taxes....................................................... 10,322 8,431
Other assets................................................................ 3,521 1,897
--------------- ------------------
Total Assets...................................................... $ 462,992 $ 504,984
--------------- ------------------
--------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................................... $ 15,073 $ 15,260
Accounts payable.......................................................... 38,803 37,870
Accrued expenses and other current liabilities............................ 28,955 34,463
--------------- ------------------
Total Current Liabilities......................................... 82,831 87,593
--------------- ------------------
Long-term debt............................................................ 239,689 290,475
Other noncurrent liabilities.............................................. 9,087 22,419
--------------- ------------------
Total Liabilities................................................. 331,607 400,487
--------------- ------------------
Commitments and contingencies (Notes 7 and 9)
Redeemable preferred stock, $86,641 liquidation value at January 3, 1993.... 82,596 26,556
Common Stockholder's Equity:
Common stock, $.01 par value, 1,000,000 shares authorized, 101 shares
issued and outstanding
Additional paid-in capital................................................ 117,522 123,746
Accumulated deficit....................................................... (68,733) (45,805)
--------------- ------------------
Total Common Stockholder's Equity................................. 48,789 77,941
--------------- ------------------
Total Liabilities and Stockholders' Equity........................ $ 462,992 $ 504,984
--------------- ------------------
--------------- ------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
COLOR TILE, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JANUARY 3, 1993, DECEMBER 29, 1991 AND DECEMBER 30, 1990
(AMOUNTS IN THOUSANDS)
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29, DECEMBER 30,
1993 1991 1990
----------- ------------- -------------
<S> <C> <C> <C>
Systemwide Sales (Note 1)............................................. $ 586,007 $ 546,761 $ 526,273
----------- ------------- -------------
----------- ------------- -------------
Net Sales............................................................. $ 580,385 $ 544,315 $ 525,819
----------- ------------- -------------
Costs and Expenses:
Cost of sales....................................................... 311,368 292,517 274,686
Selling, general and administrative................................. 208,796 201,237 195,056
Depreciation and amortization....................................... 28,683 29,202 27,781
Special charges..................................................... 30,000
----------- ------------- -------------
Total Costs and Expenses......................................... 578,847 522,956 497,523
----------- ------------- -------------
Operating income................................................. 1,538 21,359 28,296
Gain on sale of assets.............................................. 4,007
Interest expense (net of interest income of $102, $540, and
$1,479)............................................................... (25,697) (51,986) (50,100)
----------- ------------- -------------
Loss before income taxes and extraordinary item.................. (20,152) (30,627) (21,804)
Provision (Benefit) for Income Taxes:
Current............................................................. 1,240 (2,133) 336
Deferred............................................................ 57
----------- ------------- -------------
1,240 (2,133) 393
----------- ------------- -------------
Loss before extraordinary item................................... (21,392) (28,494) (22,197)
Extraordinary gain (loss) on early extinguishment of debt, net of
tax................................................................... (601) 4,886
----------- ------------- -------------
Net Loss.............................................................. $ (21,993) $ (23,608) $ (22,197)
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
COLOR TILE, INC.
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED JANUARY 3, 1993, DECEMBER 29, 1991 AND DECEMBER 30, 1990
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE> <CAPTION>
COMMON STOCK ADDITIONAL TOTAL COMMON
------------------------ PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1990................................... 100 $ 50,000 $ 50,000
Senior Cumulative Preferred Stock dividends, declared and
undeclared................................................. (2,900) (2,900)
Accretion of difference between redemption value and
proceeds of Senior Cumulative Preferred Stock............ (79) (79)
Net loss................................................... $ (22,197) (22,197)
----- ----- ----------- ------------ --------------
Balance, December 30, 1990................................. 100 47,021 (22,197) 24,824
----- ----- ----------- ------------ --------------
Issuance of common stock................................... 1 79,704 79,704
Senior Cumulative Preferred Stock dividends, declared and
undeclared................................................. (2,900) (2,900)
Accretion of difference between redemption value and
proceeds of Senior Cumulative Preferred Stock............ (79) (79)
Net loss................................................... (23,608) (23,608)
----- ----- ----------- ------------ --------------
Balance, December 29, 1991................................. 101 123,746 (45,805) 77,941
----- ----- ----------- ------------ --------------
Senior Cumulative Preferred Stock dividends, declared and
undeclared................................................. (2,923) (2,923)
Accretion of difference between redemption value and
proceeds of Senior Cumulative Preferred Stock............ (79) (79)
Senior Increasing Rate Preferred Stock dividends, declared
and undeclared............................................. (3,078) (3,078)
Accretion of difference between redemption value and
proceeds of Senior Increasing Rate Preferred Stock....... (144) (144)
Cumulative translation adjustment.......................... (935) (935)
Net loss................................................... (21,993) (21,993)
----- ----- ----------- ------------ --------------
Balance, January 3, 1993................................... 101 $ 117,522 $ (68,733) $ 48,789
----- ----- ----------- ------------ --------------
----- ----- ----------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
COLOR TILE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 3, 1993, DECEMBER 29, 1991 AND DECEMBER 30, 1990
(AMOUNTS IN THOUSANDS)
<TABLE> <CAPTION>
JANUARY 3,
1993 DECEMBER 29, 1991 DECEMBER 30, 1990
-------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (21,993) $ (23,608) $ (22,197)
-------------- ----------------- -----------------
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization......................... 30,177 33,179 30,348
Deferred interest on junior subordinated notes........ 6,860 3,825
Extraordinary (gain) loss on early extinguishment of
debt...................................................... 910 (7,403)
Special charges....................................... 30,000
(Gain) loss on sale of assets......................... (4,327) 613 102
(Increase) decrease in accounts receivable............ (5,731) 210 7,243
(Increase) decrease in inventories.................... (1,813) 4,746 1,379
Increase in other current assets...................... (2,206) (2,489) (1,056)
Decrease in other assets.............................. 3,467 4,286
Increase (decrease) in accounts payable............... 1,179 (1,024) 7,844
Decrease in accrued expenses.......................... (7,407) (10,827) (22,870)
Increase (decrease) in layaways and deposits.......... 213 (138) 979
Decrease in other liabilities......................... (8,457) (7,549)
-------------- ----------------- -----------------
Total adjustments................................ 36,005 20,464 27,794
-------------- ----------------- -----------------
Cash provided by (used in) operating activities....... 14,012 (3,144) 5,597
-------------- ----------------- -----------------
Cash flows from investing activities:
Purchases of property, plant and equipment.............. (13,938) (9,517) (12,133)
Proceeds from sale of assets............................ 14,015 1,129 131
Purchase of Canadian operations......................... (7,056)
Other investing activities.............................. (4,065) 13,575 (1,395)
-------------- ----------------- -----------------
Cash provided by (used in) investing activities....... (3,988) 5,187 (20,453)
-------------- ----------------- -----------------
Cash flows from financing activities:
Borrowings on revolving line of credit.................. 241,414 8,910 28,829
Payments on revolving line of credit.................... (231,845)
Payments on long-term debt.............................. (20,295) (5,534) (27,724)
Borrowings to fund repurchase of debt................... 63,436 125,673
Issuance of common stock................................ 79,704
Issuance of Senior Increasing Rate
Preferred Stock....................................... 51,038
Dividends paid on Senior Increasing Rate Preferred
Stock..................................................... (1,224)
Repurchase of debt...................................... (111,958) (211,681)
-------------- ----------------- -----------------
Cash provided by (used in) financing activities....... (9,434) (2,928) 1,105
-------------- ----------------- -----------------
Effect of exchange rate differences on cash............... (663)
-------------- ----------------- -----------------
Decrease in cash and cash equivalents..................... (73) (885) (13,751)
Cash and cash equivalents at beginning of period........ 73 958 14,709
-------------- ----------------- -----------------
Cash and cash equivalents at end of period.............. $ 0 $ 73 $ 958
-------------- ----------------- -----------------
-------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
On December 28, 1989, Color Tile Holdings, Inc. acquired all of the
outstanding common stock of Color Tile, Inc. (the "1989 Merger"). For financial
reporting purposes, the effective date of the 1989 Merger and certain related
transactions is January 1, 1990.
The allocation of the purchase price was based upon the estimated fair
values as of January 1, 1990 of the assets and liabilities of Color Tile, Inc.
and its subsidiaries (collectively, the "Company"), with the excess of the
purchase price over the fair value of the net assets acquired allocated to
goodwill.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Color Tile, Inc. and its subsidiaries after elimination of significant
intercompany accounts and transactions.
Foreign Currency Translation
For foreign operations, whose functional currency is not U.S. dollars, the
balance sheet is translated at the year end exchange rate. Resulting translation
adjustments are made to accumulated deficit. Income statement transactions are
translated at the average exchange rate for the year. Any exchange gain or loss
is credited or charged to operations.
Accounting Period
The Company operates on a fifty-two, fifty-three week accounting year. The
year ended January 3, 1993 was comprised of 53 weeks. The years ended December
29, 1991 and December 30, 1990 were each comprised of 52 weeks.
Inventories
Inventories are stated at the lower of cost or market. Cost of sales is
determined principally by the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property, plant and equipment, including assets under capital leases, are
stated at cost and are depreciated on a straight-line basis over the estimated
useful lives of the assets.
Betterments, renewals and repairs that extend the life of the asset are
capitalized; other repairs and maintenance are expensed as incurred. Upon
retirement or other disposal, the asset cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to operations.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are amortized primarily on a
straight-line basis over the estimated useful lives of the assets or the terms
of the leases. At each balance sheet date, management assesses whether there has
been a permanent impairment in the value of goodwill and other intangible assets
by considering factors such as expected future operating income, current
operating results, and other economic factors. Management believes no impairment
has occurred.
F-7
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Software Development Costs
Significant internal software development costs are being capitalized and
amortized over their estimated useful lives, principally five years, commencing
when the software is installed and available for use. Unamortized software costs
and amortization for the periods presented are as follows:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29, DECEMBER 30,
1993 1991 1990
----------- ------------- -------------
<S> <C> <C> <C>
Unamortized software cost......................... $ 3,082 $ 3,146 $ 3,458
Amortization expense.............................. 1,444 605 464
</TABLE>
Deferred Financing Costs
Deferred financing costs are amortized over the term of the related debt.
Income Taxes
The Company has adopted the liability method of accounting for income taxes
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (FAS No. 109) as of December 31, 1990 (See Note
8). Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities and net
operating loss carryforwards for which income tax benefits will be realized in
future years.
Systemwide Sales
Systemwide sales include retail sales of all Company Stores, retail sales
of all Franchised Stores and sales of manufactured products to outside third
parties.
Franchise Revenue Recognition
Initial franchise fees are recognized as income when the Company has
substantially performed all of its material obligations under the franchise
agreement. Franchise royalty fees and advertising contributions are recognized
as income based on a percentage of franchise sales. Sales of inventories to
franchisees are recognized as sales when shipped to the franchisee.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers short-term
investments with maturities of three months or less when purchased to be cash
equivalents. Cash equivalents are stated at cost, which approximates market
value.
Reclassification
Certain balances for the years ended December 29, 1991 and December 30,
1990 have been reclassified to conform to the presentation adopted for the year
ended January 3, 1993. These reclassifications did not result in a change in net
loss or Common Stockholder's equity.
F-8
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. INVENTORIES:
Inventory categories are as follows:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
1993 1991
----------- -------------
<S> <C> <C>
Finished goods................................................... $ 71,994 $ 71,216
Work in progress................................................. 557 1,023
Raw materials.................................................... 1,494 3,268
----------- -------------
$ 74,045 $ 75,507
----------- -------------
----------- -------------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and estimated useful lives at January 3, 1993
and December 29, 1991 consists of the following:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
LIFE 1993 1991
------------ ----------- -------------
<S> <C> <C> <C>
Land.............................................. $ 26,790 $ 27,626
Buildings......................................... 35 years 26,363 22,875
Assets under capital leases....................... 3-35 years 51,121 57,759
Leasehold improvements............................ 5-10 years 27,772 23,523
Fixtures and equipment............................ 2-15 years 44,630 39,396
Construction in progress.......................... 884 2,483
----------- -------------
177,560 173,662
Less: Accumulated depreciation.................... (55,611) (31,428)
----------- -------------
$ 121,949 $ 142,234
----------- -------------
----------- -------------
</TABLE>
Depreciation expense was $17,336, $16,970 and $15,449 for the years ended
January 3, 1993, December 29, 1991 and December 30, 1990, respectively.
4. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill and other intangible assets and related amortization periods at
January 3, 1993 and December 29, 1991 consists of the following:
<TABLE> <CAPTION>
AMORTIZATION JANUARY 3, DECEMBER 29,
PERIOD 1993 1991
------------- ----------- -------------
<S> <C> <C> <C>
Goodwill......................................... 40 years $ 188,585 $ 191,973
Less: Accumulated amortization................. (14,738) (10,137)
----------- -------------
Goodwill, net.................................. 173,847 181,836
Other intangible assets
Favorable operating leases and lease options... Lease term 44,316 48,247
Other.......................................... 5-40 years 32,058 29,715
----------- -------------
76,374 77,962
Less: Accumulated amortization................... (30,997) (14,671)
----------- -------------
Other intangible assets, net..................... 45,377 63,291
----------- -------------
$ 219,224 $ 245,127
----------- -------------
----------- -------------
</TABLE>
F-9
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at January 3, 1993 and
December 29, 1991 consists of the following:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
1993 1991
----------- -------------
<S> <C> <C>
Employee compensation............................................ $ 6,581 $ 4,925
Accrued payroll, property and sales tax.......................... 5,173 5,761
Accrued interest................................................. 225 4,466
Other accrued expenses........................................... 10,890 13,438
Layaways and deposits............................................ 6,086 5,873
----------- -------------
$ 28,955 $ 34,463
----------- -------------
----------- -------------
</TABLE>
6. LONG-TERM DEBT:
Long-term debt at January 3, 1993 and December 29, 1991 is comprised of the
following:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
1993 1991
----------- -------------
<S> <C> <C>
Term loan........................................................ $ 140,000 $ 102,350
Revolving line of credit......................................... 85,300 59,945
Mortgage loans on real estate.................................... 4,127 5,387
Obligations under capital leases................................. 25,335 30,972
12 3/8 Senior Notes.............................................. 63,712
13% Senior Subordinated Notes.................................... 20,319
13 3/4% Subordinated Debentures.................................. 23,050
----------- -------------
Total long-term debt............................................. 254,762 305,735
Less: Current portion............................................ (15,073) (15,260)
----------- -------------
$ 239,689 $ 290,475
----------- -------------
----------- -------------
</TABLE>
The Company has a Credit Agreement with a group of commercial banks which
provides for a $150,000 term loan facility due in varying amounts through 1998
and a $100,000 revolving line of credit facility expiring in 1998. The term loan
facility has been used to repurchase the Company's outstanding notes and
debentures and for payment of fees and expenses related to the repurchase of
those notes and debentures. The entire $100,000 revolving line of credit can be
used to fund working capital requirements and to repurchase outstanding bonds.
The Company's Credit Agreement contains certain covenants that may affect
the operations of the Company. These covenants, among other things, restrict,
subject to certain limitations, the Company's ability to incur additional
indebtedness or issue redeemable preferred stock, enter into transactions with
affiliates, make payments in respect of its capital stock, make capital
expenditures, sell assets and purchase subordinated debt. At January 3, 1993, in
accordance with these covenants, the Company was restricted from paying
dividends on its common stock. Such covenants also require the Company to
maintain certain financial ratios.
Trade and certain standby letters of credit, which amounted to $5,720 at
January 3, 1993, reduce the amounts available for additional borrowings and
letters of credit under the revolving line of credit
F-10
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. LONG-TERM DEBT:--(CONTINUED)
facility. At January 3, 1993, the Company had approximately $9,000 available
under the revolving line of credit facility for additional working capital
borrowings.
The outstanding borrowings under the Credit Agreement accrue interest at
the higher of the bank's announced reference rate or 1/2% above the federal
funds rate, in each case plus 1 1/2% (7 1/2% at January 3, 1993). Outstanding
borrowings can be converted to Eurodollar loans which accrue interest at LIBOR
plus 2 3/4%. In accordance with terms of the Credit Agreement, certain
borrowings have been converted to Eurodollar loans which accrued interest at
6.00% to 6.31% at January 3, 1993. Commercial letter of credit fees are 3/4% of
the stated amount and standby letter of credit fees are 2 1/2% per annum. In
addition, the Company is required to pay commitment fees of 1/2% on available
lines of credit. The Company paid commitment fees of approximately $124 and $507
for the years ended January 3, 1993 and December 29, 1991, respectively. The
Credit Agreement, which expires on December 31, 1998, is collateralized by
substantially all of the assets of the Company.
The Company has purchased interest rate caps in an aggregate notional
amount of $125,000, which establishes a maximum total borrowing rate in respect
of such notional amount of 9% per annum through April 20, 1994.
The estimated fair value of the Company's long-term debt approximates the
carrying amount based on discounted cash flows and book values.
Mortgage loans on real estate have interest rates ranging from 9.25% to
14.75% and are payable monthly in arrears.
All remaining 12 3/8% Senior Notes were redeemed on October 15, 1992 at a
premium of 1.8%. The remaining 13% Senior Subordinated Notes due October 15,
1996 were redeemed on April 15, 1992, at a premium of 5.8%. The remaining 13
3/4% Subordinated Debentures due October 15, 1998 were redeemed April 15, 1992
at a premium of 7.0%.
During 1992 and 1991, the Company repurchased all of the aggregate
principal amount of the 12 3/8% Senior Notes, 13% Senior Subordinated Notes and
13 3/4% Subordinated Debentures with proceeds from the Company's term loan, line
of credit facility and the proceeds of the private placement of the Class B,
Series A Senior Increasing Rate Preferred Stock in August 1992. In conjunction
with these early extinguishments of debt, the Company recorded a pretax loss of
$910 in 1992 and pretax gain of $7,403 in 1991, which, after an income tax
benefit of $309 and a tax provision of $2,517, respectively, were recorded as
extraordinary items in the consolidated statement of operations.
Future minimum payments of long-term debt are as follows:
<TABLE>
<S> <C>
1993.................................................................. $ 15,073
1994.................................................................. 20,143
1995.................................................................. 24,142
1996.................................................................. 28,285
1997.................................................................. 32,980
Thereafter............................................................ 134,139
-----------
$ 254,762
-----------
-----------
</TABLE>
F-11
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. CAPITAL AND OTHER LEASES:
Retail operations of Company Stores are conducted in 633 leased and 138
owned facilities. Under the lease agreements for leased facilities, initial
terms normally range from ten to twenty-five years, most of which include
renewal options. Leases are generally triple net, and provide that the Company
will pay real estate taxes, insurance, common area maintenance and other
operating costs in addition to specified rental amounts. Certain leases contain
rental escalation provisions and/or contingent rentals based on sales.
The building portions of minimum rentals which meet the criteria of capital
leases are capitalized, and the related assets and obligations are recorded
using the rate implicit in the lease. The asset is amortized on a straight-line
basis over the lesser of the useful life of the building or the lease term.
Assets under capital leases consist of the following:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
1993 1991
---------- -------------
<S> <C> <C>
Buildings (manufacturing and distribution facilities)............ $ 5,612 $ 11,785
Buildings (retail stores)........................................ 37,470 37,470
Fixtures and equipment........................................... 8,039 8,504
---------- -------------
51,121 57,759
Less: Accumulated amortization................................... (18,479) (13,456)
---------- -------------
$ 32,642 $ 44,303
---------- -------------
---------- -------------
</TABLE>
Certain other noncancellable leases and the land portion of the minimum
rentals under building capital leases are accounted for as operating leases.
Total rental expense was as follows:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
1993 1991
----------- -------------
<S> <C> <C>
Minimum rentals.................................................. $ 27,367 $ 23,989
Contingent rentals............................................... 754 976
Less: Sublease rentals........................................... (4,547) (4,518)
----------- -------------
$ 23,574 $ 20,447
----------- -------------
----------- -------------
</TABLE>
Minimum rental commitments are summarized as follows:
<TABLE> <CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
<S> <C> <C>
1993................................................................ $ 6,774 $ 26,722
1994................................................................ 6,456 24,525
1995................................................................ 4,999 21,595
1996................................................................ 3,765 19,692
1997................................................................ 3,175 17,610
Thereafter.......................................................... 8,630 70,349
--------- -----------
Total minimum lease payments........................................ 33,799 $ 180,493
-----------
-----------
Less: Amount representing interest.................................. (8,464)
---------
Present value of net minimum lease payments......................... $ 25,335
---------
---------
</TABLE>
F-12
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. CAPITAL AND OTHER LEASES:--(CONTINUED)
Minimum payments for capital and operating leases have not been reduced by
minimum sublease rentals of approximately $3,128 for capital leases and $5,490
for operating leases which are due in the future under noncancellable subleases.
In addition, minimum payments do not include contingent rentals which may
be paid under certain store leases on the basis of a percentage of sales in
excess of stipulated amounts or future rental increases as periodically
determined.
8. INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29, DECEMBER 30,
1993 1991 1990
----------- ------------- ---------------
<S> <C> <C> <C>
Current:
Federal.............................................................. $ 544 $ (2,517)
State................................................................ 574 384 $ 336
Foreign.............................................................. 122
----------- ------------- ------
Provision (benefit) for income taxes................................. 1,240 (2,133) 336
Provision (benefit) for current taxes
included in extraordinary item.................................... (309) 2,517
----------- ------------- ------
931 384 336
----------- ------------- ------
Deferred:
Federal.............................................................. 57
----------- ------------- ------
Provision for income taxes........................................... $ 931 $ 384 $ 393
----------- ------------- ------
----------- ------------- ------
</TABLE>
The consolidated effective tax provision (benefit) of the Company differs
from the tax that would be expected from applying the U.S. statutory rate as
follows:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29, DECEMBER 30,
1993 1991 1990
----------- --------------- ---------------
<S> <C> <C> <C>
Tax (benefit) at U.S. statutory rates............................... (34.0)% (34.0)% (34.0)%
Extraordinary item.................................................. (1.6) 8.2
State income taxes, net of federal tax benefit...................... 1.9 0.8 1.2
Foreign income taxes................................................ 0.6
Losses providing no tax benefit..................................... 29.6 20.9 28.1
Amortization of goodwill............................................ 6.9 5.4 6.5
Alternative minimum tax............................................. 1.2
----------- ------ ------
Effective tax rate.................................................. 4.6% 1.3% 1.8%
----------- ------ ------
----------- ------ ------
</TABLE>
F-13
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. INCOME TAXES:--(CONTINUED)
Deferred federal income taxes have resulted from temporary differences in
the recognition of revenue and expenses for tax and financial reporting
purposes. The source of these differences and the related tax effects are as
follows:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29, DECEMBER 30,
1993 1991 1990
----------- ------------- -------------
<S> <C> <C> <C>
Depreciation................................................ $ (452) $ 467 $ 1,245
Computer software........................................... 1,048
Inventory reserves.......................................... 178 (455) 1,977
Capital leases.............................................. (658) (764) (869)
Favorable leasehold interest................................ 528 536 540
Other reserves, net......................................... (9,889) 243 343
Layaway deposits............................................ (41) (10) (1,266)
Accrued expenses............................................ 2,374 2,402 1,047
Effect of tax net operating losses.......................... 6,976 (50) (4,084)
Premium on extinguishment of debt........................... 2,012 (1,922)
Gain on sale of assets...................................... (899)
Other, net.................................................. (129) (447) 76
----------- ------------- -------------
Deferred federal income tax................................. $ 0 $ 0 $ 57
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
Effective December 31, 1990, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". In accordance with
the provisions of this statement, the Company elected not to restate prior years
and has determined that the cumulative effect of implementation was not
significant.
The components of the net deferred tax asset recognized are as follows:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
1993 1991
---------- -------------
<S> <C> <C>
Deferred tax liability
Depreciation................................................... $ (4,355) $ (5,706)
---------- -------------
Deferred tax asset
Accrued liabilities............................................ 2,227 4,601
Other, net..................................................... 18,080 10,401
Tax net operating loss carryforward............................ 30,086 32,071
---------- -------------
Deferred tax asset.......................................... 50,393 47,073
Less: Valuation allowance................................... (31,886) (30,599)
---------- -------------
Deferred tax asset, net of valuation allowance............ 18,507 16,474
---------- -------------
Net deferred tax asset........................................... $ 14,152 $ 10,768
---------- -------------
---------- -------------
</TABLE>
F-14
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
8. INCOME TAXES:--(CONTINUED)
As of January 3, 1993, the Company has net operating loss carryforwards of
approximately $87,996 and $68,266 for federal income tax and alternative minimum
tax purposes, respectively. These carryforwards will expire from 2001 through
2006. Subsequently recognized tax benefits of the valuation allowance will
reduce goodwill in the amount of $5,425.
9. COMMITMENTS AND CONTINGENCIES:
There are various claims and pending actions incident to the business
operations of the Company. In the opinion of management, the Company's potential
liability in all pending actions and claims, in the aggregate, is not material.
10. REDEEMABLE PREFERRED STOCK:
Redeemable preferred stock at January 3, 1993 and December 29, 1991 is
comprised of the following:
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29,
1993 1991
----------- -------------
<S> <C> <C>
Class B, Series A Senior Increasing Rate Preferred Stock,
$56,574 liquidation value at January 3, 1993........................................ $ 53,035
Senior Cumulative Preferred Stock, $30,067 liquidation value
at January 3, 1993.................................................................. 29,561 $ 26,556
----------- -------------
Redeemable preferred stock............................................................ $ 82,596 $ 26,556
----------- -------------
----------- -------------
</TABLE>
On August 13, 1992, the Company issued 2,200,000 shares of Class B, Series
A Senior Increasing Rate Preferred Stock, $1 par value, $25 liquidation value.
The Class B, Series A Senior Increasing Rate Preferred Stock provides for the
payment of cumulative quarterly cash dividends equal to $.8125 per share.
Dividends paid to date are $.5564 per share ($.8125 prorated for the period from
August 13, 1992 through October 15, 1992), and $.8125 per share for the
quarterly dividends payable on October 15, 1992 and January 15, 1993,
respectively. The quarterly dividend applicable to each dividend thereafter will
increase by $.03125 per share over the previously prevailing quarterly dividend
on each July 15 and January 15, commencing with the quarterly dividend payable
for the quarter beginning on January 15, 1993, up to a maximum quarterly
dividend of $1.0625 per share. Quarterly dividends payable in excess of $.9375
per share may, at the option of the Company, be paid to holders of the shares in
whole or in part by the issuance of additional shares at the rate of one
additional share for each $25.00 of such dividends not paid in cash. The
difference between the ultimate redemption value and the initial carrying value
is being accreted over the redemption period. The Class B, Series A Senior
Increasing Rate Preferred Stock is subject to mandatory redemption at $25.00 per
share, plus accrued but unpaid dividends on January 15, 2003. The Class B,
Series A Senior Increasing Rate Preferred Stock may be redeemed, in whole or in
part, on or after January 15, 1993 at prices beginning at $25.25 on January 15,
1993 and increasing to $26.00 per share on July 15, 1995 and then subsequently
declining to $25.00 at July 15, 1998 and thereafter. The carrying amount of the
Class B, Series A Senior Increasing Rate Preferred Stock has been increased
$1,854 for undeclared and unpaid cash dividends as of January 3, 1993.
F-15
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
10. REDEEMABLE PREFERRED STOCK:--(CONTINUED)
On October 20, 1986, the Company issued 200,000 shares of Senior Cumulative
Preferred Stock, $1 par value, $100 liquidation value. From July 15, 1989
through January 15, 1995, the Senior Cumulative Preferred Stock provides for the
accrual, on a quarterly basis, of cumulative dividends in the form of additional
shares of Senior Cumulative Preferred Stock at the annual rate of .1450 shares
per share of Senior Cumulative Preferred Stock payable January 15, 1995. Such
accrued dividends do not compound additional dividends. Commencing January 15,
1995, the Senior Cumulative Preferred Stock provides for cumulative dividends at
the annual rate of 14.50% per share payable quarterly after January 15, 1995.
Dividends which are due and unpaid accrue additional dividends, compounding on a
quarterly basis, at the rate of $14.50 per share per annum. The difference
between the ultimate redemption value and the initial carrying value is being
accreted over the redemption period. The Senior Cumulative Preferred Stock is
subject to mandatory redemption in an amount equal to 50% of the outstanding
shares on October 15, 1998 and the remaining 50% of such outstanding shares on
October 15, 1999. Certain features of the Senior Cumulative Preferred Stock were
modified in connection with the 1989 Merger. As of January 3, 1993 and December
29, 1991, the carrying amounts of the Senior Cumulative Preferred Stock have
been increased by approximately $10,067 and $7,142, respectively, representing
cumulative dividends not currently declared or paid, but which are payable under
the mandatory redemption features.
The liquidation values of the Company's redeemable preferred stocks, which
are not actively traded or quoted in any market, approximate the estimated fair
value of those securities.
11. SPECIAL CHARGES:
During the fourth quarter of fiscal 1992, following a detailed study of its
operations, the Company recorded a write-down of certain property, plant,
equipment and intangible assets, and established provisions for restructuring of
operations, store closures and conversion of certain stores to Franchised
Stores. These write-downs and provisions aggregated $30,000 and are reflected as
special charges in the Consolidated Statement of Operations.
12. GAIN ON SALE OF ASSETS:
Effective May 15, 1992, the Company completed the sale of its hardwood
flooring manufacturing plant located in Melbourne, Arkansas ("Wood Plant") and
realized a pretax gain of $4,007. The proceeds of the sale, before fees and
related expenses, included $11,809 in cash and the buyer's assumption of certain
liabilities, including the defeasance of approximately $2,600 of outstanding
industrial revenue bonds related to the Wood Plant. In conjunction with the sale
of the Wood Plant, the Company entered into a supply agreement to purchase
minimum annual levels of wood flooring products from the Wood Plant throughout
the six-year term of the agreement.
F-16
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
13. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE> <CAPTION>
FOR THE YEARS ENDED
-----------------------------------------
JANUARY 3, DECEMBER 29, DECEMBER 30,
1993 1991 1990
----------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid........................................................ $ 28,320 $ 55,950 $ 48,418
Income taxes paid.................................................... 1,281 450 572
Noncash investing and financing activities:
Capital lease obligations incurred for property, plant and
equipment.............................................................. 3,400
Senior Increasing Rate Preferred Stock unpaid dividends.............. 1,854
Senior Cumulative Preferred Stock dividends in kind.................. 2,923 2,900 2,900
</TABLE>
14. TRANSACTIONS WITH RELATED PARTIES:
During the years ended December 29, 1991 and December 30, 1990, the Company
incurred interest expense on the Junior Subordinated Notes totaling $10,291 and
$10,342, respectively, of which $6,860 and $3,825, respectively, was deferred.
On November 27, 1991, Holdings purchased one additional share of the Company's
common stock for $79,704. With these funds, the Company redeemed the $60,000 of
the Junior Subordinated Notes, related deferred interest of $10,685 and accrued
interest of $3,431 at a premium of $5,588.
In conjunction with the refinancing of the Company's debt in 1991, $3,750
was paid to INVESTCORP International, Inc. ("International") for financing
advisory fees for its assistance in arranging the $250,000 Credit Agreement.
Additionally, an affiliate of INVESTCORP was paid $6,000 in connection with the
repurchase of certain existing indebtedness of the Company. These transactions
have been reviewed by the independent member of the Board of Directors who
determined that, and the Company has received a letter from an independent
nationally known investment banking firm which concluded that, the terms and
conditions associated with these transactions were as favorable to the Company
as the Company could have reasonably obtained from an independent third party.
The Company paid International $500 for management fees during each of the
fiscal years 1992, 1991 and 1990.
The Color Tile Employees Investment Plan ("Investment Plan"), which is
under the direct control of Company management, owns 44 properties leased by the
Company. During the years ended January 3, 1993, December 29, 1991 and December
30, 1990, the Company paid approximately $3,085, $3,113 and $2,860,
respectively, in rentals to the Investment Plan for these properties.
15. EMPLOYEE BENEFIT PLANS:
The Investment Plan is a defined contribution plan open to all employees
upon completing certain periods of service with the Company. This plan requires
the Company to make contributions to the plan equal to a certain percentage of
the employee's contribution rate during the year. The Company's contributions to
the Investment Plan were $846, $715 and $976, respectively, for the years ended
January 3, 1993, December 29, 1991 and December 30, 1990.
F-17
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
15. EMPLOYEE BENEFIT PLANS:--(CONTINUED)
Under the Color Tile Family Security Plan (Family Security Plan), salaried
and certain other employees who have three years of service with the Company are
eligible to become participants in the Family Security Plan. The Family Security
Plan provides that in the event of the death of a participant who is an
employee, who is on authorized leave of absence or who is under an approved
disability, the participant's beneficiary will receive approximately one-half
the participant's Family Security Plan salary on a monthly basis for a defined
period of time. The Company provides a noncontributory benefit for a period of
10 years; employees may also obtain, on a contributory basis, the same benefit
until the employee would have attained age 65. The Family Security Plan is
administered through a Voluntary Employees' Beneficiary Association (VEBA)
qualified under Section 501(c)(9) of the Internal Revenue Code of 1986. The
Family Security Plan is funded by life insurance owned by the VEBA. A
participant's Family Security Plan salary approximates the total compensation
paid to the participant by the Company during the plan year.
Officers and director employees participate in the Family Security Plan on
the same terms as other employees. For the years ended January 3, 1993, December
29, 1991, and December 30, 1990, the Company contributed $228, $237, and $230,
respectively, to the Family Security Plan.
F-18
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
16. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized financial data by quarter for fiscal 1992 and 1991 is
as follows:
<TABLE> <CAPTION>
QUARTER ENDED
-----------------------------------------------------
YEAR ENDED JANUARY 3, 1993: MARCH 29 JUNE 28 SEPTEMBER 27 JANUARY 3
- ---------------------------------------------------------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales................................................. $ 139,864 $ 150,193 $ 146,772 $ 143,556
Cost of sales............................................. 73,552 79,169 79,965 78,682
Selling, general and administrative....................... 53,036 55,342 51,304 49,114
Depreciation and amortization............................. 7,107 6,821 6,830 7,925
Special charges........................................... 30,000
----------- ----------- ------------- ------------
Operating income (loss)................................... 6,169 8,861 8,673 (22,165)
Gain on sale of assets.................................... 4,007
Interest expense, net..................................... (7,928) (6,808) (5,930) (5,031)
Income taxes.............................................. (123) (339) (547) (231)
Extraordinary loss on early extinguishment of debt, net... (601)
----------- ----------- ------------- ------------
Net income (loss).................................... $ (1,882) $ 5,721 $ 1,595 $ (27,427)
----------- ----------- ------------- ------------
----------- ----------- ------------- ------------
</TABLE>
<TABLE> <CAPTION>
QUARTER ENDED
-----------------------------------------------------
YEAR ENDED DECEMBER 29, 1991: MARCH 31 JUNE 30 SEPTEMBER 29 DECEMBER 29
- ---------------------------------------------------------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales................................................. $ 134,269 $ 141,219 $ 134,486 $ 134,341
Cost of sales............................................. 71,231 76,048 73,060 72,178
Selling, general and administrative....................... 52,619 53,404 48,483 46,731
Depreciation and amortization............................. 7,369 7,305 7,036 7,492
----------- ----------- ------------- ------------
Operating income.......................................... 3,050 4,462 5,907 7,940
Interest expense, net..................................... (12,904) (12,952) (12,897) (13,233)
Income (taxes) benefit.................................... (101) (97) (97) 2,428
Extraordinary gain on early extinguishment of debt, net... 4,886
----------- ----------- ------------- ------------
Net income (loss).................................... $ (9,955) $ (8,587) $ (7,087) $ 2,021
----------- ----------- ------------- ------------
----------- ----------- ------------- ------------
</TABLE>
During the third quarter of 1992, the Company began the implementation of a
new store based layaway tracking system. Utilizing the information gathered
through this system and other available data, the Company restated its quarterly
results of operations for fiscal 1992 and fiscal 1991 in order to more closely
match sales and costs of sales on layaway transactions during interim periods.
This restatement does not effect the results of operations for the fiscal years
ended January 3, 1993 and December 29, 1991.
F-19
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
17. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION:
The Company is a specialty retailer operating predominantly in one industry
segment. Effective September 27, 1990, the Company acquired certain assets of
Factory Carpet from an unrelated party. All operations of Factory Carpet are in
Canada. The operations of Factory Carpet were immaterial to the Company in
fiscal 1992 and 1991. The Company's sales by geographic area are as follows:
UNITED
YEAR ENDED STATES CANADA TOTAL
- ----------------------- ----------- --------- -----------
January 3, 1993 $ 549,300 $ 31,085 $ 580,385
December 29, 1991 $ 512,905 $ 31,410 $ 544,315
F-20
<PAGE>
COLOR TILE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
OCTOBER 3, 1993 AND JANUARY 3, 1993
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE> <CAPTION>
OCTOBER 3, JANUARY 3,
1993 1993
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................................. $ $
Accounts and notes receivable, net of allowance for bad debts
of $369 and $415................................................................... 10,370 12,643
Inventories........................................................................... 80,902 74,045
Deferred income taxes................................................................. 3,834 3,830
Other current assets.................................................................. 4,619 3,567
----------- -----------
Total Current Assets.......................................................... 99,725 94,085
----------- -----------
Property, plant and equipment........................................................... 183,432 177,560
Less accumulated depreciation........................................................... (64,020) (55,611)
----------- -----------
Net property, plant and equipment..................................................... 119,412 121,949
----------- -----------
Goodwill, net........................................................................... 170,334 173,847
Other intangible assets, net............................................................ 36,260 45,377
Deferred financing costs, net........................................................... 12,770 13,891
Deferred income taxes................................................................... 10,322 10,322
Other assets............................................................................ 5,113 3,521
----------- -----------
Total Assets.................................................................. $ 453,936 $ 462,992
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt..................................................... $ 18,727 $ 15,073
Accounts payable...................................................................... 52,002 38,803
Accrued expenses...................................................................... 19,643 22,869
Layaways and deposits................................................................. 8,258 6,086
----------- -----------
Total Current Liabilities..................................................... 98,630 82,831
----------- -----------
Long-term debt........................................................................ 225,624 239,689
Other noncurrent liabilities.......................................................... 5,945 9,087
----------- -----------
Total Liabilities............................................................. 330,199 331,607
----------- -----------
Commitments and contingencies (Note 4)
Redeemable preferred stock, $90,031 liquidation value at
October 3, 1993....................................................................... 86,008 82,596
Common Stockholder's Equity:
Common stock, $.01 par value, 1,000,000 shares authorized,
101 shares issued and outstanding
Additional paid-in capital............................................................ 108,360 117,522
Accumulated deficit................................................................... (70,631) (68,733)
----------- -----------
Total Common Stockholder's Equity............................................. 37,729 48,789
----------- -----------
Total Liabilities and Stockholders' Equity.................................... $ 453,936 $ 462,992
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-21
<PAGE>
COLOR TILE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 3, 1993 AND SEPTEMBER 27, 1992
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE> <CAPTION>
NINE MONTHS ENDED
--------------------------
OCTOBER 3, SEPTEMBER 27,
1993 1992
----------- -------------
<S> <C> <C>
Systemwide Sales..................................................................... $ 409,993 $ 441,691
----------- -------------
----------- -------------
Net Sales............................................................................ $ 401,563 $ 436,829
----------- -------------
Costs and Expenses:
Cost of sales...................................................................... 218,631 232,686
Selling, general and administrative................................................ 142,259 159,682
Depreciation and amortization...................................................... 18,034 20,758
----------- -------------
Total Costs and Expenses........................................................ 378,924 413,126
----------- -------------
Operating income..................................................................... 22,639 23,703
Gain (loss) on disposal of a line of business........................................ (9,500) 4,007
Interest expense, net................................................................ (14,413) (20,666)
----------- -------------
Income (loss) before income taxes and extraordinary item............................. (1,274) 7,044
Provision for income taxes........................................................... 624 1,009
----------- -------------
Income (loss) before extraordinary item......................................... (1,898) 6,035
Extraordinary loss on early extinquishment of debt, net.............................. (601)
----------- -------------
Net Income (Loss)............................................................... $ (1,898) $ 5,434
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-22
<PAGE>
COLOR TILE, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 3, 1993
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE> <CAPTION>
COMMON STOCK ADDITIONAL TOTAL COMMON
------------------------ PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT EQUITY
----------- ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance, January 3, 1993........................ 101 $ 117,522 $ (68,733) $ 48,789
Senior Cumulative Preferred Stock dividends,
declared and undeclared......................... (2,169) (2,169)
Accretion of difference between redemption value
and proceeds of Senior Cumulative Preferred
Stock........................................... (60) (60)
Senior Increasing Rate Preferred Stock
dividends, declared and undeclared.............. (6,658) (6,658)
Accretion of difference between redemption value
and proceeds of Senior Increasing Rate
Preferred Stock................................. (275) (275)
Net Income...................................... (1,898) (1,898)
----- ----------- ----------- ------------ --------------
Balance, October 3, 1993........................ 101 $ 108,360 $ (70,631) $ 37,729
----- ----------- ----------- ------------ --------------
----- ----------- ----------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-23
<PAGE>
COLOR TILE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 3, 1993 AND SEPTEMBER 27, 1992
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE> <CAPTION>
OCTOBER 3, SEPTEMBER 27,
1993 1992
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................... $ (1,898) $ 5,434
----------- -------------
Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization..................................................... 19,155 22,018
(Gain) loss on disposal of a line of business..................................... 8,651 (4,007)
(Increase) decrease in accounts receivable........................................ 1,156 (1,197)
Increase in inventory............................................................. (9,123) (7,577)
(Increase) decrease in other current assets....................................... (1,565) 1,079
Decrease in other assets.......................................................... 1,560
Increase in accounts payable and accrued expenses................................. 14,072 4,821
Decrease in other liabilities..................................................... (2,275)
----------- -------------
Total adjustments............................................................ 31,631 15,137
----------- -------------
Cash provided by operating activities............................................. 29,733 20,571
----------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment.......................................... (9,357) (10,578)
Proceeds from sale of assets........................................................ 12,960
Other investing activities.......................................................... (4,291) (5,216)
----------- -------------
Cash provided by (used in) investing activities................................... (13,648) (2,834)
----------- -------------
Cash flows from financing activities:
Borrowings under revolving line of credit........................................... 150,200 129,890
Payments on revolving line of credit................................................ (149,600) (175,045)
Borrowings on long-term debt........................................................ 41,615
Payments on long-term debt.......................................................... (11,185) (16,495)
Borrowings to fund repurchase of debt............................................... 63,436
Issuance of senior increasing rate preferred stock.................................. 50,929
Repurchase of debt.................................................................. (111,958)
Dividends paid on senior increasing rate preferred stock............................ (5,500)
----------- -------------
Cash used in financing activities................................................. (16,085) (17,628)
----------- -------------
Increase in cash...................................................................... -- 109
Cash at beginning of period........................................................... -- 73
----------- -------------
Cash at end of period................................................................. $ -- $ 182
----------- -------------
----------- -------------
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Capital lease obligations incurred for property, plant & equipment................ $ 174 $ 2,640
----------- -------------
----------- -------------
Cash paid during the year for:
Interest.......................................................................... $ 13,244 $ 20,342
----------- -------------
----------- -------------
Income taxes...................................................................... $ 338 $ 547
----------- -------------
----------- -------------
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-24
<PAGE>
COLOR TILE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
Color Tile, Inc. ("Color Tile" or the "Company") is a wholly owned
subsidiary of Color Tile Holdings, Inc. ("Holdings"). Reference is made to the
summary of significant accounting policies in the Company's Annual Report on
Form 10-K for the fiscal year ended January 3, 1993. These financial statements
and the related notes should be read in connection with such Form 10-K.
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial position
of the Company as of October 3, 1993 and January 3, 1993 and its results of
operations for the nine months ended October 3, 1993 and September 27, 1992 and
cash flows for the nine months ended October 3, 1993 and September 27, 1992.
Information included in the condensed consolidated balance sheet as of January
3, 1993 has been derived from the Company's audited financial statements in its
Annual Report on Form 10-K.
The results of operations for the nine months ended October 3, 1993 may not
be indicative of the results of operations for the full fiscal year ending
January 2, 1994.
2. SYSTEMWIDE SALES:
Systemwide sales include retail sales of all Company stores, retail sales
of all Franchised stores and outside sales of manufactured products to third
parties.
3. INVENTORIES:
Inventories consisted of the following:
<TABLE> <CAPTION>
OCTOBER 3, JANUARY 3,
1993 1993
----------- -----------
<S> <C> <C>
Finished Goods................................................... $ 78,650 $ 71,994
Work in Progress................................................. 631 557
Raw Materials.................................................... 1,621 1,494
----------- -----------
$ 80,902 $ 74,045
----------- -----------
----------- -----------
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES:
There are various claims and pending actions incident to the business
operations of the Company. In the opinion of management, the Company's potential
liability in all pending actions and claims, in the aggregate, is not material.
5. GAIN (LOSS) ON DISPOSAL OF A LINE OF BUSINESS:
In the third quarter of 1993, the Company decided to dispose of its wholly
owned Canadian subsidiary, Factory Carpet, which operates 37 retail stores in
Canada (including 8 Franchised stores). In connection with the disposition of
Factory Carpet, the Company recorded a charge to continuing operations of
$8,651. The sales and costs and related expenses of Factory Carpet's operations
have been eliminated from the individual line items of the 1993 Condensed
Consolidated Statement of Operations
F-25
<PAGE>
COLOR TILE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
5. GAIN (LOSS) ON DISPOSAL OF A LINE OF BUSINESS:--(CONTINUED)
and the pre-tax losses of this line of business has been included on a one-line
basis in the loss from disposal of a line of business as follows:
<TABLE> <CAPTION>
NINE MONTHS
ENDED OCTOBER 3, 1993
----------------------
<S> <C>
Net Sales............................................. $ 18,343
----------
----------
Pre-tax losses........................................ $ (849)
Estimated loss on disposal............................ (8,651)
----------
Loss on disposal of a line of business................ $ (9,500)
----------
----------
</TABLE>
Effective May 15, 1992, the Company completed the sale of its hardwood
flooring manufacturing plant (the "Wood Plant") located in Melbourne, Arkansas
and realized a pre-tax gain of $4,007. The proceeds of the sale, before fees and
related expenses, included $11,809 in cash and the buyer's assumption of certain
liabilities, including an agreement to defease $2,600 of industrial revenue
bonds related to the Wood Plant.
6. INCOME TAXES
As a result of an ownership change, within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, that occurred with respect to the
Company on May 14, 1990, the Company's ability to utilize approximately $52,347
of its net operating loss carryforwards for tax purposes is limited to $4,977
per year. No limitation currently is required by Section 382 with respect to
$36,140 of the Company's net operating loss carryforwards. The Company
recognized reductions in federal tax expense primarily from the utilization of
its deductible temporary difference of $683 and $2,961 for the nine month
periods ended October 3, 1993 and September 27, 1992, respectively.
F-26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
AMERICAN BLIND FACTORY, INC.
We have audited the accompanying balance sheets of American Blind Factory,
Inc. (a Michigan corporation) as of December 31, 1992 and 1991, and the related
statements of earnings and retained earnings and cash flows for each of the
three years in the period ended December 31, 1992. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Blind Factory, Inc.
as of December 31, 1992 and 1991, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1992, in
conformity with generally accepted accounting principles.
GRANT THORNTON
Detroit, Michigan
February 23, 1993
F-27
<PAGE>
AMERICAN BLIND FACTORY, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE> <CAPTION>
1992 1991
-------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (notes A1 and F)....................................... $ 4,685,903 $ 5,664,520
Investments (note B)............................................................. 3,918,427 --
Receivables
Trade......................................................................... 64,296 87,844
Related parties (note C)...................................................... 200,000 --
-------------- -------------
264,296 87,844
Interest receivable.............................................................. 75,961 --
Prepaid expenses................................................................. 20,204 41,527
-------------- -------------
Total current assets........................................................ 8,964,791 5,793,891
PROPERTY AND EQUIPMENT--AT COST (note A2)
Furniture and fixtures........................................................... 1,241,317 854,801
Leasehold improvements........................................................... 423,957 329,743
-------------- -------------
1,665,274 1,184,544
Less accumulated depreciation and amortization................................ 416,328 247,639
-------------- -------------
1,248,946 936,905
-------------- -------------
$ 10,213,737 $ 6,730,796
-------------- -------------
-------------- -------------
CURRENT LIABILITIES
Accounts payable, including customer deposits.................................... $ 5,870,314 $ 4,354,855
Accounts payable--related parties (note C)....................................... 63,411 147,863
Accrued liabilities.............................................................. 841,939 417,740
-------------- -------------
Total current liabilities................................................... 6,775,664 4,920,458
COMMITMENT (note D)
STOCKHOLDER'S EQUITY
Common Stock, authorized 1,000 shares of $1.00 par value; issued and outstanding
1,000 shares....................................................................... 1,000 1,000
Retained earnings................................................................ 3,437,073 1,809,338
-------------- -------------
3,438,073 1,810,338
-------------- -------------
$ 10,213,737 $ 6,730,796
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
AMERICAN BLIND FACTORY, INC.
STATEMENT OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31,
<TABLE> <CAPTION>
1992 1991 1990
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales........................................................ $ 64,084,028 $ 44,275,833 $ 24,713,265
Cost of goods sold............................................... 47,979,890 33,071,551 18,958,896
-------------- -------------- --------------
Gross profit.............................................. 16,104,138 11,204,282 5,754,369
Operating expenses
Selling expenses............................................ 7,028,124 5,477,040 3,759,333
General and administrative expense (note G)................. 7,814,063 4,524,219 1,975,708
-------------- -------------- --------------
14,842,187 10,001,259 5,735,041
-------------- -------------- --------------
Income from operations........................................... 1,261,951 1,203,023 19,328
Other income, principally interest............................... 365,784 306,365 243,644
-------------- -------------- --------------
Net earnings (note E)..................................... 1,627,735 1,509,388 262,972
Retained earnings at beginning of year........................... 1,809,338 299,950 36,978
-------------- -------------- --------------
Retained earnings at end of year................................. $ 3,437,073 $ 1,809,338 $ 299,950
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
AMERICAN BLIND FACTORY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE> <CAPTION>
1992 1991 1990
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings...................................................... $ 1,627,735 $ 1,509,388 $ 262,972
Adjustments to reconcile net earnings to net cash provided by
operating activities
Depreciation and amortization..................................... 168,690 112,520 99,788
Changes in operating assets and liabilities
Decrease in accounts receivable.............................. 23,548 86,395 (119,932)
Increase in interest receivable.............................. (75,961) -- --
(Increase) decrease in prepaid expenses...................... 21,323 (41,527) 56,069
(Increase) decrease in accounts receivable--related
parties............................................................. (200,000) 45,228 370,991
Increase (decrease) in accounts payable--related parties..... (84,452) 147,863 --
Increase in accounts payable................................. 1,515,459 1,014,838 1,461,244
Increase in accrued liabilities.............................. 424,200 212,327 69,667
-------------- ------------- -------------
1,792,807 1,577,644 1,937,827
-------------- ------------- -------------
Net cash provided by operating activities................. 3,420,542 3,087,032 2,200,799
Cash flows used by investing activities
Purchase of property and equipment................................ (480,732) (270,900) (394,409)
Purchase of investment securities................................. (3,918,427) -- --
-------------- ------------- -------------
Net cash used by investing activities..................... (4,399,159) (270,900) (394,409)
-------------- ------------- -------------
Increase (decrease) in cash....................................... (978,617) 2,816,132 1,806,390
Cash and cash equivalents at beginning of year...................... 5,664,520 2,848,388 1,041,998
-------------- ------------- -------------
Cash and cash equivalents at end of year............................ $ 4,685,903 $ 5,664,520 $ 2,848,388
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
AMERICAN BLIND FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1991 AND 1990
NOTE A--SUMMARY OF ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows.
1. Cash and Cash Equivalents
Cash and cash equivalents include funds invested in liquid instruments with
maturities less than three months at time of purchase.
2. Depreciation and Amortization
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives, principally
by the straight-line method for financial reporting purposes and by
straight-line and accelerated methods for income tax purposes. Leasehold
improvements are amortized on the straight-line method over the life of the
lease or the service lives of the improvements, whichever is shorter.
3. Profit-Sharing Plan
The Company has in effect a profit-sharing plan covering those eligible
employees who have completed two full years of employment. Contributions are
determined annually at the discretion of the Board of Directors. Contributions
are limited to 15% of the annual compensation of eligible employees. The plan
also allows for voluntary contributions by eligible employees of up to 10% of
their annual compensation. No contributions were made by the Company for either
of the years ended December 31, 1992, 1991 or 1990.
NOTE B--INVESTMENTS
Investments are carried at the lower of aggregate cost or market value. At
December 31, 1992 investments consisted of the following:
<TABLE> <CAPTION>
ESTIMATED
MARKET
COST VALUE
------------- -------------
<S> <C> <C>
Obligations of U.S. Governmental Agencies................... $ 1,144,920 $ 1,166,562
Other Investments........................................... 2,773,507 2,775,719
------------- -------------
$ 3,918,427 $ 3,942,281
------------- -------------
------------- -------------
</TABLE>
NOTE C--RELATED PARTY TRANSACTIONS
The Company and two retail chains are related through common ownership. The
following is a schedule of activity between related parties:
<TABLE> <CAPTION>
1992 1991 1990
-------------- ------------- --------------
<S> <C> <C> <C>
Beginning balance--net..................... $ (147,863) $ 45,228 $ 416,219
Charge for administrative services......... (672,000) (855,000) (240,000)
Advances made by the entities to or on the
behalf of the Company...................... (1,549,569) (714,960) (2,239,849)
Advances made by the Company to or on the
behalf of the entities..................... 2,506,021 1,376,869 2,108,858
-------------- ------------- --------------
Ending balance--net........................ $ 136,589 $ (147,863) $ 45,228
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
F-31
<PAGE>
AMERICAN BLIND FACTORY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1992, 1991 AND 1990
NOTE D--LEASE COMMITMENT
The Company conducts its operations in facilities leased from a party
related through common ownership. The following is a schedule, by years, of
future minimum rental payments required under the lease:
YEARS ENDING DECEMBER 31,
- ------------------------------
1993................. $ 127,975
1994................. 75,726
-----------
$ 203,701
-----------
-----------
Rent expense for the years ending December 31, 1992, 1991 and 1990 was
$139,854, $117,062 and $115,337, respectively.
NOTE E--INCOME TAXES
The stockholder of the Company has elected Subchapter S corporation status
under the Internal Revenue Code. Accordingly, federal income taxes on the net
earnings of the Company are payable personally by the stockholder. Accordingly,
no provision has been made for federal income taxes.
NOTE F--CONCENTRATION OF CREDIT RISK
The Company maintains its bank accounts in financial institutions located
in Michigan. These balances are insured by the Federal Deposit Insurance
Corporation up to $100,000.
NOTE G--OFFICER COMPENSATION
Included in general and administrative expenses is compensation to the sole
shareholder and other officers of the Company amounting to approximatley
$6,150,000, $3,350,000 and $1,550,000 for 1992, 1991 and 1990, respectively.
F-32
<PAGE>
AMERICAN BLIND FACTORY, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1993 AND DECEMBER 31, 1992
(UNAUDITED)
<TABLE> <CAPTION>
SEPTEMBER 30, DECEMBER 31,
1993 1992
-------------- --------------
<S> <C> <C>
Current Assets
Cash and cash equivalents...................................................... $ 15,028,232 $ 4,685,903
Investments.................................................................... -- 3,918,427
Receivables
Trade....................................................................... 254,110 64,296
Related parties............................................................. 200,000 200,000
-------------- --------------
454,110 264,296
Prepaid administrative services--related party (Note B)........................ 270,000 --
Interest receivable............................................................ -- 75,961
Prepaid expenses............................................................... 80,398 20,204
-------------- --------------
Total current assets................................................... 15,832,740 8,964,791
Property and equipment--at cost
Furniture and fixtures......................................................... 1,415,326 1,241,317
Leasehold improvements......................................................... 500,507 423,957
-------------- --------------
1,915,833 1,665,274
Less accumulated depreciation and amortization.............................. 560,328 416,328
-------------- --------------
1,355,505 1,248,946
-------------- --------------
$ 17,188,245 $ 10,213,737
-------------- --------------
-------------- --------------
Current Liabilities
Accounts payable, including customer deposits.................................. $ 9,251,931 $ 5,870,314
Accounts payable--related parties.............................................. 35,678 63,411
Accrued liabilities
Payroll..................................................................... 4,091,567 224,000
Other....................................................................... 370,996 617,939
-------------- --------------
Total current liabilities.............................................. 13,750,172 6,775,664
Commitments and contingencies (Note C)........................................... -- --
Stockholder's Equity
Common Stock, authorized 1,000 shares of $1.00 par value;
issued and outstanding 1,000 shares......................................... 1,000 1,000
Retained earnings.............................................................. 3,437,073 3,437,073
-------------- --------------
3,438,073 3,438,073
-------------- --------------
$ 17,188,245 $ 10,213,737
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-33
<PAGE>
AMERICAN BLIND FACTORY, INC.
CONDENSED STATEMENTS OF EARNINGS
AND RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE> <CAPTION>
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992
------------------- -------------------
<S> <C> <C>
Net sales............................................................... $ 61,764,723 $ 46,638,023
Cost of goods sold...................................................... 47,470,179 35,413,163
------------------- -------------------
Gross profit.................................................. 14,294,544 11,224,860
Operating expenses
Selling expenses...................................................... 6,558,175 5,124,824
General and administrative expenses................................... 8,344,195 4,885,603
------------------- -------------------
14,902,370 10,010,427
------------------- -------------------
Income (loss) from operations........................................... (607,826) 1,214,433
Other income, principally interest...................................... 607,826 266,382
------------------- -------------------
Net earnings.................................................. -- 1,480,815
Retained earnings at January 1,......................................... 3,437,073 1,809,338
------------------- -------------------
Retained earnings at September 30,...................................... $ 3,437,073 $ 3,290,153
------------------- -------------------
------------------- -------------------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-34
<PAGE>
AMERICAN BLIND FACTORY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
<TABLE> <CAPTION>
NINE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 1993 SEPTEMBER 30, 1992
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities
Net earnings.......................................................... $ -- $ 1,480,815
Adjustments to reconcile net earnings to net cash provided by operating
activities
Depreciation and amortization......................................... 144,000 108,000
Gain on sale of investments........................................... (116,929) --
Changes in operating assets and liabilities
Increase in accounts receivable.................................... (189,814) (78,662)
Decrease in interest receivable.................................... 75,961 --
Increase in prepaid burden charge--related party................... (270,000) --
Increase (decrease) in prepaid expenses............................ (60,194) 42,210
Decrease in accounts payable--related parties...................... (27,733) (41,914)
Increase in accounts payable....................................... 3,381,617 2,546,282
Decrease in accrued liabilities--other............................. (246,943) (189,630)
Increase in accrued liabilities--payroll........................... 3,867,567 421,870
------------------- -------------------
6,557,532 2,808,156
------------------- -------------------
Net cash provided by operating activities..................... 6,557,532 4,288,971
Cash flows used by investing activities
Purchase of property and equipment.................................... (250,559) (423,032)
Purchase of investment securities..................................... (2,799,023) (4,089,239)
Proceeds from sale of investment securities........................... 6,834,379 --
Cash paid for note receivable--related party.......................... -- (1,000,000)
------------------- -------------------
Net cash used by investing activities......................... 3,784,797 (5,512,271)
------------------- -------------------
Increase (decrease) in cash........................................... 10,342,329 (1,223,300)
Cash and cash equivalents at January 1,................................. 4,685,903 5,664,520
------------------- -------------------
Cash and cash equivalents at September 30,.............................. $ 15,028,232 $ 4,441,220
------------------- -------------------
------------------- -------------------
</TABLE>
The accompanying notes are an integral part of these condensed statements.
F-35
<PAGE>
AMERICAN BLIND FACTORY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1993 AND DECEMBER 31, 1992
(UNAUDITED)
NOTE A--BASIS OF PRESENTATIONS
Reference is made to the summary of significant accounting policies in Note
A to the American Blind Factory, Inc.'s (the Company) Financial Statements for
the year ended December 31, 1992 appearing herein. These financial statements
and the related notes should be read in connection with such Financial
Statements.
In the opinion of the Company, the accompanying unaudited financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of September 30, 1993 and December 31, 1992 and its results of operations for
the nine months ended September 30, 1993 and 1992 and cash flows for the nine
months ended September 30, 1993 and 1992. Information included in the condensed
balance sheet as of December 31, 1992 has been derived from the Company's
audited financial statements.
The results of operations for the nine months ended September 30, 1993 may
not be indicative of the results of operations for the full fiscal year ending
December 31, 1993.
NOTE B--PREPAID ADMINISTRATIVE SERVICES
On May 31, 1993, the Company prepaid a portion of its expected charge for
administrative services amounting to $822,000. Such amount is being charged to
operations at a rate of $138,000 per month over the remainder of 1993.
NOTE C--COMMITMENTS AND CONTINGENCIES
There are various claims and pending actions incident to the business
operations of the Company. In the opinion of management, the company's potential
liability in all pending actions and claims, in the aggregate, is not material.
NOTE D--OFFICER COMPENSATION
Included in general and administrative expenses is compensation to the sole
shareholder and other officers of the Company amounting to approximately
$6,296,000 and $3,635,000 for each of the nine month periods ended September 30,
1993 and 1992, respectively.
NOTE E--INCOME TAXES
The stockholder of the Company has elected Subchapter S corporation status
under the Internal Revenue Code. Accordingly, federal income taxes on the net
earnings of the Company are payable personally by the stockholder. Accordingly,
no provision has been made for federal income taxes.
NOTE F--SUBSEQUENT EVENT
On October 5, 1993, ABF Acquisition Corp., an affiliate of Investcorp,
entered into an agreement with American Blind Factory, Inc. to acquire the
assets of the Company and certain related companies.
F-36
<PAGE>
SCHEDULE V
COLOR TILE, INC.
PROPERTY, PLANT AND EQUIPMENT
(AMOUNTS IN THOUSANDS)
<TABLE> <CAPTION>
BALANCE AT BALANCE AT
BEGINNING RETIREMENTS OTHER END
DESCRIPTION OF PERIOD ADDITIONS(A) AND SALES (B)(C)(D) OF PERIOD
- ------------------------------------------------ ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended January 3, 1993:
Land.......................................... $ 27,626 $ (644) $ (192) $ 26,790
Buildings..................................... 22,875 $ 352 (2,653) 5,789 26,363
Assets under capital leases................... 57,759 3,400 (10,038) 51,121
Leasehold improvements........................ 23,523 3,765 (646) 1,130 27,772
Fixtures and equipment........................ 39,396 5,801 (8,323) 7,756 44,630
Construction in progress...................... 2,483 4,020 (123) (5,496) 884
----------- ----------- ----------- ---------- -----------
Totals................................ $ 173,662 $ 17,338 $ (12,389) $ (1,051) $ 177,560
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Year ended December 29, 1991:
Land.......................................... $ 27,916 $ (290) $ 27,626
Buildings..................................... 23,642 (851) $ 84 22,875
Assets under capital leases................... 57,759 57,759
Leasehold improvements........................ 19,471 $ 2,664 (489) 1,877 23,523
Fixtures and equipment........................ 34,719 1,477 (600) 3,800 39,396
Construction in progress...................... 2,868 5,376 (5,761) 2,483
----------- ----------- ----------- ---------- -----------
Totals................................ $ 166,375 $ 9,517 $ (2,230) $ 0 $ 173,662
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
Year ended December 30, 1990:
Land.......................................... $ 27,260 $ 711 $ (49) $ (6) $ 27,916
Buildings..................................... 21,988 1,662 (8) 23,642
Assets under capital leases................... 55,124 2,635 57,759
Leasehold improvements........................ 13,763 3,840 (34) 1,902 19,471
Fixtures and equipment........................ 27,686 6,547 (217) 703 34,719
Construction in progress...................... 2,018 3,466 (2,616) 2,868
----------- ----------- ----------- ---------- -----------
Totals................................ $ 147,839 $ 18,861 $ (300) $ (25) $ 166,375
----------- ----------- ----------- ---------- -----------
----------- ----------- ----------- ---------- -----------
<FN>
- ---------------
(a) Additions for the year ended December 30, 1990 include property, plant and equipment of Factory Carpet
acquired on September 27, 1990.
(b) Represents transfers of assets from construction in progress to other assets for the years ended January 3,
1993, December 29, 1991 and December 30, 1990.
(c) Represents transfer of capital lease assets purchased and foreign currency translation adjustments associated
with Factory Carpet for the year ended January 3, 1993.
(d) Represents $625 of fixed asset write-offs related to the special charges at January 3, 1993.
</TABLE>
S-1
<PAGE>
SCHEDULE VI
COLOR TILE, INC.
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(AMOUNTS IN THOUSANDS)
<TABLE> <CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND RETIREMENTS AT END OF
DESCRIPTION OF PERIOD EXPENSE(B) AND SALES OTHER(A) PERIOD
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Year ended January 3, 1993:
Buildings.......................................... $ 1,435 $ 1,027 $ (336) $ 319 $ 2,445
Assets under capital leases........................ 13,456 5,491 (467) 18,480
Leasehold improvements............................. 4,791 5,701 (258) (129) 10,105
Fixtures and equipment............................. 11,746 17,534 (4,784) 85 24,581
----------- ----------- ----------- ----------- ---------
Totals..................................... $ 31,428 $ 29,753 $ (5,378) $ (192) $ 55,611
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Year ended December 29, 1991:
Buildings.......................................... $ 699 $ 748 $ (12) $ 1,435
Assets under capital leases........................ 6,885 6,571 13,456
Leasehold improvements............................. 2,137 2,810 (156) 4,791
Fixtures and equipment............................. 5,588 6,841 (683) 11,746
----------- ----------- ----------- ----------- ---------
Totals..................................... $ 15,309 $ 16,970 $ (851) $ 0 $ 31,428
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Year ended December 30, 1990:
Buildings.......................................... $ $ 699 $ $ $ 699
Assets under capital leases........................ 6,958 (73) 6,885
Leasehold improvements............................. 2,137 2,137
Fixtures and equipment............................. $ 5,655 (67) 5,588
----------- ----------- ----------- ----------- ---------
Totals..................................... $ 0 $ 15,449 $ (140) $ 0 $ 15,309
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
- ---------------
(a) Represents transfers of capital lease assets purchased and foreign currency
translation adjustments associated with Factory Carpet for the year ended
January 3, 1993.
(b) Includes $12,400 of expense related to special charges at January 3, 1993.
S-2
<PAGE>
SCHEDULE VIII
COLOR TILE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE> <CAPTION>
BALANCE
AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
- --------------------------------------------------- --------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Valuation accounts deducted from asset account to
which it applies:
Allowance for doubtful accounts:
Year ended January 3, 1993....................... $ 305 $ 389(a) $ 0 $ (279)(b) $ 415
--------- ------ ----------- ----------- -----------
--------- ------ ----------- ----------- -----------
Year ended December 29, 1991..................... $ 562 $ 147(a) $ 0 $ (404)(b) $ 305
--------- ------ ----------- ----------- -----------
--------- ------ ----------- ----------- -----------
Year ended December 30, 1990..................... $ 0 $ 606(a) $ 0 $ (44)(b) $ 562
--------- ------ ----------- ----------- -----------
--------- ------ ----------- ----------- -----------
Deferred tax asset valuation allowance:
Year ended January 3, 1993....................... $ 30,599 $ 0 $ 1,287(c) $ 0 $ 31,886
--------- ------ ----------- ----------- -----------
--------- ------ ----------- ----------- -----------
Year ended December 29, 1991..................... $ 0 $ 0 $ 30,599(c) $ 0 $ 30,599
--------- ------ ----------- ----------- -----------
--------- ------ ----------- ----------- -----------
</TABLE>
- ---------------
(a) Uncollectible accounts charged to bad debt expense.
(b) Balances written-off, net of recoveries.
(c) Valuation allowance charged to deferred tax asset.
S-3
<PAGE>
SCHEDULE X
COLOR TILE, INC.
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
(AMOUNTS IN THOUSANDS)
<TABLE> <CAPTION>
JANUARY 3, DECEMBER 29, DECEMBER 30,
1993 1991 1990
----------- ------------- -------------
<S> <C> <C> <C>
Property, franchise and other taxes.................................... $ 6,933 $ 7,446 $ 8,253
----------- ------------- -------------
----------- ------------- -------------
Advertising............................................................ $ 46,469 $ 40,394 $ 35,700
----------- ------------- -------------
----------- ------------- -------------
Amortization of intangible assets...................................... $ 11,347 $ 12,245 $ 12,332
----------- ------------- -------------
----------- ------------- -------------
Repairs and maintenance................................................ $ 2,833 $ 5,084 $ 4,173
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
S-4
<PAGE>
====================================== ======================================
No dealer, salesman or other person 2,200,000 Shares
has been authorized to give any
information or to make any
representation other than those
contained in this Prospectus in
connection with the offer contained
herein, and if given or made, such
information or representation must
not be relied upon as having been
authorized by the Company or any
Underwriter. This Prospectus does
not constitute an offer to sell, or
a solicitation of an offer to buy,
any securities offered hereby in
any jurisdiction to any person to
whom it is not lawful to make any such
offer or solicitation in such jurisdiction.
- --------------------------------------
TABLE OF CONTENTS COLOR TILE, INC.
Page
Available Information....................... 2
Prospectus Summary.......................... 3
Summary Selected Consolidated Financial
Data...................................... 6
Risk Factors................................ 14
Capitalization.............................. 17
Selected Consolidated Financial Information. 18
Unaudited Pro Forma Condensed Combined
Financial Statements...................... 23 SERIES A SENIOR INCREASING
Management's Discussion and Analysis RATE PREFERRED STOCK
of Financial Condition and Results of
Operations................................ 28
Business.................................... 36
Legal Proceedings........................... 50
Management.................................. 51
Security Ownership of Certain Beneficial
Owners and Management..................... 56
Capital Structure........................... 61
Description of the Securities............... 68
Certain Federal Income Tax Considerations... 75
Plan of Distribution........................ 78
Selling Stockholders........................ 80
Legal Matters............................... 80
Experts..................................... 81 -----------
Index to Consolidated Financial Statements.. F-1 PROSPECTUS
_______________________ -----------
UNTIL MAY 17, 1994 (90 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. FEBRUARY 16, 1994
====================================== ======================================
