UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended January 2, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file no. 0-8777
COLOR TILE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-1606185
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 Houston Street, Fort Worth, Texas 76102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 870-9400
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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All the common stock of the registrant is held by Color Tile Holdings, Inc., a
Delaware corporation.
The number of shares of the registrant's common stock outstanding as of April 1,
1994 was 101.
(Exhibits Index Begins on Page 45)
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COLOR TILE, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 14
4. Submission of Matters to a Vote of Security Holders . . . . . . 14
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . 15
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . 15
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 18
8. Financial Statements and Supplementary Data . . . . . . . . . . 24
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . 24
PART III
10. Directors and Executive Officers of the Registrant . . . . . . . 25
11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 26
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . 30
13. Certain Relationships and Related Transactions . . . . . . . . . 34
PART IV
14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 38
<PAGE>
PART I
Item 1. BUSINESS
General
Color Tile, Inc. (collectively, with its subsidiaries, the "Company") , a
Delaware corporation, 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
January 2, 1994, the Company sold its line of products through 800 domestic
Color Tile Stores (collectively "Color Tile Stores", whether Company owned
("Company Stores") or franchisee owned ("Franchised 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 most of its products through local independent contractors.
Management believes that the Company's most important competitive
advantages are its nationwide store network, nationally recognized "Color Tile"
and "ColorCarpet" trademarks and strong vendor relationships. 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.
Since its founding in 1953, the Company has sold a broad selection of hard-
surface flooring products. Ceramic tile is offered in a variety of sizes,
colors, textures and finishes. Resilient flooring 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.
Since 1989, the Company has offered a full line of carpeting on a nation-
wide basis using the trade name "ColorCarpet". The principal features of the
<PAGE>
Company's carpet program are the marketing of carpet by color, rather than by
style, and marketing of a broad assortment of carpets on a cut-to-order basis.
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 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
opened its second Floors A Plenty store in Cincinnati, Ohio during the first
quarter of 1994. Floors A Plenty stores offer approximately 20,000 SKU's, of
which approximately 10,000 are carpet SKU's.
The Company developed a format of smaller, principally franchised specialty
carpet stores operating under Color Tile's "ColorCarpet" trade name. During
1993, the Company opened the first two ColorCarpet stores in the Dallas-Fort
Worth area. In the first quarter of 1994, the Company opened one additional
ColorCarpet Store in the Dallas-Fort Worth area. ColorCarpet stores offer
approximately 12,000 SKU's of carpeting in approximately 3,500 square feet of
retail space. Carpeting represents approximately 80% of ColorCarpet store's
total SKU's. A limited selection of hard-surface flooring products is also
available.
A typical Color Tile Store currently offers for sale approximately 17,000
SKU's, approximately 14,000 of which are devoted to special-order products
(approximately 10,000 of which relate to carpet and approximately 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.
The Company recently acquired the assets (the "ABF Assets") of American
Blind Factory, Inc. ("ABF") and certain related entities and assumed certain
liabilities in connection therewith through its new wholly-owned subsidiary,
American Blind and Wallpaper Factory, Inc. ("ABWF"). ABF was a Detroit based
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.
The Company's fiscal year ends on the Sunday nearest to December 31. All
references herein to "1993", "1992" and "1991" refer to the 52 week or 53 week
fiscal years ended January 2, 1994, January 3, 1993 and December 29, 1991,
respectively. The fiscal year ended January 3, 1993 was comprised of 53 weeks.
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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 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.
Class of Products 1993 1992 1991
----------------- ---- ---- ----
Ceramic Tile 24% 25% 25%
Resilient Flooring 25 26 26
Carpet and Installation 26 26 23
Installation Materials
and Tools 14 14 16
Other(1) 11 9 10
--- ---- ----
100% 100% 100%
==== ==== ====
______________________
(1) Includes sales of window treatments, wallcoverings, wood flooring and
sales by ABWF since November 1, 1993.
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 1993, approximately 19% of the ceramic tile products sold by the
Company were manufactured at the Company's tile manufacturing facility located
in Cleveland, Mississippi (the "Tile Facility"). See "Manufacturing."
Approximately 29% of the ceramic tile products sold by the Company during this
period were purchased from domestic suppliers and approximately 52% were
imported from suppliers in Italy, Spain, Brazil and countries in the Far East,
including Japan, Thailand and Korea.
3
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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 and Installation
Color Tile Stores offer a full line of carpeting under the "ColorCarpet"
trade name. Approximately 10,000 different styles and colors of carpet are
offered at a broad range of prices. 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.
Window Treatments and Wallcoverings
Color Tile Stores. Color Tile Stores also sell window treatments under the
"WindowColors" trade name. Window treatments consist of window shades, blinds,
wooden window coverings and related products. Window treatments are 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 selection of brand name wallpaper.
ABWF. ABWF's principal product lines include horizontal, vertical, pleated
and wood blinds and wallpaper. ABWF features a broad range of name brands of
vertical, horizontal, pleated and wood blinds, as well as a complete line of
private-label blinds. Private-label blinds are manufactured by the brand-name
product vendors and are of like quality. ABWF also features a broad selection
of major name brands of wallpaper. Wallpaper is ordered by specific pattern
number and book name and is available both directly from manufacturers or
through various wholesale distributors. ABWF maintains a database of more than
30,000 wallpaper patterns, the majority of which have multiple vendor sources.
The two-tiered distribution system for wallpaper provides ABWF with the
opportunity to offer its customers a broad selection at a competitive cost.
4
<PAGE>
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 1993, 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.
Wood Flooring
A broad selection of wood flooring (both strip and plank flooring and
parquet tile) is offered by Color 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 1993, 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
The Company's franchising program is 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
5
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(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.
At January 2, 1994, 86 Franchised Stores were in operation (excluding nine
Franchised Stores operating under the name "Factory Carpet" in Canada). During
1993, 56 Franchised Stores (excluding the nine Franchised Stores in Canada) were
opened (including 26 Franchised Stores that were previously Company Stores), two
Franchised Stores were closed and three Franchised Stores were reacquired by the
Company and are currently operated as Company Stores. 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, radio, print advertising and in-store
displays.
Expenditures for advertising and promotion purposes were approximately
7.2%, 8.0%, and 7.4% of net sales for 1993, 1992 and 1991, respectively. The
Company also receives cooperative advertising contributions from certain of its
suppliers of resilient flooring, carpet and other product categories.
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 arranged by
color. 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.
ABWF's primary means of generating new customers for blinds and wallpaper
is through advertisements in women's and home-related magazines. Based on
ABWF's high rates of repeat and referral business, ABWF continually analyzes its
advertising program and sources of customers to optimize the cost benefit of its
advertising. In addition, ABWF continually tests new magazines to increase
consumer awareness of ABWF.
6
<PAGE>
Retail Operations
Store Operations. The Company operates a network of stores throughout
the continental United States. 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. The
Company also operates 37 stores in seven provinces of Canada pending their
disposition.
The Company operates Color Tile stores in each of 49 states of the United
States. At January 2, 1994, their geographic distribution was as follows:
Number of Color Tile Stores (including Franchised Stores)
Alabama . . . . . . 7 Nevada . . . . . 4
Arizona . . . . . . 12 New Hampshire . . . 5
Arkansas . . . . . 4 New Jersey . . . 28
California . . . . 87 New Mexico . . . . 3
Colorado . . . . . 18 New York . . . . . 42
Connecticut . . . . 15 North Carolina . . 14
Delaware . . . . . 5 North Dakota . . . 2
Florida . . . . . . 46 Ohio . . . . . . . 42
Georgia . . . . . . 17 Oklahoma . . . . . 6
Hawaii . . . . . . 1 Oregon . . . . . . 10
Idaho . . . . . . . 3 Pennsylvania . . . 49
Illinois . . . . . 44 Rhode Island . . . 4
Indiana . . . . . . 22 South Carolina . . 8
Iowa . . . . . . . 10 South Dakota . . . 1
Kansas . . . . . . 6 Tennessee . . . . . 15
Kentucky . . . . . 11 Texas . . . . . . . 62
Louisiana . . . . . 10 Utah . . . . . . . 5
Maine . . . . . . . 4 Vermont . . . . . . 1
Maryland . . . . . 19 Virginia . . . . . 21
Massachusetts . . . 20 Washington . . . . 20
Michigan . . . . . 36 West Virginia . . . 3
Minnesota . . . . . 14 Wisconsin . . . . . 15
Mississippi . . . . 2 Wyoming . . . . . . 1
Missouri . . . 19 ---
Montana . . . . . . 4 TOTAL 800
Nebraska . . . . . 3 ===
7
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A summary of Color Tile's Store openings and closings is provided
below:
Historical Store Openings and Closings
--------------------------------------
1993 1992 1991
---- ---- ----
Company Stores:(1)(2)
--------------
Beginning of period 731 733 731
Opened 25 13 11
Converted from Franchised Stores 3 1 ---
Converted to Franchised Stores (26) (13) (3)
Closed (19) (3) (6)
---- ---- ----
End of period 714 731 733
=== === ===
Franchised Stores: (2)
-----------------
Beginning of period 35 13 4
Opened 30 10 7
Converted from Company Stores 26 13 3
Converted to Company Stores (3) (1) --
Closed (2) -- (1)
--- -- ---
End of period 86 35 13
== == ==
Total Color Tile Stores: (2)
-----------------------
Beginning of period 766 746 735
Opened 55 23 18
Closed (21) (3) (7)
---- ---- ----
End of period 800 766 746
=== === ===
(1) Includes owned stores operated under the names Color Tile, Floors A Plenty
or ColorCarpet.
(2) Excludes Factory Carpet stores operated in Canada. The Company intends to
operate these stores pending their disposition.
______________________________
Color Tile 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
8
<PAGE>
approximately 17,000 SKU's, approximately 14,000 of which are devoted to
special-order products (approximately 10,000 of which relate to carpet and
approximately 4,000 of which relate to other products).
Each Company Store typically employs approximately five people, including a
store manager. Thirty-two 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.
ABWF Direct-Response Operations. Prospective customers contact ABWF by
dialing toll-free 1-800-735-5300 and are greeted by a trained sales
representative who follows a scripted dialogue to determine 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 generates a price quote for the item ordered and, where applicable,
identifies the lowest cost vendor to ABWF for a particular brand name product
based on size, quantity and special vendor discounts and promotions. ABWF
offers over 100,000 SKU's to its customers.
Completed orders are transmitted to the manufacturer or distributor.
Orders are shipped directly to the customer by United Parcel Service or similar
carrier, and arrive three to seven working days after shipment.
ABWF's internally developed proprietary software utilizes the most recent
vendor pricing in quotes given to customers and ensures that orders are
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.
Increasingly, ABWF is utilizing electronic data interchange to transmit orders
and confirm shipment with vendors.
Floors A Plenty. Floors A Plenty is a free-standing "super-store"
developed to capitalize on the Company's success in the carpet product line in a
larger, higher volume retail outlet. This format 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 opened its
second Floors A Plenty store in Cincinnati, Ohio during the first quarter of
1994. Floors A Plenty stores offer approximately 20,000 SKU's, of which
approximately 10,000 are carpet 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
9
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carpet stores operating under the "ColorCarpet" trade name. During 1993, the
Company opened the first two ColorCarpet stores in the Dallas-Fort Worth area.
During the first quarter of 1994, the Company opened one additional ColorCarpet
store in the Dallas-Fort Worth area. ColorCarpet stores offer approximately
12,000 SKU's of carpet in approximately 3,500 square feet of retail space.
Carpeting represents approximately 80% 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.
Canadian Stores. Effective for the quarter ended October 3, 1993, the
Company decided to dispose of its Canadian operations. In conjunction with this
anticipated disposition, the Company recorded a loss of $9,500,000, which
included operating losses of $849,000 for 1993. As of March 31, 1994, the
Company had not disposed of these 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 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. The Company is in the process of negotiating the sale of the Canadian
operations.
Suppliers
The Company believes that one of its competitive advantages is its strong
relationship with its vendors. The Company continues to have good relationships
with suppliers.
During 1993, the Company manufactured approximately 15% of the products
sold in Color Tile Stores, with the balance supplied by unaffiliated domestic
(approximately 72%) and foreign (approximately 13%) 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 1993.
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 subject to annual
negotiation and adjustment starting in May 1994. The Company has completed such
negotiations for the 1994 contract year.
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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 or bi-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 following the order.
Manufacturing
Approximately 15% of the products sold in Color Tile Stores during 1993
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 are 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 1993 the
Company sold approximately 33% and 18%, 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
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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 1993, this facility produced approximately 94% of the Company's
adhesives, grouts and other surface-preparation products, which collectively
represented approximately 10% of the Company's total product sales. During
1993, the Adhesives Facility on average operated at approximately 50% of
capacity.
The Adhesives Facility is situated on approximately 9.2 acres of land and
contains approximately 163,000 square feet of production, warehouse, office 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
installations to increase production and operating efficiency. Tile produced at
this facility accounted for approximately 19% of the sales of ceramic tile by
Color Tile Stores and approximately 5% of total product sales during 1993. The
Company also manufactures trim pieces and decorated tiles at this facility. The
Tile Facility on average operated at approximately 85% of capacity during 1993.
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" and "ColorCarpet" trademarks and
logos, would not, in the opinion of management, have a material effect on the
conduct of its business. The Company has granted a security interest in its
trademarks and copyrights to secure its indebtedness under the Company's credit
agreement dated November 27, 1991, as amended, with a group of commercial banks
and other institutional lenders (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
12
<PAGE>
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 January 2, 1994, the Company employed approximately 4,000 persons,
including approximately 300 employees of ABWF and approximately 200 employees of
the Company's Canadian subsidiary. Substantially all of these employees are
employed on a full-time basis. The Company believes that its working
relationship with its employees is good.
Item 2. PROPERTIES
At January 2, 1994, 138 of the 800 Color Tile Stores were owned by the
Company and 662 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
196 leases expiring within the next three fiscal years, 143 have renewal
options. Leases generally are "triple-net", which obligates the Company to pay
real estate taxes, insurance and common area maintenance 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 in excess of stipulated amounts.
The Company currently operates two manufacturing facilities. See
"Manufacturing." The Company distributes merchandise to Color Tile Stores
through four distribution centers. See "Distribution."
13
<PAGE>
The total space owned and leased by the Company as of January 2, 1994 was
as follows:
Approximate Square Footage(1)
Owned Leased Total
----- ------ -----
Retail, net of subleases 685,000(1) 2,703,000(2) 3,388,000
Manufacturing 163,000 115,000 278,000
Distribution Centers -- 523,000 523,000
Office -- 129,000 129,000
-------- ---------- ---------
Totals 848,000 3,470,000 4,318,000
======== ========== =========
_________________________
(1) Excludes Factory Carpet stores operated in Canada which the Company intends
to operate pending their disposition. As of January 2, 1994, Factory
Carpet leased 331,000 square feet.
(2) The Company was subleasing approximately 898,000 square feet of retail
space to franchisees and other tenants as of such date.
During fiscal 1993, aggregate rental payments were approximately
$30,600,000 (exclusive of sublease rental income for such space of approximately
$7,300,000).
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.
Item 3. 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
All of the common stock of the Company is owned by Color Tile Holdings,
Inc. ("Holdings"). There is no established public trading market for the common
stock of the Company. Cash dividends have not been paid on the common stock of
the Company since 1978 when its predecessor was incorporated.
The Senior Credit Agreement contains covenants generally restricting the
ability of the Company to pay dividends on its capital stock in the future,
except for certain permitted payments on the Company's preferred stock. The
Company may however pay dividends or make other distributions on its common
stock to Holdings in amounts equal to the amounts (i) required for Holdings to
pay franchise taxes and other fees required to maintain its corporate existence
and provide for other operating costs of up to $100,000 per fiscal year, (ii)
required for Holdings to pay Federal, state and local income taxes to the extent
such income taxes are attributable to the income of the Company and its
subsidiaries, or (iii) expended by Holdings, up to an aggregate amount of
$1,500,000 in any fiscal year of the Company, to repurchase capital stock of the
Company or Holdings owned by former employees of the Company or its subsidiaries
or their assigns, estates and heirs.
The terms of the Company's Class B, Series A Senior Increasing Rate
Preferred Stock (the "Series A Shares") also generally restrict payment of
dividends on the Company's common stock so long as shares of such Series A Stock
are outstanding on generally the same terms as contained in the Senior Credit
Agreement.
On December 17, 1993, the Company issued (the "Senior Notes Offering") $200
million in principal amount of 10-3/4% Senior Notes, due 2001 (the "Senior
Notes"). The Senior Notes were issued pursuant to an indenture which restricts
the payment of dividends, the repurchase of capital stock and the making of
other Restricted Payments (as defined), subject to certain exceptions similar to
those contained in the Senior Credit Agreement.
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented in the table below for the Company
for the fiscal years ended January 2, 1994, January 3, 1993, December 29, 1991
and December 30, 1990, and for the Predecessor Company for the fiscal year ended
December 31, 1989, have been derived from the Company's and the Predecessor
Company's audited consolidated financial statements. The Company operates on a
52-53 week fiscal year ending on the Sunday closest to December 31 each year.
The acquisition of the Predecessor Company by Holdings occurred on December 28,
1989, and was accounted for as a purchase. Accordingly, 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
15
<PAGE>
at such date. For financial reporting purposes, the effective date of the
acquisition and related transactions is January 1, 1990. This information
should be read in conjunction with, and is qualified in its entirety by, the
Company's audited consolidated financial statements included elsewhere herein.
<TABLE> <CAPTION>
Fiscal Year Ended
-----------------
Predecessor
Company
--------
Jan. 2, Jan. 3, Dec. 29, Dec. 30, Dec. 31,
1994 1993 1991 1990 1989
-------- -------- -------- --------- --------
Results of Operations: (Amounts in Thousands)
---------------------
<S> <C> <C> <C> <C> <C>
Net sales $555,127 $580,385 $544,315 $525,819 $465,207
Cost of sales 309,528 311,368 292,517 274,686 238,928
Selling, general and
administrative expenses 191,451 208,796 201,237 195,056 192,063
Depreciation and
amortization 25,546 28,683 29,202 27,781 21,496
Special charges (a) 30,000
--------- -------- -------- -------- --------
Operating income 28,602 1,538 21,359 28,296 12,720
Gain (loss) on disposal
of a line of business (b) (9,500) 4,007
Interest expense, net (20,380) (25,697) (51,986) (50,100) (37,209)
--------- -------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary item and
cumulative effect of
changes in accounting
methods (1,278) (20,152) (30,627) (21,804) (24,489)
(Provision) benefit
for income taxes (641) (1,240) 2,133 (393) 618
Extraordinary gain (loss)
on early extinguishment
of debt, net of tax (c) (12,603) (601) 4,886
Cumulative effect of
change in accounting
methods, net of tax (d) (4,687)
--------- --------- -------- -------- --------
Net loss $(14,522) $(21,993) $(23,608) $(22,197) $(28,558)
========= ========= ========= ========= =========
</TABLE>
- ----------------------
(a) The special charges for the year ended January 3, 1993 relate to the
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 12 of the Notes to
Consolidated Financial Statements).
(b) Effective October 3, 1993, the Company determined 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. The sales, costs and
related expenses of the Factory Carpet's operations have been eliminated
16
<PAGE>
from the individual line items of the selected financial data for 1993 and
the operating losses of this line of business of $849 have been included on
a one-line basis in the $9,500 loss from disposal of a line of business.
Factory Carpet sales of $23,661 have been eliminated from the summary
financial data for 1993.
The gain on disposal of a line of business for 1992 relates to the sale of
the Company's formerly owned wood manufacturing facility located in
Melbourne, Arkansas (the "Wood Plant") (see Note 13 of the Notes to
Consolidated Financial Statements).
(c) The extraordinary items for 1993, 1992, and 1991 relate to the gains
(losses) on the early extinguishment of certain long-term debt (See Note 7
of the Notes to Consolidated Financials Statements).
(d) The cumulative effect of changes in accounting methods for 1989 related 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.
Predecessor
Company
-------
Jan. 2, Jan. 3, Dec. 29, Dec. 30, Dec. 31,
1994 1993 1991 1990 1989
-------- ------- -------- -------- --------
Balance Sheet Data: (Amounts in Thousands)
------------------
Current assets $108,084 $ 94,085 $ 88,999 $ 92,351 $124,302
Current liabilities 103,712 82,831 87,593 89,334 80,793
Working capital 4,372 11,254 1,406 3,017 43,509
Total assets 565,343 462,992 504,984 525,338 402,482
Long-term debt (inc.
current portion) 353,357 254,762 305,735 369,452 300,213
Redeemable preferred
stock 86,838 82,596 26,556 23,576 20,597
Common stockholder's
equity (deficiency) $ 21,738 $ 48,789 $ 77,941 $ 24,824 $(23,537)
17
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year Ended January 2, 1994 (52 weeks) Compared to Fiscal Year Ended
January 3, 1993 (53 weeks).
Effective October 3, 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 consolidated statement of operations for
1993 but are included in the results of operations for prior periods.
Systemwide Sales. Systemwide sales include retail sales of all Company
Stores (excluding Canadian operations in 1993), retail sales of all Franchised
Stores, sales of ABWF and outside sales of manufactured products to third
parties. Systemwide sales for the Company's U.S. operations increased 2.4%
during 1993 as compared to the comparable prior-year period.
Net Sales. Total net sales of the Company declined as a result of the
elimination from net sales of $23,661,000 of retail sales of the Canadian retail
operations for 1993. Total net sales for 1992 include $31,085,000 of retail
sales of the Canadian operations. Net sales for the Company's domestic
operations increased $5,827,000, or 1.1%, for 1993 as compared to net sales for
the comparable prior-year period. The improvement in sales resulted from (a)
increases in (i) sales of carpet and related installation services,
(ii) franchising fees and royalties and (iii) sales of merchandise to
franchisees and (b) the addition of the sales of ABWF. These increases were
partially offset by decreases in sales resulting from (i) the conversion of 26
Company Stores (excluding 9 Company stores in Canada) to Franchised Stores,
(ii) decreased sales of other product lines 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.
Net sales for domestic Company Stores open over one year decreased 3.4% for
1993 compared to the comparable prior-year period. The Company believes
that the factors affecting retail sales in 1993 include (i) the severe winter
weather during March, the Company's peak selling period, (ii) a continued
decline in consumer confidence during the first three quarters of 1993,
(iii) generally weak economic conditions, and (iv) the extremely soft retail
climate in California and the Northeast. As part of its continuing efforts to
reduce expenses in this difficult retail environment, management reduced
domestic advertising expenditures by approximately $4,304,000, or 9.7%, for 1993
compared to the prior year, which reductions management believes also
contributed to the decline in net sales.
At January 2, 1994, there were 800 Color Tile Stores (excluding the 37
Canadian stores) in operation, 86 of which were Franchised Stores. During 1993,
25 new Company Stores were opened, 19 Company Stores were closed, 56 new
Franchised Stores were opened (including the 26 Company Stores converted to
Franchised Stores), two Franchised Stores were closed and three Franchised
Stores were reacquired by the Company and are currently operated as Company
Stores (excluding the Canadian Stores). In addition, as of January 2, 1994,
there were 58 signed franchise agreements for additional Franchised Stores
that the Company expects will open within the next 12 to 18 months.
18
<PAGE>
Cost of Sales. Cost of sales decreased by $1,840,000, or 0.6%, for 1993,
due principally to the elimination of the Canadian operation's cost of sales,
which decreased cost of sales by $14,485,000, and also due to lower overall
domestic retail sales. As a percentage of net sales, cost of sales increased to
55.8% for 1993 as compared to 53.6% 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,
(iii) decreased sales of hard-surface flooring products and (iv) the addition of
the sales by ABWF since its acquisition.
Operating Expenses. Selling, general and administrative expenses decreased
as a percentage of sales to 34.5% for 1993 as compared to 36.0% 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 $17,345,000 for 1993 as
compared to the comparable prior-year period primarily due to (i) decreases in
payroll, (ii) reductions in advertising expenditures discussed previously,
(iii) lower insurance costs due to favorable claims experience and
(iv) elimination of $9,542,000 of operating expenses of the Canadian operations.
Gain (Loss) on Disposal of a Line of Business. During the third quarter of
1993, the Company determined to dispose of its Canadian operations. The 37
retail stores comprising the Canadian operations, including 9 Franchised Stores,
operate under the Factory Carpet name, and 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. As of March 31, 1994, the Company was in
the process of negotiating the sale of the Canadian operations. In conjunction
with this anticipated disposition, the Company recorded a loss of $9,500,000,
which included operating losses of $849,000 for 1993.
During May 1992, the Company sold its Wood Plant and realized a gain of
$4,007,000.
Interest Expense, Net. Interest expense decreased $5,317,000 for 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 in August 1992. Borrowings
under the Senior Credit Agreement bear interest at fluctuating rates, which
19
<PAGE>
approximated 6.3% per annum during 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."
Pre-Tax Income (Loss). Pre-tax loss for 1993 was $1,278,000 as compared to
pre-tax loss of $20,152,000 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 $8,222,000 for 1993. Excluding the 1992 gain on the sale of the
Wood Plant of $4,007,000 and the $30,000,000 Special Charges, pre-tax income for
1992 would have been $5,841,000. This improvement in pre-tax income resulted
from lower interest expense in 1993.
Income Taxes. Income tax expense was $641,000 for 1993 compared to
$931,000 in the comparable prior-year period, due to higher state income taxes
in 1992 on the gain on the sale of the Wood Plant.
Extraordinary Item. In 1993 the Company recognized a $12,603,000
extraordinary loss on the early extinguishment of debt. During 1992, the
Company reported an extraordinary loss on the early extinguishment of debt of
$601,000.
Net Loss. Net loss for 1993 was $14,522,000 after the $9,500,000
loss on the Canadian operations and the $12,603,000 extraordinary loss on the
early extinguishment of debt. This loss compares to net loss in the prior year
of $21,993,000, which included $4,007,000 pre-tax gain on sale of the Wood
Plant and the $30,000,000 Special Charges. Excluding the extraordinary
losses in both years, the loss on disposal of the Canadian operations during
1993 and the gain on sale of the Wood Plant and the Special Charges during
1992, net income would have been $7,581,000 for 1993 as compared to net
income of $4,910,000 for the comparable prior-year period.
Fiscal Year Ended January 3, 1993 (53 Weeks), Compared to Fiscal Year Ended
December 29, 1991 (52 Weeks).
The discussion that follows includes the 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 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 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
20
<PAGE>
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 1992
compared to the prior period. As a percentage of net sales, cost of sales
declined to 53.6% during 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 1992
decreased as a percentage of sales to 36.0% from 37.0% in the prior year as 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 Senior Credit Agreement due in 1992.
Interest Expense, Net. Interest expense decreased $26,289,000, or 50.6%,
in 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
21
<PAGE>
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 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 1992). Excluding the Special Charges recorded in 1992, pre-tax
income would have been $9,848,000, as compared to the $30,627,000 pre-tax loss
in 1991.
Income Tax Expense (Benefit). Income tax expense for 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 1992 earnings.
Extraordinary Item. In 1992 the Company recognized a $910,000 pre-tax
extraordinary loss on the early extinguishment of debt. This extraordinary loss
resulted from the redemption of the remaining outstanding 12-3/8% Senior Notes
at a premium on October 15, 1992. During 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 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.
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 Color Tile
Holdings, Inc. ("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 January 2, 1994, the Company had $126,600,000 in outstanding borrowings
under the Senior Credit Agreement, which bear interest at fluctuating rates. At
January 2, 1994, the average fluctuating interest rate on such borrowings
approximated 6.2% per annum. The Company was in compliance as of January 2,
1994 with all restrictive covenants contained in the Senior Credit Agreement.
22
<PAGE>
Upon the application of net proceeds from the Senior Notes Offering, the
Company prepaid $86,500,000 of indebtedness under the term loan portion of its
Senior Credit Agreement, which reduced the Company's mandatory debt repayment
obligations on currently outstanding debt over the next five years. After
giving effect to the use of net proceeds from the Senior Notes Offering,
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 1994. In 1995, the Company's Redeemable Senior Preferred Stock will
begin to accrue cash dividends of approximately $5,200,000 each year.
Capital expenditures for 1993 were $14,031,000 as compared to $13,938,000
for 1992. These capital expenditures for new store openings, remodeling of
existing stores, new fixtures and capitalized repairs have been funded through
cash flow from operations and the revolving credit portion of the Senior Credit
Agreement. In 1994, the Company anticipates total capital expenditures of
approximately $18,000,000 to $20,000,000.
The Company believes that funds generated from operations, the revolving
line of credit portion of the Senior Credit Agreement, lease financings
and purchase money mortgages will provide sufficient resources through 1994 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 to finance planned capital expenditures. At March 31, 1994 there was
approximately $10,000,000 of availability under the Senior Credit Agreement.
In order to consummate the Senior Notes 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 Notes Offering. Such amendment modifies the Senior Credit Agreement to,
among other things, permit the Senior Notes 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 Notes 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 the ABF Assets.
23
<PAGE>
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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth on pages F-1
through F-24 and the related financial schedules are set forth on pages S-1
through S-4.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
24
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information with respect to the directors and executive officers of
the Company is set forth below:
Name Age Position
---- --- --------
Eddie M. Lesok 45 Chairman of the Board, Chief
Executive Officer and Director
N. Laurence Nagle 65 President, Chief Operating Officer
and Director
Daniel J. Gilmartin 49 Senior Vice President, Treasurer,
Chief Financial Officer and
Director
Alan J. Bethscheider 35 Vice President-Legal, Secretary and
General Counsel
Paul W. Soldatos 44 Director
Walter F. Loeb 69 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 and Senior
Vice President since January 1994. 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 &
25
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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.
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.
Director Compensation
Mr. Loeb receives a director's fee of $20,000 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. ("Investcorp") 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.
Item 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation earned in fiscal
1993 by the Company's Chief Executive Officer and each of the other three most
highly compensated executive officers, whose remuneration exceeded $100,000.
26
<PAGE>
Summary Compensation Table
--------------------------
Long
Term
Compen-
Annual Compensation sation Other
Awards
(a) (b) (c) (d) (e) (g) (i)
Other All
Annual Other
Name Compen- Compen
and Salary sation Holdings -sation
Principal ($) Bonus ($) Options ($)
Position Year (B) ($) (C,D) (#)(E) (C,F,G)
(A)
Eddie M. Lesok 1993 358,100 - - - 4,497
Chief Executive 1992 358,100 296,000 - - 4,364
Officer 1991 358,100 - - - -
N. Laurence Nagle 1993 282,500 - - - 4,497
President 1992 282,500 256,000 - - 4,364
1991 282,500 - - - -
Daniel J. 1993 207,500 50,000 - - 4,497
Gilmartin 1992 207,500 192,000 - - 26,696
Chief Financial 1991 107,836 - - 4,240 -
Officer
Alan J. 1993 132,200 - - - 4,260
Bethscheider 1992 115,053 65,262 - 6,375 -
Vice President-
Legal
___________________
(A) Mr. Gilmartin joined the Company in September 1991. Mr. Bethscheider
joined the Company in February 1992.
27
<PAGE>
(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) Information for years ended 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
1993 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
Holdings. All references to common stock in the Executive
Compensation tables and discussion contained in this Item 11 refer to
common stock of Holdings.
(F) See Employment Contracts; Termination and Change-in-Control
Arrangements."
(G) The amounts shown in this column for 1993 and 1992, respectively, are
derived from the following figures: (i) Mr. Lesok, $4,497 and $4,364,
respectively, Company payments to the Investment Plan ($4,497 and
$4,364 of which is vested), and (ii) Mr. Nagle, $4,497 and $4,364,
respectively, Company payments to the Investment Plan ($4,497 and
$4,364 of which is vested), (iii) Mr. Gilmartin, $4,497 and $1,696,
respectively, Company payments to the Investment Plan ($1,799 and $678
of which are vested), and $25,000 relocation allowance for 1992 and
(iv) Mr. Bethscheider, $4,260 Company payment during 1993 to the
Investment Plan ($852 of which is vested).
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<PAGE>
Option Exercises and Value Table - Fiscal 1993
Aggregated Option Exercises in Fiscal 1993, and FY-End Option Value
(a) (b) (c) (d) (e)
Value of Un-
exercised "In-
Number of the-Money"
Unexercised Holdings
Holdings Holdings Options at FY-
Shares Options at End
Acquired on Value FY-End ($)
Name Exercise (#) Realized (#) Exercisable/
($) Exercisable/ Unexercisable
Unexercisable (A)
Eddie M. - - 7,091.8/28,367.2 -
Lesok
N. Laurence - - 3,636.8/14,627.2 -
Nagle
Daniel J. - - 848/3,392 -
Gilmartin
Alan J. - - 1,275/5,100 -
Bethscheider
_______________________
(A) Underlying shares are not publicly traded and are subject to
repurchase by 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 acquisition of the Company by Holdings (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. In January 1994, these agreements were amended to, among other things,
29
<PAGE>
extend their terms until the end of the Company's 1998 fiscal year. The
agreements 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 $450,000 (subject to upward adjustment) during the term of the agreement.
Mr. Nagle will receive, under his agreement, an annual base salary of $375,000
(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 twelve months' base salary. Mr.
Bethscheider's current base salary is $150,000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Holdings owns all of the Company's issued and outstanding shares of common
stock. Holdings has pledged all such shares to secure the Company's obligations
under its Senior Credit Agreement. See "Capital Structure". The mailing
address of Holdings is 280 Park Avenue, 37th Floor, New York, New York 10017.
Holdings' Principal Stockholders
Class D Stock, par value $.01 per share, is the only class of Holdings'
stock that currently possesses voting rights. At January 2, 1994, there were
5,000 shares of 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 January 2, 1994 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 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:
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<PAGE>
Class D Voting Stock:
Percent of
Outstanding Shares
Number of of
Shares of Holdings' Holdings'
Class D Class D
Name and Address Voting Stock Voting Stock
of Beneficial Owner Beneficially Owned(1) Beneficially Owned(1)
------------------- --------------------- ---------------------
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.
Planning Equity Limited(4)(8) 350 7%
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
31
<PAGE>
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.
___________________________
(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.
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<PAGE>
(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 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.
33
<PAGE>
Class C Non-Voting Stock:
Percent of
Number of Outstanding Shares of
Shares of Holdings' Holdings'
Class C Class C
Name and Address Non-Voting Stock Non-Voting Stock
of Beneficial Owner Beneficially Owned (1) Beneficially Owned (1)
------------------- ---------------------- ----------------------
All directors and 66,357 25.2%
executive officers 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
___________________________
(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.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Holdings acquired the Company in a merger transaction in 1989 (the "1989
Merger") pursuant to an Agreement of Merger, dated as of October 16, 1989, as
amended as of December 17, 1989 (the "Merger Agreement"), by and among 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).
Holdings was formed to acquire the Company by
34
<PAGE>
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 has an agreement for
management advisory and consulting services with Investcorp International,
Inc. ("International") pursuant to which the Company has agreed to pay
International $500,000 per annum for a five-year term.
During 1991 and 1990, the Company incurred interest expense on the
$60 million Junior Subordinated Notes (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.
During 1991, 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.
During 1993, the Company paid the Investment Plan aggregate rentals of
approximately $3,500,000 with respect to 44 properties leased to the Company by
the Investment Plan. During 1992 and 1991, the Company paid the Investment Plan
aggregate rentals of approximately $3,100,000 with respect to 43 properties and
approximately $3,100,000 with respect to 43 properties, respectively. These
leases were originally between
35
<PAGE>
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
Notes 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 cash purchase price of approximately $73,000,000 net of 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 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 $80,000,000, including fees and expenses of
$6,500,000, 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 Notes
Offering on December 17, 1993.
In connection with the Option Agreement, the Company and ABF Acquisition
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 for such services. Pursuant to this agreement, the Company has received a
fee of approximately $2,000 and does not expect to receive any additional
compensation.
36
<PAGE>
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.
37
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of reports:
----------------------------------
1. Financial Statements included under Item 8:
See Index to Consolidated Financial Statements included on page
F-1.
2. Financial Statement Schedules filed herewith:
See Index to Consolidated Financial Statements Schedules included
on page F-1.
All other schedules are omitted either because they are not
required or because the required information is included in the financial
statements and notes thereto included herein. See "Index to Consolidated
Financial Statements."
3. List of Exhibits
Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this Form 10-K is identified with an
asterisk ("*") below.
3(a) Certificate of Incorporation of the Company (filed as
Exhibit 3(a) to the Registration Statement (No. 33-13428)
on Form S-1 filed by the Company on April 14, 1987 (the
"Registration Statement") and incorporated herein by
reference)
3(b) Certificate of Amendment of Certificate of Incorporation
of the Company (filed as Exhibit 4(f) to the Company's
Current Report on Form 8-K dated December 28, 1989 (the
"December 28, 1989 Form 8-K") and incorporated herein by
reference)
3(c) Amended and Restated Bylaws of the Company (filed as
Exhibit 3(b) to the Registration Statement and
incorporated herein by reference)
3(d) Certificate of Amendment of Certificate of Incorporation
of the Company (filed as Exhibit 3(d) to the Company's
Current Report on Form 10-K dated March 28, 1991 and
incorporated herein by reference)
3(e) Certificate of Designations, Preferences, and Relative,
Participating, Optional, and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions thereof for the Registrant's Series A Senior
Increasing Rate Preferred Stock (filed as Exhibit 4.1 to
the Company's current report on Form 8-K dated August 28,
1992 (the "August 28, 1992 Form 8-K") and incorporated
herein by reference)
38
<PAGE>
3(f) Certificate of Designations, Preferences, and Relative,
Participating, Optional, and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions thereof for the Registrant's Series B Senior
Increasing Rate Preferred Stock (filed as Exhibit 4.2 to
the August 28, 1992 Form 8-K and incorporated herein by
reference)
3(g) Certificate of Amendment to the Certificate of
Incorporation of the Registrant (filed as Exhibit 4.5 to
the August 28, 1992 Form 8-K and incorporated herein by
reference)
4(a) Securities Purchase Agreement, dated as of October 20,
1986, among GFICT and each of the Purchasers referred to
therein (filed as Exhibit 4(a) to the Registration
Statement and incorporated herein by reference)
4(b) Registration Rights Agreement, dated as of October 20,
1986, among GFICT and each of the Purchasers referred to
therein relating to the Securities (filed as Exhibit 4(b)
to the Registration Statement and incorporated herein by
reference)
4(c) Specimen Certificate of the Company's Senior Preferred
Stock (filed as Exhibit 4(m) to the Registration
Statement and incorporated herein by reference)
4(d) Agreement, dated as of December 28, 1989, among Color
Tile Holdings, Inc., CT Acquisition Corp., Color Tile,
Inc., Knoll International Holdings, Inc. and NEAC, INC.
(filed as Exhibit 4(f) to the December 28, 1989 Form 8-K)
4(d) Securities Purchase Agreement by and among the Registrant
and each of the Purchasers referred to therein, dated as
of August 13, 1992 (filed as Exhibit 4.3 to the August
28, 1992 Form 8-K)
4(e) Exchange and Registration Rights Agreement by and among
the Registrant and each of the Purchasers referred to
therein, dated as of August 13, 1992 (filed as Exhibit
4(m) to the August 28, 1992 Form 8-K)
4(f) Form of Indenture for Color Tile, Inc. 10-3/4% Senior
Notes Due 2001 (filed as exhibit 4(g) to the Company's
Form S-1 Registration Statement filed November, 1993 and
incorporated herein by reference).
39
<PAGE>
10(a) Lease and Agreement, dated as of August 1, 1979, between
the City of Melbourne, Arkansas ("Melbourne") and the
Company (filed as Exhibit 10(a) to the Registration
Statement and incorporated herein by reference)
10(b) First Supplemental Lease and Agreement, dated as of
February 1, 1981, between Melbourne and the Company
(filed as Exhibit 10(b) to the Registration Statement and
incorporated herein by reference)
10(c) Trust Indenture, dated as of August 1, 1979, by and
between Melbourne and TCB, as Trustee, relating to the 7-
1/8% Industrial Development Revenue Bond - Color Tile
Project, Series 1979 (the "Melbourne Bonds") (filed as
Exhibit 10(c) to the Registration Statement and
incorporated herein by reference)
10(d) First Supplemental Trust Indenture, dated as of February
1, 1981, by and between Melbourne and TCB, as Trustee,
relating to the Melbourne Bonds (filed as Exhibit 10(d)
to the Registration Statement and incorporated herein by
reference)
10(e) Guaranty Agreement, dated as of August 1, 1979, between
the Company and TCB relating to the Melbourne Bonds
(filed as Exhibit 10(e) to the Registration Statement and
incorporated herein by reference)
10(f) First Supplemental Guaranty Agreement, dated as of
February 1, 1981, between the Company and TCB relating to
the Melbourne Bonds (filed as Exhibit 10(f) to the
Registration Statement and incorporated herein by
reference)
10(g) Lease Agreement, dated January 1, 1981, between the
Village of Park Forest South ("Park Forest") and the
Company (filed as Exhibit 10(g) to the Registration
Statement and incorporated herein by reference).
10(h) Indenture of Mortgage and Deed of Trust, dated January 1,
1981, from Park Forest to Texas Commerce Bank National
Association ("TCB") and Edward Mogee, as Trustees,
relating to the 9.375% Industrial Revenue Bonds (Color
Tile, Inc. Project), Series A, due December 15, 2000 (the
"Park Forest Bonds") (filed as Exhibit 10(h) to the
Registration Statement and incorporated herein by
reference)
10(i) Guarantee and Indemnification Agreement, dated January 1,
1981, between the Company and TCB, as Trustee, relating
to the Park Forest Bonds (filed as Exhibit 10(i) to the
Registration Statement and incorporated herein by
reference)
40
<PAGE>
10(j) Lease Agreement, dated January 1, 1981, between the City
of Cleveland, Mississippi ("Cleveland") and the Company
(filed as Exhibit 10(j) to the Registration Statement and
incorporated herein by reference)
10(k) Indenture of Mortgage and Deed of Trust, dated January 1,
1981, from Cleveland to TCB, as Trustee, relating to the
10% Industrial Development Revenue Bonds (Color Tile,
Inc. Project), Series A, due January 15, 2001 (the
"Cleveland Bonds") (filed as Exhibit 10(k) to the
Registration Statement and incorporated herein by
reference)
10(l) Guarantee and Indemnification Agreement, dated January 1,
1981, between the Company and TCB, as Trustee, relating
to the Cleveland Bonds (filed as Exhibit 10(l) to the
Registration Statement and incorporated herein by
reference)
10(m) Lease Agreement, dated October 1, 1981, between City of
West Chicago ("West Chicago") and the Company (filed as
Exhibit 10(m) to the Registration Statement and
incorporated herein by reference)
10(n) Indenture of Mortgage and Deed of Trust, dated October 1,
1981, from West Chicago to TCB and Albert V. O'Neal, as
Trustees, relating to the 9.80% Indenture Development
Revenue Bonds (Color Tile, Inc. Project), Series A, due
1983-1997 (the "West Chicago Bonds") (filed as Exhibit
10(n) to the Registration Statement and incorporated
herein by reference)
10(o) Guarantee and Indemnification Agreement, dated October 1,
1981, between the Company and TCB, as Trustee, relating
to the West Chicago Bonds (filed as Exhibit 10(o) to the
Registration Statement and incorporated herein by
reference)
*10(p) Profit Sharing Plan (filed as Exhibit 10(r) to the
Registration Statement and incorporated herein by
reference)
10(q) Agreement of Merger, dated as of October 16, 1989, among
Color Tile Holdings, Inc., CT Acquisition Corp., Color
Tile, Inc. , Knoll International Holdings, Inc. and NEAC,
INC. (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended October 1, 1989
and incorporated by reference)
10(r) Amendment to Agreement of Merger, dated as of December
17, 1989, among Color Tile Holdings, Inc., CT Acquisition
Corp., Color Tile, Inc., Knoll International Holdings,
Inc. and NEAC, INC. (filed as Exhibit 2(b) to the
December 28, 1989 Form 8-K and incorporated herein by
reference)
41
<PAGE>
*10(s) Amendment to Employment Agreement dated January 3, 1994,
between the Company and Eddie M. Lesok
*10(t) Amendment to Employment Agreement dated January 3, 1994,
between the Company and N. Laurence Nagle
10(u) Agreement for Management Advisory and Consulting Services
between INVESTCORP International Inc. and CT Acquisition
Corp. dated December 22, 1989 (filed as Exhibit 10(aa) to
the December 31, 1989 Form 10-K and incorporated herein
by reference)
10(v) Credit Agreement dated as of November 27, 1991, as
amended through April 2, 1992, among the Company, the
lenders party thereto and Manufacturers Hanover Trust
Company as agent (filed as Exhibit 10(ff) to the December
29, 1991 Form 10-K and incorporated herein by reference)
10(x) Amendment, Acknowledgement and Consent, dated July 30,
1992, among the Registrant, Chemical Bank, as agent, and
certain banks listed therein, amending certain provisions
of the Credit Agreement, dated as of November 27, 1991 as
amended through April 2, 1992, and the Senior
Subordinated Loan Agreement, dated as of November 27,
1991 as amended through April 2, 1992 (each of which were
previously filed as Exhibits 10(ff) and 10(gg) to the
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 29, 1991) (filed as Exhibit 28.1 to
the August 28, 1992 Form 8-K)
10(y) Amendment No. 3, dated as of November 1, 1993, to the
Credit Agreement, dated as of November 27, 1991, as
amended April 2, 1992, among the Company, the lenders
party thereto and Chemical Bank as agent (filed an
Exhibit 10(r) to Registration Statement (No. 33-50599)
filed by the Company on October 14, 1993 and incorporated
herein by reference).
18 Letter regarding Change in Accounting Principles (filed
as Exhibit 18 to the December 31, 1989 Form 10-K and
incorporated herein by reference)
21(a) Press Release of the Registrant concerning the Placement,
dated August 13, 1992 (filed as Exhibit 21.2 to the
August 28, 1992 Form 8-K)
22 Subsidiaries of the Company
42
<PAGE>
(b) Reports on Form 8-K:
-------------------
The following Reports on Form 8-K were filed during the
last quarter of time period covered by this Report on
Form 10-K:
None
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COLOR TILE, INC.
By: /s/ Eddie M. Lesok
----------------------------------------
Eddie M. Lesok, Chief Executive Officer
DATED: April 1, 1994
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and on
the date indicated.
/s/ Eddie M. Lesok
- -----------------------------------------
Eddie M. Lesok, Chairman of the Board, April 1, 1994
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ N. Laurence Nagle
- ------------------------------------------
N. Laurence Nagle, Director April 1, 1994
/s/ Daniel J. Gilmartin
- -----------------------------------------
Daniel J. Gilmartin, Director April 1, 1994
(Principal Financial Officer)
/s/ Paul W. Soldatos
- -----------------------------------------
Paul W. Soldatos, Director April 1, 1994
/s/ Walter F. Loeb
- -----------------------------------------
Walter F. Loeb, Director April 1, 1994
44
<PAGE>
COLOR TILE, INC.
Annual Report on Form 10-K
Year Ended January 2, 1994
EXHIBITS INDEX
Sequentially
Exhibit Numbered
No. Description Page
- ------- --------------------------------------------------- ------------
Report of Independent Accountants
Consolidated Financial Statements:
Consolidated Balance Sheet as of January 2, 1994
and January 3, 1993
Consolidated Statement of Operations for
the years ended January 2, 1994,
January 3, 1993 and December 29, 1991
Consolidated Statement of Common Stockholder's
Equity for the years ended
January 2, 1994, January 3, 1993,
and December 29, 1991
Consolidated Statement of Cash Flows for the years
ended January 2, 1994, January 3, 1993 and
December 29, 1991
Notes to Consolidated Financial Statements
Financial Statement Schedules:
Schedule V - Property, Plant and Equipment
Schedule VI - Accumulated Depreciation and
Amortization of Property,
Plant and Equipment
Schedule VIII - Valuation and Qualifying Accounts
Schedule X - Supplementary Income Statement
Information
10(s) Employment Agreement - Eddie M. Lesok
10(t) Employment Agreement - N. Laurence Nagle
22 Subsidiaries of Company
45
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page
------
Report of Independent Accountants F - 2
Consolidated Financial Statements:
Consolidated Balance Sheet as of January 2, 1994 and
January 3, 1993 F - 3
Consolidated Statement of Operations for the years
ended January 2, 1994, January 3, 1993 and
December 29, 1991 F - 4
Consolidated Statement of Common Stockholder's
Equity for the years ended January 2, 1994,
January 3, 1993 and December 29, 1991 F - 5
Consolidated Statement of Cash Flows for the years
ended January 2, 1994, January 3, 1993 and
December 29, 1991 F - 6
Notes to Consolidated Financial Statements F - 7
Consolidated Financial Statement Schedules for the years ended
January 2, 1994, January 3, 1993 and December 29, 1991:
Schedule V - Property, Plant and Equipment S - 1
Schedule VI - Accumulated Depreciation and Amortization
of Property, Plant and Equipment S - 2
Schedule VIII - Valuation and Qualifying Accounts S - 3
Schedule X - Supplementary Income Statement Information S - 4
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
Board of Directors
Color Tile, Inc.
We have audited the consolidated financial statements and the financial
statement schedules of Color Tile, Inc. listed on page F-1 of this Form 10-K.
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 2, 1994 and January 3, 1993 and the consolidated results of its
operations and cash flows for each of the three years in the period ended
January 2, 1994 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
March 28, 1994
F-2
<PAGE>
COLOR TILE, INC.
Consolidated Balance Sheet
January 2, 1994 and January 3, 1993
(Amounts in Thousands, except share amounts)
ASSETS
January 2, January 3,
--------- ---------
1994 1993
--------- ---------
Current Assets:
Cash and cash equivalents $ 4,522 $
Accounts and notes receivable, net of
allowance for bad debts of
$369 and $415 13,860 12,643
Inventories 83,552 74,045
Deferred income taxes 1,078 3,830
Other current assets 5,072 3,567
------- -------
Total Current Assets 108,084 94,085
------- -------
Property, plant and equipment, net 119,993 121,949
Goodwill, net 269,824 173,847
Other intangible assets, net 40,696 45,377
Deferred financing costs, net 6,464 13,891
Deferred income taxes 13,078 10,322
Other assets 7,204 3,521
-------- -------
Total Assets $565,343 $462,992
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 5,790 $15,073
Accounts payable 60,941 38,803
Accrued expenses and other current
liabilities 36,981 28,955
------- -------
Total Current Liabilities 103,712 82,831
------- -------
Long-term debt 347,567 239,689
Other noncurrent liabilities 5,488 9,087
------- -------
Total Liabilities 456,767 331,607
------- -------
Commitments and contingencies (Notes 8
and 10)
Redeemable preferred stock, $90,784
liquidation value at January 2, 1994 86,838 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 105,230 117,522
Accumulated deficit (83,492) (68,733)
-------- -------
Total Common Stockholder's Equity 21,738 48,789
------- -------
Total Liabilities and Stockholders'
Equity $565,343 $462,992
======== =======
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 2, 1994, January 3, 1993
and December 29, 1991
(Amounts in Thousands)
January 2, January 3, December 29,
1994 1993 1991
--------- --------- ---------
Systemwide Sales (Note 1) $568,314 $586,007 $546,761
======== ======== ========
Net Sales $555,127 $580,385 $544,315
-------- -------- --------
Costs and Expenses:
Cost of sales 309,528 311,368 292,517
Selling, general and
administrative expenses 191,451 208,796 201,237
Depreciation and
amortization 25,546 28,683 29,202
Special charges 30,000
--------- ------- ---------
Total Costs and
Expenses 526,525 578,847 522,956
-------- -------- --------
Operating income 28,602 1,538 21,359
Gain (loss) on
disposal of a line of
business (9,500) 4,007
Interest expense (net
of interest
income of $163,
$102, and $540) (20,380) (25,697) (51,986)
-------- -------- --------
Loss before income
taxes and
extraordinary item (1,278) (20,152) (30,627)
Provision (benefit) for
Income Taxes 641 1,240 (2,133)
-------- -------- -------
Loss before
extraordinary item (1,919) (21,392) (28,494)
Extraordinary gain (loss) on
early extinguishment
of debt, net of tax (12,603) (601) 4,886
-------- -------- -------
Net Loss $(14,522) $(21,993) $(23,608)
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<TABLE> <CAPTION>
COLOR TILE, INC.
Consolidated Statement of Common Stockholder's Equity
for the years ended January 2, 1994, January 3, 1993 and December 29, 1991
(Amounts in Thousands, except share amounts)
Total
Additional Common
Common Stock Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Equity
------- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
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
------- ------- ------ ------- --------
Senior Cumulative Preferred Stock
dividends, declared and undeclared (2,892) (2,892)
Accretion of difference between
redemption value and proceeds of
Senior Cumulative Preferred Stock (80) (80)
Senior Increasing Rate Preferred Stock
dividends, declared and undeclared (8,953) (8,953)
Accretion of difference between
redemption value and proceeds of
Senior Increasing Rate Preferred Stock (367) (367)
Cumulative translation adjustment (237) (237)
Net loss (14,522) (14,522)
------- ------- ------ ------- --------
Balance, January 2, 1994 101 $105,230 $(83,492) $ 21,738
======= ======= ======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE> <CAPTION>
COLOR TILE, INC.
Consolidated Statement of Cash Flows
for the years ended January 2, 1994, January 3, 1993
and December 29, 1991
(Amounts in Thousands)
January 2, January 3, December 29
1994 1993 1991
---------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,522) $(21,993) $(23,608)
-------- -------- --------
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 27,011 30,177 33,179
Deferred interest on
junior subordinated notes 6,860
Extraordinary (gain) loss on
early extinguishment of debt 12,603 910 (7,403)
Special charges 30,000
(Gain) loss on disposal
of a line of business 8,189 (4,327) 613
(Increase) decrease in
accounts receivable (420) (5,731) 210
(Increase) decrease in inventories (11,773) (1,813) 4,746
(Increase) decrease in
other current assets 742 (2,206) (2,489)
(Increase) decrease in other assets (12,534) 3,467 4,286
Increase (decrease) in accounts payable 11,904 1,179 (1,024)
Decrease in accrued expenses (7,017) (7,407) (10,827)
Increase (decrease) in
layaways and deposits (448) 213 (138)
Decrease in other liabilities (5,032) (8,457) (7,549)
-------- -------- --------
Total adjustments 23,225 36,005 20,464
-------- -------- --------
Cash provided by (used in)
operating activities 8,703 14,012 (3,144)
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant
and equipment (14,031) (13,938) (9,517)
Proceeds from sale of assets 2,051 14,015 1,129
Acquisition, net of cash acquired (74,934)
Other investing activities (5,362) (4,065) 13,575
-------- -------- --------
Cash provided by (used in)
investing activities (92,276) (3,988) 5,187
-------- -------- --------
Cash flows from financing activities:
Borrowings under revolving
line of credit 212,250 241,414 8,910
Payments on revolving line
of credit (216,950) (231,845)
Payments on long-term debt (99,518) (20,295) (5,534)
Borrowings to fund repurchase of debt 63,436 125,673
Issuance of common stock 79,704
Issuance of 10 3/4 % Senior Notes 200,000
Issuance of Senior Increasing Rate
Preferred Stock 51,038
Dividends paid on Senior Increasing Rate
Preferred Stock (7,450) (1,224)
Repurchase of debt (111,958) (211,681)
-------- -------- --------
Cash provided by (used in)
financing activities 88,332 (9,434) (2,928)
-------- -------- --------
Effect of exchange rate
differences on cash equivalents (237) (663)
-------- -------- --------
Increase (Decrease) in cash and cash
equivalents 4,522 (73) (885)
Cash and cash equivalents at
beginning of period 0 73 958
-------- -------- --------
Cash and cash equivalents at
end of period $4,522 $ 0 $ 73
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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
---------------------
Color Tile, Inc. ("Color Tile") has been a wholly-owned subsidiary of
Color Tile Holdings, Inc. ("Holdings"), an affiliate of INVESTCORP, S.A.
("Investcorp"), since Holdings' acquisition of all outstanding common
stock of Color Tile, Inc. on December 28, 1989 (the "1989 Merger").
On December 17, 1993, Color Tile, Inc. through its wholly-owned
subsidiary, American Blind and Wallpaper Factory, Inc. ("ABWF"), acquired
the operating assets (the "ABF Assets") of American Blind Factory, Inc.,
("ABF") (see note 2 - Acquisitions) from ABF Acquisition Corp. ("ABF
Acquisition "), a Delaware corporation and affiliate of Investcorp (see
note 15 - Transactions with Related Parties). ABF Acquisition acquired
the ABF Assets and assumed certain liabilities in connection therewith on
November 4, 1993 to facilitate the acquisition of such assets by Color
Tile, Inc. pending the receipt of proceeds from the consummation of the
$200 million 10 3/4% Senior Notes (the "Senior Notes") Offering (the
"Senior Notes Offering"). For financial reporting purposes, the results of
operations of ABWF are combined with the operating results of Color Tile,
Inc., and its subsidiaries (collectively, the "Company") from the
effective date of the acquisition of the ABF Assets by ABF Acquisition,
November 1, 1993.
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. Operating
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 fiscal year of the Company ends on the Sunday nearest to December 31.
All references herein to "1993", "1992" and "1991" mean the 52 week or 53
week fiscal years ended January 2, 1994, January 3, 1993 and December 29,
1991, respectively. The year ended January 3, 1993 was comprised of 53
weeks. The years ended January 2, 1994 and December 29, 1991 were each
comprised of 52 weeks.
F-7
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
------------------------------------------------------
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 lives of assets 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.
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.
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" (SFAS No. 109) as of December 31, 1990
(see note 9 - Income Taxes). 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.
F-8
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
1. Summary of Significant Accounting Policies (Continued):
-------------------------------------------------------
Systemwide Sales
----------------
Systemwide sales include retail sales of all Company Stores, sales of ABWF
since the date of acquisition, 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 January 3, 1993 and December 29, 1991
have been reclassified to conform to the presentation adopted for the year
ended January 2, 1994. These reclassifications did not result in a change
in net loss or common stockholder's equity.
2. Acquisitions:
-------------
On December 17, 1993, the Company completed its acquisition of the ABF
Assets. ABF was a Detroit, Michigan based direct response marketing
organization, engaged in the sale of name-brand and private-label
horizontal, vertical, pleated and wood blinds and name-brand wallcovering.
Also included in the acquisition were 24 retail stores previously operated
by the former owner of ABF in metropolitan Detroit and Chicago of which
five stores were converted to Color Tile stores and the remainder were
subsequently closed.
The purchase price of approximately $80 million, including fees and
expenses of approximately $6.5 million, was provided from proceeds of the
Senior Notes Offering which was consummated on December 17, 1993.
The acquisition was accounted for as a purchase and the results of
operations of ABWF have been included in the accompanying consolidated
financial statements since November 1, 1993, the effective date of the
acquisition of the ABF Assets by ABF Acquisition (see note 15 -
Transactions with Related Parties).
The cost of the acquisition has been allocated on the basis of the
estimated fair market value of the assets acquired and the liabilities
assumed. The allocation resulted in goodwill of
F-9
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
2. Acquisitions (Continued):
------------------------
approximately $101 million, which is being amortized over 40 years. The
allocation of purchase price will be finalized during 1994.
The following unaudited proforma results of operations assumes the
acquisition of the ABF Assets occurred at the beginning of 1993 and 1992
after including the impact of certain adjustments, such as: amortization
of intangibles, increased interest expense on the acquisition debt,
elimination of prior owner's compensation and the related income tax
effect. These proforma results are prepared for informational purposes
only and are not necessarily indicative of future results of operations,
nor the historical results of operations that would have occurred had the
acquisition been consummated as of the assumed dates.
1993 1992
-------- --------
(unaudited)
Net sales $624,241 $644,469
Gross profit 260,990 285,121
Loss before
extraordinary item (5,132) (25,091)
Net loss (17,735) (25,692)
3. Inventories:
------------
Inventories at January 2, 1994 and January 3, 1993 are summarized as
follows:
1993 1992
---- ----
Finished goods $81,381 $71,994
Work in progress 656 557
Raw materials 1,515 1,494
-------- -----
$83,552 $74,045
======= ======
4. Property, Plant and Equipment:
-----------------------------
Property, plant and equipment and estimated useful lives at January 2,
1994 and January 3, 1993 consist of the following:
Life 1993 1992
---- ---- ----
Land $26,790 $26,790
Buildings 35 years 26,007 26,363
Assets under capital leases 3-35 53,934 51,121
Leasehold improvements 5-10 29,253 27,772
Fixtures and equipment 2-15 48,153 44,630
Construction in progress 1,621 884
----- -----
185,758 177,560
Less: accumulated depreciation (65,765) (55,611)
------ ------
$119,993 $121,949
======= =======
F-10
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
4. Property, Plant and Equipment (Continued):
-----------------------------------------
Depreciation expense was $15,626, $17,336 and $16,970 for
1993, 1992 and 1991, respectively.
5. Goodwill and Other Intangible Assets:
------------------------------------
Goodwill and other intangible assets and related amortization periods at
January 2, 1994 and January 3, 1993 consist of the following:
Amortization 1993 1992
Period ---- ----
--------
Goodwill 40 years $289,668 $188,585
Less: accumulated amortization (19,844) (14,738)
------ ------
Goodwill, net 269,824 173,847
Other intangible assets
Favorable operating
leases and lease options Lease term 44,316 44,316
Other 5 - 40 years 29,868 32,058
----- ------
74,184 76,374
Less: accumulated amortization (33,488) (30,997)
------ ------
Other intangible assets, net 40,696 45,377
------ ------
$310,520 $219,224
======= =======
6. Accrued Expenses and Other Current Liabilities:
----------------------------------------------
Accrued expenses and other current liabilities at January 2, 1994 and
January 3, 1993:
1993 1992
---- ----
Employee compensation $4,867 $6,581
Accrued payroll, property and sales tax 4,757 5,173
Accrued interest 1,111 225
Other accrued expenses 20,238 10,890
Layaways and deposits 6,008 6,086
-------- ------
$36,981 $28,955
======== ======
F-11
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
7. Long-term Debt:
--------------
Long-term debt at January 2, 1994 and January 3, 1993 consists of
the following:
1993 1992
---- ----
10 3/4% Senior notes $200,000
Term loan 46,000 $140,000
Revolving line of credit 80,600 85,300
Mortgage loans on real estate 3,447 4,127
Obligations under capital leases 23,310 25,335
------- -------
Total long-term debt 353,357 254,762
Less Current portion (5,790) (15,073)
-------- --------
$347,567 $239,689
======== ========
The 10 3/4% Senior Notes due December 15, 2001 (the "Senior Notes"), were
issued on December 17, 1993. The Senior Notes are redeemable at the
Company's option, in whole or in part, at any time or from time to time on
or after December 15, 1997, initially at 104.61% of their principal amount
and thereafter at prices declining to 100% of the principal amount at
December 15, 2000, in each case together with accrued and unpaid interest
through the redemption date. In addition, if the Company or Holdings
consummates one or more public offerings of its common stock prior to
December 15, 1996, the Company may redeem up to 35% of the initially
outstanding principal amount of the Senior Notes with the net proceeds of
any such public offering available to the Company at a price of 110% of
their principal amount, together with accrued and unpaid interest, if any;
provided, however, that following such redemption at least 65% of the
aggregate principal amount of the Senior Notes originally issued remains
outstanding. The Senior Notes are not subject to any sinking fund
requirement. The Senior Notes are uncollateralized obligations of the
Company.
The Company has a Senior Credit Agreement with a group of commercial banks
and other institutional investors which provides for a $46,000 term loan
facility, originally $150,000, due in varying amounts through 1998 and a
$100,000 revolving line of credit facility expiring in 1998. The term loan
facility was used to repurchase certain outstanding debt securities and
for payment of fees and expenses related to the repurchase of those debt
securities. The entire $100,000 revolving line of credit can be used to
fund working capital requirements. The Senior 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 2, 1994, in accordance with these
covenants, the Company was restricted from paying dividends on its
F-12
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
7. Long-term Debt (Continued):
--------------------------
common stock. Such covenants also require the Company to maintain certain
financial ratios.
Trade and certain standby letters of credit, which amounted to $10,657 at
January 2, 1994, reduce the amounts available for additional borrowings
and letters of credit under the revolving line of credit by a like
amount. At January 2, 1994, the Company had approximately $8,700
available under the revolving line of credit facility for additional
working capital borrowings.
The outstanding borrowings under the Senior 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
2, 1994). Outstanding borrowings can be converted to Eurodollar loans
which accrue interest at LIBOR plus 2-3/4 %. In accordance with terms of
the Senior Credit Agreement, certain borrowings have been converted to
Eurodollar loans which accrued interest at rates from 6.00% to 6.25% at
January 2, 1994. 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% per
annum on available lines of credit. The Company paid commitment fees of
approximately $106 and $124 for the years ended January 2, 1994 and
January 3, 1993, respectively. The Senior Credit Agreement, which expires
on December 31, 1998, is collateralized by substantially all of the assets
of the Company.
In conjunction with the Senior Notes Offering, the Company and its lenders
substantially modified the Senior Credit Agreement to, among other things,
permit the Senior Notes Offering, the purchase of ABF Assets, and the
disposal of the Company's Canadian operations and certain retail stores
acquired from the former owner of ABF. The amendment also increases the
level of permitted capital expenditures, reduces the interest coverage
ratio and other financial covenants required to be maintained under the
agreement and significantly modifies both the timing and amounts of the
minimum future repayments of borrowings under the term loan portion of the
Senior Credit Agreement.
During 1993, the Company prepaid $86,500 of borrowings under the term loan
portion of the Senior Credit Agreement with proceeds of the Senior Notes
Offering. In conjunction with this early extinguishment of debt and
substantial modifications to the Senior Credit Agreement, the Company has
recorded an extraordinary loss of $12,603 on the write-off of related
deferred financing costs in the consolidated statement of operations.
F-13
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
7. Long-term Debt (Continued):
--------------------------
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.
At Janaury 2, 1994, the fair value of the Senior Notes, excluding accrued
interest, was determined to be $203,000, based on quoted prices for the
issue. The estimated fair value of the Company's remaining 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
9.75% and are payable monthly in arrears.
Future minimum payments of long-term debt are as follows:
1994 $5,790
1995 4,830
1996 15,923
1997 17,952
1998 102,403
Thereafter 206,459
--------
$353,357
========
8. Capital and Other Leases:
------------------------
Retail operations of Company Stores are conducted in 662 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 portion of minimum rentals which meet the criteria of capital
leases are capitalized, and the related assets and obligations are
recorded using the rate implicit
F-14
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
8. Capital and Other Leases (Continued):
------------------------------------
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 at January 2, 1994 and January 3, 1993 consist
of the following:
1993 1992
---- ----
Buildings (manufacturing and
distribution facilities) $5,612 $5,612
Buildings (retail stores) 37,470 37,470
Fixtures and equipment 10,852 8,039
------- ------
53,934 51,121
Less: accumulated amortization (25,564) (18,480)
-------- --------
$28,370 $32,641
======== ========
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:
1993 1992
---- ----
Minimum rentals $29,906 $27,367
Contingent rentals 696 754
Less: sublease rentals (7,315) (4,547)
-------- --------
$23,287 $23,574
========= ========
Minimum rental commitments are summarized as follows:
Capital Operating
Leases Leases
------ ------
1994 $7,310 $22,393
1995 5,811 20,328
1996 4,385 19,172
1997 3,669 17,699
1998 2,796 16,083
Thereafter 8,174 66,630
-------- ---------
Total minimum lease payments 32,145 $162,305
========
Less: amount representing interest (8,835)
--------
Present value of net minimum
lease payments $23,310
========
Minimum payments for capital and operating leases have not been reduced by
minimum sublease rentals of approximately $2,104 for capital leases and
$27,608 for operating leases which are due in the future under
noncancellable subleases.
F-15
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
8. Capital and Other Leases (Continued):
------------------------------------
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.
9. Income Taxes:
------------
The Company has been included in the consolidated federal income tax
return of its parent company, Holdings, beginning with the income tax
return filed of 1990. Income taxes are presented by the Company as if it
filed a separate federal income tax return.
The provision (benefit) for income taxes consists of the following:
1993 1992 1991
---- ---- ----
Current:
Federal $544 ($2,517)
State $660 574 384
Foreign (19) 122
---- ---- ---------
Provision
(benefit) for income taxes 641 1,240 (2,133)
Provision for current taxes
included in extraordinary item (309) 2,517
---- ------ --------
641 931 384
---- ------ --------
Deferred:
Federal
---- ------ --------
Provision for
income taxes $641 $931 $384
==== ====== ========
The following is a reconciliation of income taxes at the Federal statutory
rate with income taxes recorded by the Company:
1993 1992 1991
---- ---- ----
Tax (benefit) at $( 447) $(6,850) $(10,413)
federal statutory rates
Extraordinary item (4,411) (309) 2,517
State income taxes, net of
federal tax benefit 429 379 253
Foreign income taxes (19) 122
Losses providing no tax benefit 3,298 5,948 6,387
Amortization of goodwill 1,791 1,406 1,640
Alternative minimum tax 235
--------- ------ --------
Provision for income taxes $ 641 $ 931 $ 384
======== ====== ========
F-16
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
9. Income Taxes (Continued):
------------------------
The components of the net deferred tax asset recognized as of January 2,
1994 and January 3, 1993 are as follows:
1993 1992
---- ----
Deferred tax liability:
Depreciation ($3,928) ($4,355)
------ ------
Deferred tax asset:
Tax net operating loss carryforward 37,121 30,086
Other, net 16,286 20,307
------ ------
53,407 50,393
Less: Valuation allowance (35,323) (31,886)
------ ------
Deferred tax asset, net of
Valuation allowance 18,084 18,507
------ ------
Net deferred tax asset $14,156 $14,152
======= =======
As of January 2, 1994, the Company has net operating loss carryforwards of
approximately $106,335 and $82,558 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 $6,001.
10. 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.
11. Redeemable Preferred Stock:
--------------------------
Redeemable preferred stock at January 2, 1994 and January 3, 1993 is
comprised of the following:
1993 1992
---- ----
Class B, Series A Senior
Increasing Rate
Preferred Stock,$57,825
liquidation value at
January 2, 1994 $54,306 $53,035
Senior Cumulative
Preferred Stock, $32,959
liquidation value at
January 2, 1994 32,532 29,561
------- -------
Redeemable preferred
stock $86,838 $82,596
======= =======
F-17
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
11. Redeemable Preferred Stock (Continued):
--------------------------------------
The Company had 2,200,000 shares of Class B, Series A Senior Increasing
Rate Preferred stock, $1 par value, $25 liquidation value (the "Series A
Shares") issued and outstanding at January 2, 1994 and January 3, 1993.
The Series A Shares provide for the payment of cumulative quarterly cash
dividends equal to $.8125 per share at issuance.
The quarterly dividend which applied to quarters that commenced on October
15, 1992 and April 15, 1993 was equal to $.84375 per Series A Share. This
quarterly dividend 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, 1994, 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 Series A Shares are subject to mandatory redemption at $25.00 per
share, plus accrued but unpaid dividends on January 15, 2003. The Series
A Shares may be redeemed, in whole or in part, on or after July 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. As of January 2, 1994 and January 3, 1993,
the carrying amount of the Series A Shares has been increased $3,357 and
$1,854, respectively, for undeclared and unpaid cash dividends.
The Company had 200,000 shares of Senior Cumulative Preferred Stock, $1
par value, $100 liquidation value issued and outstanding at January 2,
1994 and January 3, 1993. 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 2,
F-18
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
11. Redeemable Preferred Stock (Continued):
--------------------------------------
1994 and January 3, 1993 the carrying amounts of the Senior Cumulative
Preferred Stock have been increased by approximately $12,962 and $10,067,
respectively, representing cumulative dividends not currently declared
or paid, but which are payable under the mandatory redemption features.
At January 2, 1994, the fair value of the Series A Shares was determined
to be $57,200 based on quoted prices for the issue, excluding accrued but
undeclared dividends. The estimated fair value, including accrued but
undeclared dividends, of the Senior Cumulative Preferred Stock
approximates the carrying amount based upon discounted cash flows and
book values.
12. 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 a Special Charge in the Consolidated
Statement of Operations.
13. Gain (Loss) on Disposal of a Line of Business:
----------------------------------------------
Effective October 3, 1993, the Company decided to dispose of its wholly
owned Canadian subsidiary, Factory Carpet, which operates 37 retail stores
in Canada (including 9 Franchised stores). The Company is in the process
of negotiating the sale of the Canadian operations. In connection with
the disposition of Factory Carpet, the Company recorded a charge to
continuing operations of $8,651. The sales, costs and related expenses of
Factory Carpet's operations have been eliminated from the individual line
items of the 1993 Consolidated Statement of Operations and the operating
losses of this line of business have been included on a one-line basis in
the loss from disposal of a line of business as follows:
1993
----
Net sales $23,661
========
Operating loss (849)
Estimated loss on disposal (8,651)
-------
Loss on disposal of a line of business $(9,500)
========
F-19
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
13. Gain (Loss) on Disposal of a Line of Business (Continued):
----------------------------------------------------------
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.
14. Supplemental Cash Flow Information:
----------------------------------
1993 1992 1991
---- ---- ----
Supplemental disclosure
of cash flow informations:
Interest paid $18,192 $28,320 $55,950
Income taxes paid $444 $1,281 $450
Non-cash investing and
financing activities:
Capital lease obligations
incurred for property,
plant and equipment $2,096 $3,400
Senior Increasing Rate
Preferred Stock
unpaid dividends $1,503 $1,854
Senior Cumulative
Preferred Stock
dividends in kind $2,895 $2,923 $2,900
15. Transactions With Related Parties:
---------------------------------
During the year ended December 29, 1991 the Company incurred interest
expense on the Junior Subordinated Notes totaling $10,291 of which $6,860
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"), an
affiliate, for financing advisory fees for its assistance in arranging the
Senior Credit Agreement. Additionally, an affiliate of INVESTCORP was
paid $6,000 in connection with the repurchase of certain outstanding debt
securities 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.
On October 5, 1993, 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
F-20
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
15. Transactions with Related Parties (Continued):
---------------------------------------------
Assets to facilitate the acquisition of such assets by the Company pending
(i) the receipt of proceeds from the Senior Notes Offering, (ii) the
execution of an amendment to the Senior Credit Agreement permitting, among
other things, the acquisition of the ABF Assets, and (iii) 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 net of the
anticipated effect of certain adjustments pursuant to the ABF Acquisition
Agreement. In connection with such acquisition, affiliates of Investcorp
received approximately $4,300 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 assume the liabilities associated therewith from ABF
Acquisition at a price approximately $80,000, including fees and expenses
of $6,500, 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
rights under the Option Agreement and acquired the ABF Assets
contemporaneously with the completion of the Senior Notes Offering on
December 17, 1993.
In connection with the Option Agreement, the Company and ABF Acquisition
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 ABF Assets from ABF Acquisition
pursuant to the Option Agreement, or November 4, 1994. The Management
Services Agreement provides for the Company to receive a fee for such
services. Pursuant to this agreement, the Company has received a fee of
approximately $2 and does not expect to receive any additional
compensation.
F-21
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
15. Transactions with Related Parties (Continued):
---------------------------------------------
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.
The Company paid International $500 for management fees during each of the
fiscal years 1993, 1992 and 1991.
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 1993, 1992 and 1991 the Company paid approximately
$3,460, $3,085 and $3,113, respectively, in rentals to the Investment
Plan for these properties.
16. 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 $829, $846 and $715,
respectively, for 1993, 1992 and 1991.
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.
F-22
<PAGE>
COLOR TILE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in Thousands, except share amounts)
16. Employee Benefit Plans (Continued):
----------------------------------
Officers and director employees participate in the Family Security Plan on
the same terms as other employees. For 1993, 1992 and 1991 the Company
contributed $261, $228 and $237, respectively, to the Family Security
Plan.
17. Supplemental Selected Quarterly Financial Data (Unaudited):
----------------------------------------------------------
Unaudited summarized financial data by quarter for 1993, 1992 and 1991 is
as follows:
Quarter Ended
Year ended -------------------------------------------
January 2, 1994: April 4 July 3 October 3 January 2
--------------- ------- ------ --------- ---------
Net sales $134,680 $131,596 $135,287 $153,564
Cost of sales 71,566 72,636 74,430 90,896
Selling, general and
administrative expenses 47,585 46,610 48,065 49,191
Depreciation and
amortization 6,126 5,930 5,979 7,511
-------- -------- -------- --------
Operating income 9,403 6,420 6,813 5,966
Loss on disposal
of a line of
business (346) (434) (8,720)
Interest expense, net (4,855) (4,818) (4,740) (5,967)
Income taxes (300) (223) (101) (17)
Extraordinary loss on early
extinguishment of debt, net (12,603)
-------- -------- --------- --------
Net income
(loss) $3,902 $945 $(6,748) $(12,621)
====== ======= ======== ========
Quarter Ended
Year ended --------------------------------------------
January 3, 1993: March 29 June 28 September 27 January 3
--------------- -------- ------- ------------ ---------
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 expenses 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 6,169 8,861 8,673 (22,165)
(loss)
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)
======= ======= ====== =======
F-23
<PAGE>
17. Supplemental Selected Quarterly Financial Data (Unaudited) (Continued):
----------------------------------------------------------------------
In conjunction with the recognition of the loss on the disposal of the
Canadian operations, the sales, costs and related expenses of Factory
Carpet's operations have been excluded from the individual line items of the
1993 Selected Quarterly Financial data and the operating losses of this line
of business have been included on a one-line basis in the loss on disposal
of a line of business for each quarter of 1993 (see note 13 - Gain (Loss) on
Disposal of a Line of Business).
F-24
<PAGE>
SCHEDULE V
<TABLE> <CAPTION>
COLOR TILE, INC.
PROPERTY, PLANT AND EQUIPMENT
(Amounts in Thousands)
Balance at Retirements Balance
Beginning and Other at End
Description of Period Additions(a) Sales(b) (c)(d)(e) of Period
----------- ----------- ------------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Year ended January 2, 1994:
Land $26,790 $ $ $ $26,790
Buildings 26,363 34 (374) (16) 26,007
Assets under capital leases 51,121 2,096 717 53,934
Leasehold improvements 27,772 2,751 (2,763) 1,493 29,253
Fixtures and equipment 44,630 8,161 (5,190) 552 48,153
Construction in progress 884 3,517 (2,780) 1,621
------ ----- ------- ------ -------
Totals $177,560 $16,559 $(8,327) $(34) $185,758
======== ======= ======= ====== ========
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
======= ======= ======= ====== ========
</TABLE>
(a) Additions for 1993 include the ABF Assets acquired effective November 1,
1993.
(b) Includes $2,532 of fixed asset write-offs related to the disposal of
Canadian operations during 1993.
(c) Represents transfers of assets from construction in progress to other
assets for 1993, 1992 and 1991.
(d) Represents transfer of capital lease assets purchased and foreign currency
translation adjustments associated with Factory Carpet for the 1992.
(e) Represents $625 of fixed asset write-offs related to the Special Charges at
January 3, 1993.
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 Retirements Balance
Beginning Costs and and at End
Description of Period Expense (a) Sales(b) Other (c) of Period
----------- ----------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Year ended January 2, 1994:
Buildings $2,445 $ 847 $ (26) $ 1 $ 3,267
Assets under capital leases 18,480 7,074 10 25,564
Leasehold improvements 10,105 2,640 (1,041) (14) 11,690
Fixtures and equipment 24,581 5,065 (4,264) (138) 25,244
------ ------- ------- ---- ------
Totals $55,611 $15,626 $(5,331) $ (141) 65,765
======= ======= ======= ======== =======
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
======= ======= ======= ======= =======
</TABLE>
(a) Includes $12,417 of expense related to Special Charges at January 3, 1993.
(b) Includes $1,235 of retirements related to the disposition of Canadian
operations.
(c) Represents transfers of capital lease assets purchased and foreign currency
translation adjustments associated with Factory Carpet for the year ended
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
Beginning Costs and Other at End
Description of Period Expense (a) Accounts Deductions of Period
----------- ----------- ------------ ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Valuation accounts deducted
from asset account to
which it applies:
Allowance for doubtful accounts
Year ended January 2, 1994 $415 $103(a) $ -0- $(149)(b) $ 369
==== ==== ====== ===== ======
Year ended January 3, 1993 $305 $389(a) $ -0- $(279)(b) $ 415
==== ==== ====== ===== ======
Year ended December 29, 1991 $562 $147(a) $ -0- $(404)(b) $ 305
==== ==== ====== ===== ======
Deferred tax asset
valuation allowance
Year ended January 2, 1994 $31,886 $ -0- 3,437(c) $ -0- $35,323
======= ===== ====== ===== =======
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
======= ===== ====== ===== =======
(a) Amounts 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 INCOME STATEMENT INFORMATION
(Amounts in Thousands)
1993 1992 1991
------ -------- --------
Property, franchise
and other taxes $6,125 $6,933 $7,446
====== ====== ======
Advertising $40,010 $46,469 $40,394
======= ======= =======
Amortization of
intangible assets $9,322 $11,347 $12,245
====== ======= =======
Repairs and
maintenance $2,163 $2,833 $5,084
======= ====== ======
S-4
</TABLE>
Exhibit 10(s)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made and entered
into as of January 3, 1994 by and between Color Tile, Inc., a
Delaware corporation (the "Company"), and Eddie M. Lesok (the
"Executive"), with reference to that certain Employment
Agreement dated as of December 28, 1993, by and between the
Company and the Executive, a copy of which is attached hereto
as Exhibit A (the "Existing Agreement").
The Company and the Executive hereby agree that the Existing
Agreement is amended in the following respects:
1. The first sentence of Section 1 of the Existing Agreement
is amended to read in full as follows:
"The period of the Executive's employment under this Agreement
(the "Period of Employment") shall commence on January 3, 1994
(the "Effective Date") and shall expire on the last day of the
Company's 1998 fiscal year (the "Expiration Date"), subject to
any extension as may be agreed or any earlier termination of
the Executive's employment as provided in Section 6 hereof."
2. The second sentence of Section 1 of the Existing
Agreement is amended by deleting therefrom the words "six
months" and inserting in lieu thereof the words "twelve
months".
3. The first sentence of Section 3 of the Existing Agreement
is amended by deleting therefrom the amount "$315,000" and
inserting in lieu thereof the amount "$450,000."
4. The third sentence of Section 3 of the Existing Agreement
is deleted in its entirety and there is inserted in lieu
thereof the following sentence:
"The Executive acknowledges and agrees that it is not intended
that there will be any increase in the Base Salary with
respect to either the Company's 1994 or 1995 fiscal year."
Except as specifically amended pursuant to the preceding
paragraphs 1 through 4, the Existing Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, this Amendment to Employment Agreement has
been duly executed as of the day and year first written above.
COLOR TILE, INC.
By: /s/ N. Laurence Nagle
----------------------------
N. Laurence Nagle, President
and Chief Operating Officer
EXECUTIVE
/s/ Eddie M. Lesok
--------------------------------
Eddie M. Lesok
Exhibit 10(t)
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement is made and entered
into as of January 3, 1994 by and between Color Tile, Inc., a
Delaware corporation (the "Company"), and N. Laurence Nagle
(the "Executive"), with reference to that certain Employment
Agreement dated as of December 28, 1993, by and between the
Company and the Executive, a copy of which is attached hereto
as Exhibit A (the "Existing Agreement").
The Company and the Executive hereby agree that the Existing
Agreement is amended in the following respects:
1. The first sentence of Section 1 of the Existing Agreement
is amended to read in full as follows:
"The period of the Executive's employment under this Agreement
(the "Period of Employment") shall commence on January 3, 1994
(the "Effective Date") and shall expire on the last day of the
Company's 1998 fiscal year (the "Expiration Date"), subject to
any extension as may be agreed or any earlier termination of
the Executive's employment as provided in Section 6 hereof."
2. The second sentence of Section 1 of the Existing
Agreement is amended by deleting therefrom the words "six
months" and inserting in lieu thereof the words "twelve
months".
3. The first sentence of Section 3 of the Existing Agreement
is amended by deleting therefrom the amount "$247,500" and
inserting in lieu thereof the amount "$375,000."
4. The third sentence of Section 3 of the Existing Agreement
is deleted in its entirety and there is inserted in lieu
thereof the following sentence:
"The Executive acknowledges and agrees that it is not intended
that there will be any increase in the Base Salary with
respect to either the Company's 1994 or 1995 fiscal year."
5. The sixth sentence of Section 4 of the Existing Agreement
is deleted in its entirety and there is inserted in lieu
thereof the following sentence:
"The Company further agrees that if the Executive or his
estate or personal representative shall sell the Executive's
personal residence in the Forth Worth, Texas area within two
years of the date of the termination of the Executive's
employment by the Company, the Company shall reimburse the
Executive or such estate or personal representative for any
loss sustained in connection with such sale (i.e., the
negative difference between the original purchase price and
the gross sales price less commissions and closing costs),
provided that (i) the Company's maximum reimbursement
obligation shall be $100,000, (ii) the Company shall have no
reimbursement obligation if the employment of the Executive
hereunder is terminated pursuant to Section 6.1(c)(i),
6.1(c)(ii), 6.1(c)(iii), 6.1(c)(iv) or 6.2(b) hereof, and
<PAGE>
(iii) the Executive acknowledges that the Company has no
further obligation to the Executive pursuant to that certain
Letter Agreement dated April 10, 1988 between Knoll
International Holdings, Inc. and the Executive."
Except as specifically amended pursuant to the preceding
paragraphs 1 through 5, the Existing Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, this Amendment to Employment Agreement has
been duly executed as of the day and year first written above.
COLOR TILE, INC.
By: /s/ Eddie M. Lesok
-----------------------
Eddie M. Lesok,
Chief Executive Officer
EXECUTIVE
/s/ N. Laurence Nagle
---------------------------
N. Laurence Nagle
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
Name Incorporation
- ---------------------------------------------------- --------------
American Blind and Wallpaper Factory, Inc. Delaware
ColorCarpet, Inc. Ontario
Color Tile Franchising, Inc. Delaware
Color Tile Manufacturing, Inc. Texas
C. Tile Transportation, Inc. Texas
CT Financial, Inc. Massachusetts
Second CT Financial, Inc. Massachusetts
