<PAGE>
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 1, 1995
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.
(Exact name of registrant as specified in its charter)
Delaware 75-1606185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
515 Houston Street, Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 870-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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
15, 1995 was 101.
(Exhibits Index Begins on Page 31)
<PAGE>
COLOR TILE, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item Page
1. Business . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . 10
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 11
4. Submission of Matters to a Vote of Security Holders. . . 11
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . 12
6. Selected Financial Data. . . . . . . . . . . . . . . . . 12
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . 15
8. Financial Statements and Supplementary Data. . . . . . . 20
9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . . 20
PART III
10.Directors and Executive Officers of the Registrant . .. . 21
11.Executive Compensation . .. . . . . . . . . . . . . . . . 22
12.Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . 26
13.Certain Relationships and Related Transactions . . .. . . 29
PART IV
14.Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 31
<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 1,
1995, the Company sold its line of products through 828 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, sheet
vinyl and laminated flooring), 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
has been 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 Color Tile Stores.
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. Resilient flooring is sold
both from in-stock supplies and a large selection of special order products. In
addition, the Company also sells a broad selection of wood flooring products.
The Company sells its hard-surface flooring products primarily from in-stock
supplies, supplemented by special-order programs.
Since 1989, the Company has offered a full line of carpeting on a nationwide
basis using the trade name "ColorCarpet". The principal features of the
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 1992 the Company developed a "super-store" retail format, Floors A
Plenty, to increase further its penetration of the carpeting segment of the
floor covering market. Floors A Plenty targets customers who tend to be more
value-conscious than Color Tile's existing customers and who perceive the
superstore 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 three
Floors A Plenty stores in Cincinnati, Ohio, Tulsa, Oklahoma and North Richland
Hills, Texas, respectively, during 1994. The fifth and sixth Floors A Plenty
stores were opened in Albuquerque, New Mexico and Oklahoma City, Oklahoma in
January 1995 and March 1995, respectively. Floors A Plenty stores offer
approximately 16,000 SKU's, of which approximately 11,000 are carpet SKU's.
A typical Color Tile Store currently offers for sale approximately 17,000
SKU's, approximately 15,000 of which are devoted to special-order products
(approximately 11,000 of which relate to carpet and approximately 4,000
<PAGE>
of which relate to other products). The Company's special-order programs have
grown significantly over the past five years, principally through the
introduction of carpet in 1989 and window treatments in 1990.
The Company in December of 1993 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"). ABWF is a
metropolitan-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. During the fourth quarter 1994, ABWF
initiated a test program offering carpet for sale to its customers on a special
order basis.
The Company's fiscal year ends on the Sunday nearest to December 31. All
references herein to "1994", "1993" and "1992" refer to the 52 week or 53 week
fiscal years ended January 1, 1995, January 2, 1994 and January 3, 1993,
respectively. The fiscal year ended January 3, 1993 was comprised of 53 weeks.
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 during the periods shown.
<TABLE>
<CAPTION>
Class of Products 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Ceramic Tile 20% 24% 25%
Resilient Flooring 22 25 26
Carpet and Installation 25 26 26
Installation Materials and Tools 12 14 14
Window Treatments 10 4 3
Other(1) 11 7 6
------- ------- -------
100% 100% 100%
======= ======= =======
</TABLE>
(1) Includes sales of wallcoverings and wood flooring by Company Stores and
sales of wallcovering 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.
<PAGE>
During 1994, approximately 16% 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 27% of the ceramic tile products sold by the Company during this
period were purchased from domestic suppliers and approximately 57% were
imported from suppliers in Italy, Spain, Brazil and countries in the Far East,
including Japan, Thailand and Korea.
Resilient Flooring
Resilient flooring represents the Company's other traditional line of floor
covering products and is available in either vinyl tile or sheet vinyl. Vinyl
tile is the traditional do-it-yourself floor covering. Vinyl tile typically
costs less per square foot and is easier to install than other types and styles
of floor covering. Most of the Company's vinyl tile sales are made from a broad
selection of patterns that are maintained in stock. Color Tile Stores also stock
a limited assortment of sheet vinyl supplied by nationally recognized
manufacturers. A more extensive selection of vinyl tile and sheet vinyl is
available by special order.
Carpet and Installation
Color Tile Stores. Color Tile Stores offer a full line of carpeting under
the "ColorCarpet" trade name. Approximately 11,000 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.
ABWF. During the fourth quarter of 1994, ABWF initiated a test to determine
the viability of carpet as a potential new product line for its direct response
marketing operations. Carpet is offered to ABWF's customers on a "cut-to-order"
basis at significant discounts from traditional retail prices.
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. A broader selection of window treatments are
offered on a special-order basis 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 on
both an in-stock and special order basis. The Company plans to significantly
reduce its in-stock wallpaper program in 1995.
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 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.
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.
<PAGE>
Over 90% of the installation and maintenance items sold in 1994, 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 1994, 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, as amended, 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 (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 1, 1995, 142 Franchised Stores were in operation. During 1994, 62
Franchised Stores were opened (including 32 Franchised Stores that were
previously Company Stores), one Franchised Store was closed and five Franchised
Stores were reacquired by the Company and are currently operated as Company
Stores.
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 $25,000. 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 6.9%,
7.2% and 8.0% of net sales for 1994, 1993 and 1992, 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
<PAGE>
also developed a similar merchandising approach for
carpeting through in-store displays of samples of its "ColorCarpet" product
lines arranged by color group. Carpet is sold on a cut-to-order basis. 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, wallpaper and
carpet 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 advertising vehicles to
increase consumer awareness of ABWF.
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.
Color Tile Stores are operated in each state of the United States, other
than Alaska. At January 1, 1995, their geographic distribution was as follows:
Number of Color Tile Stores (including Franchised Stores)
Alabama . . 7
Arizona . . 14 Nevada . . . 6
Arkansas. . . 4 New Hampshire. . .5
California . . 86 New Jersey . 29
Colorado. . . 19 New Mexico . . 5
Connecticut. . . 15 New York. . . 44
Delaware. . . 5 North Carolina 15
Florida . . 48 North Dakota . . 2
Georgia . . 16 Ohio. . . 43
Hawaii. . . 1 Oklahoma. . . 9
Idaho . . 4 Oregon. . . 10
Illinois. . . 44 Pennsylvania . . 49
Indiana . . 22 Rhode Island . . 3
Iowa. . . 10 South Carolina . 8
Kansas. . . 7 South Dakota . . .2
Kentucky. . . 12 Tennessee. . . 15
Louisiana. . . 11 Texas . . 65
Maine . . 4 Utah. . . 5
Maryland. . . 20 Vermont . . 1
Massachusetts. 17 Virginia . . . 22
Michigan. . . 39 Washington . . . 22
Minnesota. . . 13 West Virginia. . .5
Mississippi. . . 3 Wisconsin. . . 14
Missouri . . 19 Wyoming . . 1
Montana . . 4 ---
Nebraska. . . 4 . . .TOTAL 828
===
<PAGE>
A summary of Color Tile Store openings and closings is provided below:
<TABLE>
<CAPTION>
Historical Color Tile Store Openings and Closings
-------------------------------------------------
1994(2) 1993(2) 1992
-------- --------- ------
Company Stores:(1)
<S> <C> <C> <C>
Beginning of period 714 731 733
Opened 19 25 13
Converted from Franchised Stores 5 3 1
Converted to Franchised Stores (30) (26) (13)
Closed (22) (19) (3)
------- -------- ------
End of period 686 714 731
======= ======== ======
Franchised Stores:
Beginning of period 86 35 13
Opened 32 30 10
Converted from Company Store 30 26 13
Converted to Company Stores (5) (3) (1)
Closed (1) (2) --
------- ------- ------
End of Period 142 86 35
======= ======= ======
Total Color Tile Stores:
Beginning of period 800 766 746
Opened 51 55 23
Closed (23) (21) (3)
-------- ------- ------
End of period 828 800 766
======== ======= ======
</TABLE>
(1) Includes owned stores operated under the names Color Tile or Floors A
Plenty.
(2) Excludes Factory Carpet stores operated in Canada. The Company
operated these stores pending their disposition in May 1994.
------------------------------
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 approximately 17,000
SKU's, approximately 15,000 of which are devoted to special-order products
(approximately 11,000 of which relate to carpet and approximately 4,000 of which
relate to other products).
Each Company Store typically employs approximately four people, including a
store manager. Thirty-four regional managers supervise the store managers and
three divisional vice presidents supervise the regional managers. The divisional
vice presidents in turn report to a senior vice president of retail operations.
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.
<PAGE>
ABWF Direct-Response Operations. Prospective customers contact ABWF by
dialing toll-free 1-800-735-5300 or other numbers 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 "super-store" developed to capitalize
on the Company's sales experience 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 Floors A
Plenty stores in Cincinnati, Ohio, Tulsa, Oklahoma and North Richland Hills,
Texas during 1994. During the first quarter of 1995, the Company opened Floors A
Plenty stores in Oklahoma City, Oklahoma and Albuquerque, New Mexico. Floors A
Plenty stores offer approximately 16,000 SKU's, of which approximately 11,000
are carpet SKU's. The Company anticipates locating its Floors A Plenty stores in
close proximity to other super-store retailers, such as Price Club, Sam's, Home
Depot and Builders Square.
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 1994, the Company manufactured approximately 10% of the products
sold in Color Tile Stores, with the balance supplied by unaffiliated domestic
(approximately 75%) and foreign (approximately 15%) manufacturers. See
"Manufacturing." Three unaffiliated suppliers, in the aggregate, accounted for
approximately 32% of the products purchased by the Company during 1994.
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 negotiation
annually. In May 1994, the Company completed such negotiations for the 1994
contract year. Due to significant increases in raw material costs passed through
from the supplier, the Company anticipates that the minimum purchase levels
required by this agreement will require the Company to sell these products at
prices which will yield lower margins than historically achieved to avoid the
buildup of significant inventory levels (in excess of prevailing market
requirements) during the remaining term of the agreement. The Company recorded a
write-down for inventory to be purchased under this agreement in the third
quarter of 1994. This write-down was the result of the impact of purchasing the
minimum levels of inventory which exceeded the Company's inventory needs under
existing market conditions. Subsequently, the Company obtained a concession in
the minimum purchase commitments under this agreement from its supplier.
<PAGE>
Management believes that the Company could find alternative sources of
supply should any of the Company's major suppliers cease doing business with it
or should the Company be restricted by governmental action from purchasing
products manufactured in other countries. The principal materials utilized by
the Company in its manufacturing operations include sand, chemicals 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 is currently expanding its San
Bernardino facility and is in negotiations for the expansion of another
facility.
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 10% of the products sold in Color Tile Stores during 1994
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 the Company owned "North American" trade
name. The Tile Facility has limited capacity in excess of that necessary to
supply Color Tile Stores and sells its products to unaffiliated entities. During
1994 the Company sold approximately 27% and 24%, respectively, of the products
manufactured at the Adhesives Facility and the Tile Facility to unaffiliated
entities.
The Adhesives Facility. The Adhesives Facility was built to the Company's
specifications and completed in 1982. The Company designed and constructed the
Adhesives Facility for the purpose of formulating products for use in connection
with installation and maintenance of other product lines sold by the Company. In
1994, this facility produced approximately 91% of the Company's adhesives,
grouts and other surface-preparation products, which collectively represented
approximately 10% of the Company's total product sales. During 1994, the
Adhesives Facility on average operated at approximately 42% 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 15% of the sales of
<PAGE>
ceramic tile by Color Tile Stores and approximately 4% of total product sales
during 1994. The Company also manufactures trim pieces and decorated tiles at
this facility. The Tile Facility on average operated at approximately 95% of
capacity during 1994.
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 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.
In addition, ABWF's market includes horizontal, vertical , pleated and
wooden blinds. This market is highly fragmented and several distinct channels
exist. Department stores are responsible for a substantial portion of window
treatments market sales and are the largest distribution channel for these
products. Of the department stores, JC Penney, Sears and Montgomery Ward are
believed to be ABWF's largest competitors. Most full service department stores
also offer a limited range of window treatments. Other distribution channels
include drapery and upholstery stores, home centers, home furnishings stores,
mail order and direct response marketing.
Employees
At January 1, 1995, the Company employed approximately 3,900 persons,
including approximately 450 employees of ABWF. Substantially all of these
employees are employed on a full-time basis. The Company believes that its
working relationship with its employees is good.
On January 13, 1995, the United Food and Commercial Workers International
Union ("UFCWI") filed a petition with the National Labor Relations Board
("NLRB") for certification of a bargaining unit (a union representation
election) composed of ABWF's teleservice, customer service, librarian and mailer
employees. The union subsequently amended the proposed unit to include only
telemarketers. A certification hearing was held by the NLRB. The Regional
Director of NLRB ordered an election in the last week of April, 1995. Following
the NLRB's decision, the UFCWI withdrew its request to proceed with the
scheduled election pending resolution of certain unfair labor practices charges
brought by the UFCWI against ABWF. The Company filed a Request for Review with
the NLRB in Washington, District of Columbia, seeking that the full board of the
NLRB reconsider the Regional Director's decision on the employees included in
the bargaining unit.
<PAGE>
Item 2. PROPERTIES
At January 1, 1995, 134 of the 828 Color Tile Stores were owned by the
Company and 694 were leased by the Company. Of the leased Company Stores, 43 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
172 leases expiring within the next three years, 112 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."
The total space owned and leased by the Company as of January 1, 1995 was
as follows:
<TABLE>
<CAPTION>
Approximate Square Footage
Owned Leased Total
------- --------- ---------
<S> <C> <C> <C>
Retail, net of subleases 645,000(1) 2,610,000(1) 3,255,000
Manufacturing 163,000 115,000 278,000
Distribution Centers -- 523,000 523,000
-- 129,000 129,000
------- --------- ---------
Totals 808,000 3,377,000 4,185,000
======= ========= =========
</TABLE>
(1) The Company was subleasing approximately 1,045,000 square feet of retail
space to franchisees and other tenants as of such date.
During fiscal 1994, aggregate rental payments were approximately
$31,500,000 (exclusive of sublease rental income for such space of approximately
$9,100,000).
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
2002.
<PAGE>
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
<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"), and its Senior Cumulative Preferred
Stock (the "Senior Preferred Stock"), also generally restrict payment of
dividends on the Company's common stock at any time during which dividends on
such classes of preferred stock have accrued but are unpaid, subject to certain
exceptions similar to those set forth in the Senior Credit Agreement.
The Company's 10 3/4% Senior Notes, due 2001 (the "Senior Notes") were
issued pursuant to an indenture containing certain covenants restricting 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 1, 1995, January 2, 1994, January 3, 1993,
December 29, 1991 and December 30, 1990, have been derived from the 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. 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.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
Jan. 1, Jan. 2, Jan. 3, Dec. 29, Dec. 30,
1995 1994 1993 1991 1990
--------- --------- --------- --------- ---------
Results of Operations (Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Net Sales $673,528 $555,127 $580,385 $544,315 $525,819
Cost of Sales 391,996 309,528 311,368 292,517 274,686
Selling, general and
administrative expenses 215,530 191,451 208,796 201,237 195,056
Depreciation and
amortization 28,696 25,546 28,683 29,202 27,781
Special charges (a) 29,600 30,000
--------- --------- --------- --------- ---------
Operating income 7,706 28,602 1,538 21,539 28,296
Gain (loss) on disposal of
a line of business (b) (2,500) (9,500) 4,007
Interest expense, net (36,634) (20,380) (25,697) (51,986) (50,100)
--------- --------- --------- --------- ---------
Loss before income
taxes and extraordinary
item (31,428) (1,278) (20,152) (30,627) (21,804)
(Provision) benefit for
income taxes (c) (14,888) (641) (1,240) 2,133 (393)
Extraordinary gain (loss)
on early extinguishment
of debt, net of tax (d) (12,603) (601) 4,886
--------- --------- --------- --------- ---------
Net Loss $(46,316) $(14,522) $(21,993) $(23,608) $(22,197)
========= ========= ========= ========= =========
</TABLE>
(a) The Company recognized Special Charges during the quarter ended October 2,
1994 to record a write-down for the impairment of certain property, plant,
equipment and intangible assets based upon discounted cash flows; to
establish provisions for store closures and conversions; and to provide
for a write-down on an unfavorable long-term inventory purchase commitment
and certain discontinued minor product categories. The Special Charges
for the year ended January 3, 1993 relate to the provision for
restructuring, store closures and conversion of 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. On May 24, 1994, the
Company sold the Canadian Operations and recorded an additional charge to
continuing operations of $2,500 in the second quarter of 1994. The sales,
costs and related expenses of the Factory Carpet's operations have been
eliminated 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 (See Note 13 of the "Notes to
Consolidated Financial Statement").
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).
<PAGE>
(c) The provision for income taxes for 1994 of $14,888 includes a non-cash
charge to expense of $14,156 to write-off the Company's deferred income tax
assets pursuant to Statement of Financial Accounting Standards No. 109 (See
Note 9 of the "Notes to Consolidated Financial Statements").
(d) 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"). The $4,886 gain
on early extinguishment of long-term debt recorded in 1991 resulted from
the repurchase of a portion of the Company's 12 3/8% Senior Notes, 13%
Senior Subordinated Notes and 13 3/4% Subordinated Debentures with a
portion of the proceeds from the term loan portion of the Senior Credit
Agreement.
<TABLE>
<CAPTION>
Jan. 1, Jan. 2, Jan. 3, Dec. 29, Dec. 30,
1995 1994 1993 1991 1990
-------- -------- -------- -------- ---------
Balance Sheet Data: (Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Current assets $110,418 $108,084 $94,085 $88,999 $92,351
Current liabilities 103,131 103,712 82,831 87,593 89,334
Working capital 7,287 4,372 11,254 1,406 3,017
Total assets 550,098 565,343 462,992 504,984 525,338
Long-term debt (inc.
current portion) 392,534 353,357 254,762 305,735 369,452
Redeemable preferred
stock 90,943 86,838 82,596 26,556 23,576
Common stockholder's
equity (deficiency) $(36,748) $ 21,738 $48,789 $77,941 $24,824
</TABLE>
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year ended January 1, 1995 (52 weeks) Compared to Fiscal Year Ended
January 2, 1994 (52 weeks)
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 operations increased 23.2% during
1994 as compared to the prior-year period. The increase in sales resulted
primarily from (i) the addition of $94,471,000 in sales of ABWF, (ii) a 3.9%
increase in retail sales of Company stores open over one year and (iii)
increased retail sales by franchisees.
Net Sales. Net sales increased $118,401,000 , or 21.3%, for 1994 as
compared to net sales for the prior-year period. The improvement in sales
resulted from (i) the addition of $94,471,000 in sales of ABWF, (ii) a 3.9%
increase in retail sales of Company stores open over one year and (iii)
increased franchise fees and royalties and sales of merchandise to franchisees.
At January 1, 1995, there were 828 Color Tile stores in operation, of which
142 were Franchised Stores. During 1994, 19 new Company Stores were opened, 22
Company Stores were closed, 62 new Franchised Stores were opened (including the
32 Company Stores converted to Franchised Stores), 1 Franchised Store was closed
and 5 Franchised Stores were reacquired by the Company and are currently
operated as Company Stores. In addition, as of January 1, 1995, there were 78
signed franchise agreements for additional Franchised Stores that the Company
expects will open within the next 12 to 18 months.
Cost of Sales. Cost of sales increased by $82,468,000 or 26.6% for 1994. As
a percentage of net sales, cost of sales increased to 58.2% for 1994 as compared
to 55.8% for the prior-year period. The increase in cost of sales as a
percentage of net sales resulted principally from a sales mix shift caused by
(i) the addition of the sales of ABWF, which operated on lower gross margins
than Company Stores, (ii) increased sales of merchandise to franchisees, and
(iii) increased sales of carpet and related installation services.
Operating Expenses. Selling, general and administrative expenses decreased
as a percentage of sales to 32.0% for 1994 as compared to 34.5% for the
prior-year period, principally as a result of the addition of ABWF, which
operates on lower operating expenses, as a percentage of Net Sales, than the
Company (excluding ABWF). Such expense increased in aggregate dollar amount by
$24,079,000, or 12.6%, due to (j) the addition of ABWF's operating expenses,(ii)
increases in commission-based payroll due to higher sales and (iii) increased
advertising expenditures for the fourth quarter.
Special Charges. During the third quarter, the Company recorded a
write-down for the impairment of certain intangible assets and property, plant
and equipment based upon discounted cash flows, established provisions for store
closures and conversions and provided for a write-down on an unfavorable
long-term inventory purchase commitment and certain discontinued minor product
categories. These write-downs and provisions consist of:
Impairment of assets $14,500,000
Unfavorable purchase commitment
product writedowns 9,700,000
Store closures and conversions 5,400,000
-----------
$29,600,000
===========
<PAGE>
The Company has a wood inventory purchase agreement which requires the Company
to purchase minimum levels of inventory through May 1998. The impact of
purchasing the minimum levels of inventory, which exceed the Company's inventory
needs under prevailing market conditions, has resulted, and is anticipated to
continue to result, in excess inventory levels. Based on these circumstances and
other provisions in the wood purchase agreement, the Company initially recorded
a write-down of $7,500,000 at the end of the third quarter for inventory to be
purchased under the contract and an additional charge was estimated at
$2,100,000 for inventory in certain minor product categories to be discontinued.
Subsequent analysis after the end of the third quarter has resulted in
refinement of the overall estimate such that the provision for the unfavorable
purchase commitment has been reduced to $4,400,000 and $5,300,000 has been
identified as applicable to the discontinued product categories.
Loss on disposal of a Line of Business. Effective October 3, 1993, the
Company elected to dispose of its wholly owned Canadian subsidiary, Factory
Carpet, which operated 37 retail stores in Canada (including 8 franchised
stores). On May 20, 1994 the Company sold the Canadian operations. In connection
with the disposition of Factory Carpet, the Company recorded a charge to
continuing operations of $8,651,000 in the third quarter of 1993 and an
additional estimated loss of $2,500,000 in the second quarter of 1994. Factory
Carpet's operations have been eliminated from the individual line items of the
1993 Consolidated Statement of Operations and the pre-tax loss of this line of
business has been included on a one-line basis in the loss on disposal of a line
of business.
Interest Expense. Interest expense increased $16,254,000 for 1994 as
compared to the prior-year period. The increased interest expense resulted from
issuance of $200,000,000 principal amount of 10 3/4% Senior Notes (the "Senior
Notes") during the fourth quarter of 1993, additional borrowings of $29,000,000
under the term loan portion of the Senior Credit Agreement on October 4,
1994 and higher interest rates on total borrowings under the Company's Senior
Credit Agreement.
Pre-Tax Loss. Pre-tax loss for 1994 was $31,428,000 as compared to a
pre-tax loss of $1,278 ,000 for the prior-year period. The increase in pre-tax
loss resulted primarily from the $29,600,000 Special Charges, the $2,500,000
loss on disposal of a line of business and the increase in interest expense of
$16,254,000, partially offset by the nonrecurrence of the $9,500,000 prior year
loss on disposal of a line of business.
Income Taxes. Income tax expense was $14,888,000 for 1994 compared to
$641,000 in the prior-year period. The increase was attributed to the Company's
decision to increase the valuation allowance against its deferred income tax
asset which reduced the net deferred tax asset by $14,156,000 in recognition of
uncertainties as to the realization of those assets. State income taxes
increased to $732,000 for 1994 as compared to $660,000 for 1993 due to the
acquisition of ABWF in late 1993.
Net Loss. Net loss for 1994 was $46,316,000 after a $2,500,000 loss on
disposal of a line of business, the $29,600,000 in Special Charges and the
$14,156,000 write-off of deferred tax assets, as compared to a net loss of
$14,522,000 in the prior-year period which included a $9,500,000 loss on
disposal of a line of business and the $12,603,000 extraordinary loss on the
early extinguishment of long-term debt.
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.
<PAGE>
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.
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 of 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 8 Franchised Stores,
operate under the Factory Carpet name, and were acquired by the Company during
1990. The
<PAGE>
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
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.
Liquidity and Capital Resources
In September 1994, the Company entered into an amendment to its Senior
Credit Agreement and, on October 4, 1994, the Company borrowed an additional
$29,000,000 under the term loan portion of the Senior Credit Agreement, the
proceeds of which were utilized to provide additional working capital for the
business.
At January 1, 1995, the Company had $165,600,000 in outstanding borrowings
under the Senior Credit Agreement, and the average fluctuating interest rate on
such borrowings approximated 9.0% per annum. At March 31, 1995, the Company had
approximately $5,550,000 of availability under the revolving line of credit
portion of
<PAGE>
the Senior Credit Agreement.
During fiscal 1995, the Company's principal payments due under its
outstanding long-term mortgage indebtedness and payments due under capitalized
leases will aggregate approximately $5,817,000. The next mandatory principal
payment under the term loan portion of the Senior Credit Agreement will be the
quarterly payment of $3,526,000 due in March 1996. Interest payments of
$10,750,000 on the Senior Notes are payable on each of the 15th of June and the
15th of December, 1995. Interest payments under the Senior Credit Agreement are
generally due at the end of each calendar quarter, and are anticipated to
approximate $3,750,000 quarterly.
Approximately $8,600,000 annually of cash dividends are scheduled to be
paid quarterly on the Series A Shares during 1995 of which the Company paid
$2,063,000 in January 1995. As of January 15, 1995, the Company's
Redeemable Senior Preferred Stock will begin to accrue cash dividends of
approximately $5,200,000 annually, scheduled to be payable quarterly.
Capital expenditures for 1994 were $19,488,000 as compared to $14,031,000
for the prior fiscal year. These capital expenditures were funded through cash
flow from operations and the revolving credit portion of the Senior Credit
Agreement. In fiscal 1995, the Company anticipates total capital expenditures of
approximately $16,448,000.
As a result of working capital needs resulting primarily from growth of
Franchised Stores in fiscal 1995, increased interest expense, expansion of the
Company's Floors A Plenty super-store concept, which has the short term effect
of reducing cash flow due to financing of initial inventory and initial
operating losses, and lower operating results in the first quarter of 1995 as
compared to the first quarter of 1994, the Company does not believe it will have
cash resources sufficient to cover required and planned cash outlays during the
balance of fiscal 1995. To address this issue the Company has reduced its
planned capital expenditures for fiscal 1995 compared to fiscal 1994 and
affiliates of Investcorp S.A., which indirectly has the power to vote a majority
of the outstanding voting shares of Holdings (collectively, with its affiliates,
"Investcorp"), have agreed to provide up to $15 million of financing to the
Company. Such financing will be provided on commercially reasonable terms and
will be available for one year, unless there is an earlier default.
The Company believes that the proceeds of such financing, together with the
anticipated cash flow from operations, the reduction in capital expenditures as
compared to fiscal 1994 and borrowings under the Senior Credit Agreement, will
provide the Company with sufficient working capital for its operational needs in
fiscal 1995 and enable the Company to make all payments required or planned for
fiscal 1995, except that the Company does not intend to pay quarterly dividends
on its preferred stock during the remainder of 1995.
Failure of the Company to pay scheduled preferred stock dividends in 1995
would not cause a default or acceleration of any financial obligations of the
Company. However, although the relevant terms of the two outstanding series of
preferred stock differ somewhat, in general if six quarterly preferred stock
dividends are not paid, the holders of the preferred stock will be entitled to
elect an aggregate of up to four directors of the Company.
The Company was in compliance with all covenants in the Senior Credit
Agreement at the end of fiscal 1994 and believes it will be in compliance at the
end of the first quarter of 1995, although there can be no assurance of such
compliance until first quarter financial statements are finalized. However, the
Company believes that it will not be in compliance with certain financial
covenants, including trailing twelve months operating profit and dividend
coverage covenants, in the Senior Credit Agreement as of the end of the second
quarter of fiscal 1995. Such anticipated non-compliance would result primarily
from covenants that become increasingly more restrictive over time in accordance
with their terms, together with lower than anticipated operating profits and
increased interest expense.
The Company intends to seek relief from the covenants under the Senior
Credit Agreement and believes that some measure of relief
<PAGE>
will be granted, especially in view of the financing being made available by
Investcorp. However, the Company has only recently initiated discussions with
the agent bank under the Senior Credit Agreement regarding this issue, and no
assurance can be given that such relief will be made available to the Company,
or, if so, whether the terms and conditions thereof will be acceptable to the
Company.
If such non-compliance were to occur and the Company were unable to secure
the requisite waivers or covenant modifications, the Company would have to
refinance some or all of its indebtedness, sell assets, restructure its
operations or raise additional equity. No assurance can be given that any of the
foregoing could be accomplished or, if accomplished, would raise sufficient
funds for the Company to satisfy its debt service and other financial
obligations on a timely basis.
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 schedule is set forth on page S-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
<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 46 Chairman of the Board, Chief
Executive Officer and Director
N. Laurence Nagle 66 President, Chief Operating
Officer and Director
William H. Pavony 55 Vice President, and Chief
Financial Officer
Alan J. Bethscheider 36 Vice President-Legal,
Secretary and General Counsel
E. Garrett Bewkes, III 44 Director
Walter F. Loeb 70 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.
William H. Pavony has been Vice President, Chief Financial Officer of
Color Tile, Inc. since November 1994. Previously, he served as Executive Vice
President of Arthur Rutenberg Homes from 1993 to 1994, and prior to that as
Executive Vice President - Administration and Chief Financial Officer with the
Kobacker Company from 1989 to 1993.
Alan J. Bethscheider has been the Secretary of the Company since
January 1992 and Vice President-Legal and General Counsel since February 1992.
Previously, Mr. Bethscheider was associated with the law firm of Gibson, Dunn &
Crutcher from June 1984 to February 1992 and acted as outside counsel to the
Company from January 1990 to February 1992.
E. Garrett Bewkes, III has been an executive of Investcorp S.A. or one
or more of its wholly-owned subsidiaries since March 1994 and a director of
Color Tile since June 1994. Mr. Bewkes held the position of Senior Managing
Director of the Bear, Stearns & Co. Inc. ("Bear Stearns") from 1986 to 1994 and
was a Vice Chairman and Co-head of Bear Stearn's Investment Banking Department
from 1992 to 1994.
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. All directors
serve until their respective successors are elected at the next
<PAGE>
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
1994 by the Company's Chief Executive Officer and each of the other three most
highly compensated executive officers, whose remuneration exceeded $100,000.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long
Term
Compen-
Annual Compensation sation Other
-----------
Awards
- ------------------------------------------------------------ ------------ --------
(a) (b) (c) (d) (e) (g) (i)
Other All
Annual Other
Compen- Compen
Name and Salary sation ($) Holdings -sation
Principal Position ($) Bonus (C,D) (Options) ($)
(A) Year (B) ($) (#)(E) (C,F,G)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Eddie M. Lesok 1994 458,100 - - - 4,620
Chief Executive 1993 358,100 - - - 4,497
Officer 1992 358,100 296,000 - - 4,364
N. Laurence Nagle 1994 382,500 - - - 4,620
President 1993 282,500 - - - 4,497
1992 282,500 256,000 - - 4,364
William H. Pavony 1994 30,326 - - - -
Chief Financial
Officer
Daniel J. Gilmartin 1994 207,500 - - - 4,620
Sr. Vice President 1993 207,500 50,000 - - 4,497
Treasurer and Chief 1992 207,500 192,000 - - 26,696
Financial Officer
Alan J. Bethscheider 1994 157,200 - - - 3,918
Vice President- 1993 132,200 - - - 4,260
Legal 1992 115,053 65,262 - - -
</TABLE>
<PAGE>
(A) Mr. Pavony joined the Company in November 1994. Mr. Bethscheider
joined the Company in February 1992. Mr. Gilmartin, formerly Senior
Vice President, Treasurer, Chief Financial Officer and Director,
resigned in November 1994 to assume the position of Executive Vice
President - Operations of ABWF.
(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
1994 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 1994, 1993 and 1992, respectively,
are derived from the following figures: (i) Mr. Lesok, $4,620, $4,497
and $4,364, respectively, Company payments to the Investment Plan
($4,620, $4,497 and $4,364 of which is vested), and (ii) Mr. Nagle,
$4,620, $4,497 and $4,364, respectively, Company payments to the
Investment Plan ($4,620, $4,497 and $4,364 of which is vested), (iii)
Mr. Gilmartin, $4,620, $4,497 and $1,696, respectively, Company
payments to the Investment Plan ($2,772, $2,618 and $1,018 of which is
vested) and (iv) Mr. Bethscheider, $3,918 and $4,260, respectively,
Company payments to the Investment Plan ($2,351 and $2,556 of which is
vested).
<PAGE>
<TABLE>
<CAPTION>
Option Exercises and Value Table - Fiscal 1994
Aggregated Option Exercises in Fiscal 1994, and FY-End Option Value
(a) (b) (c) (d) (e)
Value of Un-
Number of exercised "In-
Unexercised the-Money"
Holdings Holdings
Holdings Options at FY- Options at FY-
Shares Value End (#) End ($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
(A)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Eddie M. Lesok - - 7,091.8/28,367.2 -
N. Laurence Nagle - - 3,636.8/14,627.2 -
William H. Pavony - - 0/2,000 -
Daniel J. Gilmartin - - 848/3,392 -
Alan J. Bethscheider - - 1,275/5,100 -
</TABLE>
- -----------------------
(A) Underlying shares are not publicly traded and are subject to repurchase
by 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,
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
<PAGE>
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 Mr. Bethscheider's employment is terminated
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.
The Company has agreed that if Mr. Pavony's employment is terminated (other than
for cause) prior to December 31, 1995, Mr. Pavony will be entitled to receive
the lesser of six months base salary or his base salary until he gains other
employment. Mr. Pavony's current base salary is $200,000.
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 1, 1995, 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 1, 1995 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:
<TABLE>
<CAPTION>
Class D Voting Stock:
Percent
Number of Outstanding Shares 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)
- ------------------- ---------------------- ----------------------
<S> <C> <C>
INVESTCORP S.A. (2)(3) 2,600 52%
37 rue Notre-Dame
Luxemborg
<PAGE>
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)(7) 350 7%
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Elias N. Hallack (9) 1,200 24%
Tile Capital Limited
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Nemir A. Kirdar (3) 1,200 24%
Tile Equity Limited
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
Michael L. Merritt (10) 1,200 24%
Tile International Limited
P. O. Box 1111
West Wind Building
George Town, Grand Cayman
Cayman Islands, B.W.I.
</TABLE>
- ---------------------------
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or direct the voting of a security, or the sole or shared power to
dispose, or direct the disposition of, a security.
<PAGE>
(2) Investcorp owns no stock in any of Corporate Equity Limited, Acquisition
Equity Limited, Funding Equity Limited, Planning Equity Limited, or the
beneficial owners of these entities (see (5)-(8) below). Investcorp may
be deemed to be the beneficial owner of the shares of voting stock held by
such entities because the beneficial owners of each of those entities have
entered into revocable management agreements with a wholly-owned
subsidiary of Investcorp pursuant to which these shareholders have granted
such subsidiary the authority to direct the disposition of the stock owned
by such entities for so long as such agreements are in effect. Investcorp
is a Luxembourg corporation, with its registered address at 37 rue Notre-
Dame, Luxembourg.
(3) Mr. Kirdar, the President and Chief Executive Officer of Investcorp, owns
more than 99% of the stock of Tile Equity Limited, a Cayman Islands
corporation. Its registered office is P. O. Box 1111, West Wind Building,
George Town, Grand Cayman, Cayman Islands, British West Indies. Mr.
Kirdar has granted a revocable proxy in Tile Equity Limited to Investcorp.
Mr. Kirdar's address of record is INVESTCORP BANK E.C., Investcorp House,
P. O. Box 5240, Manama Bahrain.
(4) CIP Limited ("CIP") is a less than 1% indirect beneficial owner of stock
of Corporate Equity Limited, Acquisition Equity Limited, Funding Equity
Limited, Planning Equity Limited. CIP may be deemed to be the beneficial
owner of the shares of voting stock held by such entities because the
ultimate beneficial shareholders of each of those entities have granted to
CIP revocable proxies in companies that own those entities' stock. CIP
also may be deemed to indirectly 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.
<PAGE>
<TABLE>
<CAPTION>
Class C Non-Voting Stock:
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 executive
officers of the Company as a
<S> <C> <C>
group (15 persons) 66,357 25.2%
Eddie M. Lesok
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102 38,198 14.5%
N. Laurence Nagle
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102 18,729 7.1%
Daniel J. Gilmartin
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102 848 0.3%
Alan J. Bethscheider
c/o Color Tile, Inc.
515 Houston Street
Fort Worth, TX 76102 850 0.3%
</TABLE>
- ---------------------------
(1) As used in this table, beneficial ownership means the sole or shared power
to vote, or direct the voting of a security, or the sole or shared power to
dispose, or direct the disposition of, a security.
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 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, extended in January 1995 for an
additional five years.
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
<PAGE>
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.
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.
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.
In April 1995 affiliates of Investcorp S.A., which indirectly has the power
to vote a majority of the outstanding voting shares of Holdings, have agreed to
provide up to $15,000,000 of financing to the Company. Such financing will be
provided on commercially reasonable terms and will be available for one year,
unless there is an earlier default.
During 1994, the Company paid the Investment Plan aggregate rentals of
approximately $3,177,000 with respect to 43 properties leased to the Company by
the Investment Plan. During 1993 and 1992, the Company paid the Investment Plan
aggregate rentals of approximately $3,460,000 with respect to 44 properties and
approximately $3,085,000 with respect to 43 properties, respectively. These
leases were originally between the Company and third parties and reflect
arm'slength terms.
<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 Schedule 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)
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)
<PAGE>
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(e) 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(f) 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(g) 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).
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)
<PAGE>
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)
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)
<PAGE>
*10(s) Amendment to Employment Agreement dated January 3, 1994,
between the Company and Eddie M. Lesok (filed as Exhibit 10(s)
to the January 2, 1994 Form 10-k and incorporated by reference)
*10(t) Amendment to Employment Agreement dated January 3, 1994,
between the Company and N. Laurence Nagle (filed as Exhibit 10
(10)to the January 2, 1994 Form 10-k incorporated by reference)
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).
10(z) Amendment No. 4, dated as of September 12,1994, to Credit
Agreement, dated as of November 27, 1991, as amended, among the
Company, the lenders party there to and Chemical Bank as agent
(filed as Exhibit 10(z) to the Registrants Quarterly Report on
Form 10-Q for the Quarter ended October 2, 1994 and
incorporated herein by reference).
10(aa) Form of Letter Agreement between the Company and INVESTCORP
S.A. dated April __, 1995.
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
(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
<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 17, 1995
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 17, 1995
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ N. LAURENCE NAGLE
N. Laurence Nagle, Director April 17, 1995
/s/ WILLIAM H. PAVONY
William H. Pavony April 17, 1995
(Principal Financial and Accounting Officer)
/s/ E. GARRETT BEWKES
E. Garrett Bewkes, Director April 17, 1995
/s/ WALTER F. LOEB
Walter F. Loeb, Director April 17, 1995
<PAGE>
COLOR TILE, INC.
Annual Report on Form 10-K
Year Ended January 1, 1995
EXHIBITS INDEX
Sequentially
Exhibit Numbered
No. Description Page
Report of Independent Accountants
Consolidated Financial Statements:
Consolidated Balance Sheet as of January 1, 1995 and
and January 2, 1994
Consolidated Statement of Operations for the years ended January 1,
1995, January 2, 1994, and January 3, 1993
Consolidated Statement of Common Stockholder's Equity (Deficiency) for
the years ended January 1, 1995, January 2, 1994 and January 3,
1993,
Consolidated Statement of Cash Flows for the years ended January 1,
1995, January 2, 1994 and January 3, 1993
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
<PAGE>
Exhibit 10(aa)
INVESTCORP S.A.
37 rue Notre-Dame
Luxembourg
Color Tile, Inc.
515 Houston Street
Fort Worth, Texas 76102
Gentlemen:
You have requested that INVESTCORP S.A. ("Investcorp") or one or more
of its affiliates arrange for certain financing facilities to be made available
to Color Tile, Inc. ("Color Tile"). Investcorp hereby confirms its commitment to
provide, or to arrange for the provision of, one or more financing facilities
(individually a "Facility" and collectively the "Facilities") in an aggregate
amount not to exceed $15,000,000 and for a term not in excess of one year.
You and we will promptly agree upon the form of, and thereupon prepare
the necessary legal documentation, containing commercially reasonable terms,
for, each Facility to be provided. The closing of each such Facility would be
subject to receipt of any third party consents that must be obtained by Color
Tile in connection with entering into and implementing such Facility.
By execution of this letter, you agree (i) to pay when billed all
out-of-pocket expenses (including, without limitation, fees and expenses of
counsel) incurred by Investcorp and its affiliates in connection with this
letter and the transactions contemplated hereby and (ii) to indemnify Investcorp
and its affiliates and each of their respective employees and agents for any
expense, claim or liability to which they may become subject in connection with
this letter or the transactions contemplated hereby.
This letter shall be governed by and construed in accordance with the
laws of the State of New York.
If this letter is acceptable to you, please sign in the space provided
below.
Sincerely,
INVESTCORP S.A.
----------------------------
By:
Accepted and Agreed
_______________, 1995
COLOR TILE, INC.
By:
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Accountants F - 2
Consolidated Financial Statements:
Consolidated Balance Sheet as of January 1, 1995 and
January 2, 1994 F - 3
Consolidated Statement of Operations for the years
ended January 1, 1995, January 2, 1994 and
January 3, 1993 F - 4
Consolidated Statement of Common Stockholder's Equity (Deficiency) for the
years ended January 1, 1995, January 2, 1994 and January 3, 1993 F - 5
Consolidated Statement of Cash Flows for the years
ended January 1, 1995, January 2, 1994 and
January 3, 1993 F - 6
Notes to Consolidated Financial Statements F - 7
Consolidated Financial Statement Schedule for the years ended January 1, 1995,
January 2, 1994, and January 3, 1993:
Schedule II -Valuation and Qualifying Accounts S - 1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Color Tile, Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Color Tile, Inc. listed on page F-1 of this Form 10-K.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and the financial statement schedule 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 1, 1995 and January 2, 1994 and the consolidated results of its
operations and cash flows for each of the three years in the period ended
January 1, 1995 in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
/s/ COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
April 17, 1995
<PAGE>
<TABLE>
<CAPTION>
COLOR TILE, INC.
Consolidated Balance Sheet
January 1, 1995 and January 2, 1994
(Amounts in Thousands, except share amounts)
ASSETS
January 1, January 2,
1995 1994
---------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 630 $ 4,522
Accounts and notes receivable, net of
allowance for bad debts of $753 and $369 16,032 13,860
Inventories 87,394 83,552
Deferred income taxes 1,078
Other current assets 6,362 5,072
--------- ---------
Total Current Assets 110,418 108,084
--------- ---------
Property, plant and equipment, net 121,667 119,993
Goodwill, net 264,159 269,824
Other intangible assets, net 39,787 40,696
Deferred financing costs, net 5,757 6,464
Deferred income taxes 13,078
Other assets 8,310 7,204
---------- --------
Total Assets $ 550,098 $565,343
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Current portion of long-term debt $ 5,817 $ 5,790
Accounts payable 61,269 60,941
Accrued expenses and other current liabilities 36,045 36,981
---------- ---------
Total Current Liabilities 103,131 103,712
Long-term debt 386,717 347,567
Other noncurrent liabilities 6,055 5,488
---------- ---------
Total Liabilities 495,903 456,767
---------- ---------
Commitments and contingencies (Notes 8and 10)
Redeemable preferred stock, $94,183
liquidation value at January 1, 1995 90,943 86,838
Common Stockholder's Equity (Deficiency):
Common stock, $.01 par value, 1,000,000
shares authorized, 101 shares issued and
outstanding
Additional paid-in capital 93,060 105,230
Accumulated deficit (129,808) (83,492)
---------- ----------
Total Common Stockholder's Equity (Deficiency) (36,748) 21,738
---------- ----------
Total Liabilities and Stockholders' Equity $ 550,098 $ 565,343
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
COLOR TILE, INC.
Consolidated Statement of Operations
for the years ended January 1, 1995, January 2, 1994
and January 3, 1993
(Amounts in Thousands)
January 1, January 2, January 3,
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Systemwide sales (Note 1) $ 700,349 $ 568,314 $ 586,007
=========== =========== ==========
Net sales $ 673,528 $ 555,127 $ 580,385
Costs and expenses:
Cost of sales 391,996 309,528 311,368
Selling, general and
administrative 215,530 191,451 208,796
Depreciation and amortization 28,696 25,546 28,683
Special charges 29,600 30,000
----------- ----------- ----------
Total costs and expenses 665,822 526,525 578,847
----------- ----------- ----------
Operating income 7,706 28,602 1,538
Gain (loss) on disposal of
a line of business (2,500) (9,500) 4,007
Interest expense (net of interest
income of $485, $163 and $102) (36,634) (20,380) (25,697)
----------- ----------- ----------
Loss before income taxes
and extraordinary item (31,428) (1,278) (20,152)
Provision for income taxes 14,888 641 1,240
----------- ----------- ----------
Loss before extraordinary item (46,316) (1,919) (21,392)
Extraordinary loss on early
extinguishment of debt, net of tax (12,603) (601)
----------- ----------- ----------
Net loss $(46,316) $(14,522) $(21,993)
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
COLOR TILE, INC.
Consolidated Statement of Common Stockholder's Equity (Deficiency) for
the years ended January 1, 1995, January 2, 1994 and January 3, 1993
(Amounts in Thousands, except share amounts)
Total
Common
Additional Accumu- Stockholder's
Common Stock Paid-in lated Equity
Shares Amount Capital Deficit (Deficiency)
------ ------ ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
Senior Cumulative Preferred Stock
dividends, declared and undeclared (2,982) (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 (8,828) (8,828)
Accretion of difference between
redemption value and proceeds of
Senior Increasing Rate Preferred Stock (370) (370)
Net loss (46,316) (46,316)
------- ---------- ---------- -----------
Balance, January 1, 1995 101 $93,060 $(129,808) $(36,748)
======= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
COLOR TILE, INC.
Consolidated Statement of Cash Flows for the years ended
January 1, 1995, January 2, 1994
and January 3, 1993
(Amounts in Thousands)
January 1, January 2, January 3,
1995 1994 1993
--------- ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(46,316) $(14,522) $(21,993)
--------- --------- ---------
Adjustments to reconcile net loss
to cash provided by (used in)
operating activities:
Depreciation and amortization 29,512 27,011 30,177
Deferred income taxes 14,156
Extraordinary loss on early
extinguishment of debt 12,603 910
Special charges 29,600 30,000
Loss (gain) on disposal of
a line of business 2,500 8,189 (4,327)
Increase in accounts receivable (2,172) (420) (5,731)
Increase in inventories (9,205) (11,773) (1,813)
(Decrease) increase in
other current assets (1,290) 742 (2,206)
(Increase) decrease in
other assets (3,413) (12,534) 3,467
Increase in accounts payable 328 11,904 1,179
Decrease in accrued expenses (16,979) (7,017) (7,407)
Increase (decrease) in layaways
and deposits 870 (448) 213
Decrease in other liabilities (969) (5,032) (8,457)
--------- -------- --------
Total adjustments 42,938 23,225 36,005
--------- -------- --------
Cash (used in) provided by
operating activities (3,378) 8,703 14,012
--------- -------- --------
Cash flows from investing activities:
Purchases of property, plant
and equipment (19,488) (14,031) (13,938)
Proceeds from sale of assets 2,528 2,051 14,015
Acquisition, net of cash acquired (74,934)
Other investing activities (8,190) (5,362) (4,065)
--------- -------- --------
Cash used in investing activities (25,150) (92,276) (3,988)
--------- -------- --------
Cash flows from financing activities:
Borrowings under revolving line
of credit 193,650 212,250 241,414
Payments on revolving line of credit (183,650) (216,950) (231,845)
Borrowings under term loan facility 29,000
Payments on long-term debt (6,299) (99,518) (20,295)
Borrowings to fund repurchase of debt 63,436
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 (8,065) (7,450) (1,224)
Repurchase of debt (111,958)
--------- --------- ---------
Cash provided by (used in)
financing activities 24,636 88,332 (9,434)
--------- --------- ---------
Effect of exchange rate differences
on cash equivalents (237) (663)
--------- --------- ---------
(Decrease) increase in cash and
cash equivalents (3,892) 4,522 (73)
Cash and cash equivalents at
beginning of period 4,522 0 73
--------- --------- ---------
Cash and cash equivalents at
end of period $ 630 $4,522 $ 0
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<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 subsid
iary, 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 "1994", "1993"and "1992" mean the 52 week or 53
week fiscal years ended January 1, 1995, January 2, 1994 and January 3,
1993, respectively. The year ended January 3, 1993 was comprised of 53
weeks. The years ended January 1, 1995 and January 2, 1994 were each
comprised of 52 weeks.
Inventories
Inventories are stated at the lower of cost or market. Cost of sales is
determined principally by the first-in, first-out ("FIFO") method.
Property, Plant and Equipment
Property, plant and equipment, including assets under capital leases, are
stated at cost and are depreciated on a straight-line basis over the
estimated useful lives of the assets.
Betterments, renewals and repairs that extend the 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.
<PAGE>
1. Summary of Significant Accounting Policies (Continued):
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 exists at January 1, 1995.
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.
Systemwide Sales
Systemwide sales (unaudited) include retail sales of all Company Stores,
sales of ABWF since the date of acquisition, retail sales of all Franchised
Stores, franchise fees and royalties and sales of manufactured products to
outside third parties.
Franchise Revenue Recognition
The initial franchise fees ($25) 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
merchandise 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 2, 1994 and January 3, 1993
have been reclassified to conform to the presentation adopted for the year
ended January 1, 1995. These reclassifications did not result in a change
in net loss or common stockholder's equity (deficiency).
<PAGE>
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 - Transac
tions 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 approximately $102 million,
which is being amortized over 40 years.
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, including amortization
of intangibles, increased interest expense on the acquisition debt,
elimination of prior owner's executive compensation and the related income
tax effect of such elimination. 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.
<TABLE>
<CAPTION>
1993 1992
---------- ---------
(unaudited)
<S> <C> <C>
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)
</TABLE>
3. Inventories:
Inventories at January 1, 1995 and January 2, 1994 are summarized as
follows:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Finished goods $85,176 $81,381
Work in progress 563 656
Raw materials 1,655 1,515
------- -------
Total inventories $87,394 $83,552
======= =======
</TABLE>
<PAGE>
4. Property, Plant and Equipment:
Property, plant and equipment and estimated useful lives at January 1, 1995
and January 2, 1994 consist of the following:
<TABLE>
<CAPTION>
Life 1994 1993
----------- --------- ----------
<S> <C> <C> <C>
Land $ 26,785 $ 26,790
Buildings 35 years 26,004 26,007
Assets under capital leases 3-35 years 59,605 53,934
Leasehold improvements 5-10 years 35,432 29,253
Fixtures and equipment 2-15 years 53,693 48,153
Construction in progress 4,283 1,621
--------- ---------
205,802 185,758
Less: accumulated depreciation (84,135) (65,765)
--------- ---------
Total property, plant and equipment $121,667 $119,993
========= =========
</TABLE>
Depreciation expense was $17,547, $15,626 and $17,336 for 1994, 1993 and
1992, respectively.
5. Goodwill and Other Intangible Assets:
Goodwill and other intangible assets and related amortization periods at
January 1, 1995 and January 2, 1994 consist of the following:
<TABLE>
<CAPTION>
Amortization Period 1994 1993
------------------- ----------- ----------
<S> <C> <C> <C>
Goodwill 40 years $ 291,225 $289,668
Less: accumulated amortization (27,066) (19,844)
----------- ----------
Goodwill, net 264,159 269,824
Other intangible assets
Favorable operating leases and lease options Lease term 40,511 44,316
Other 5 - 40 years 32,633 29,868
--------- ---------
73,144 74,184
Less: accumulated amortization (33,357) (33,488)
---------- ----------
Other intangible assets, net 39,787 40,696
---------- ----------
Total goodwill and other intangible assets $303,946 $310,520
========== ==========
</TABLE>
Amortization expense was $11,149, $9,332 and $11,347 for 1994, 1993 and
1992, respectively.
6. Accrued Expenses and Other Current Liabilities:
Accrued expenses and other current liabilities at January 1, 1995 and
January 2, 1994:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Employee compensation $5,089 $4,867
Accrued payroll, property and sales tax 4,604 4,757
Accrued interest 2,099 1,111
Other accrued expenses 17,375 20,238
Layaways and deposits 6,878 6,008
---------- ----------
Total accrued expenses and other current liabilities $36,045 $36,981
========== ==========
</TABLE>
<PAGE>
7. Long-term Debt:
Long-term debt at January 1, 1995 and January 2, 1994 consists of the
following:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
10 3/4% Senior notes $200,000 $200,000
Term loan 75,000 46,000
Revolving line of credit 90,600 80,600
Mortgage loans on real estate 2,800 3,447
Obligations under capital leases 24,134 23,310
--------- ---------
Total long-term debt 392,534 353,357
Less: Current portion (5,817) (5,790)
--------- ---------
$386,717 $347,567
========= =========
</TABLE>
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 $75,000 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 1, 1995, in accordance with these covenants,
the Company was restricted from paying dividends on its common stock. Such
covenants also require the Company to maintain certain financial ratios.
Trade and certain standby letters of credit, which amounted to $3,414 at
January 1, 1995, reduce the amounts available for additional borrowings and
letters of credit under the revolving line of credit by a like amount. At
January 1, 1995, the Company had approximately $6,000 available under the
revolving line of credit facility for additional working capital borrowings.
<PAGE>
7. Long-term Debt (continued):
The outstanding borrowings under the Senior Credit Agreement accrue interest
at the higher of the bank's announced reference rate (8.50% at January 1,
1995) or 1/2% above the federal funds rate, in each case plus 1 1/2%.
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 8.57% to 9.19% at January 1, 1995. 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 $70 and $106 for the years
ended January 1, 1995 and January 2, 1994, 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.
As of September 13, 1994, the Company entered into an amendment to its
Senior Credit Agreement, which provided for additional borrowings under the
term loan facility up to a total of $75,000. On October 4, 1994, the Company
borrowed an additional $29,000 under the term loan portion of the Senior
Credit Agreement, the proceeds of which were utilized to provide additional
working capital for the business.
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.
During 1992 and 1991, the Company repurchased all of the aggregate
outstanding 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 pre-tax loss of $910 in 1992, which after an
income tax benefit of $309 was recorded as an extraordinary item in the
consolidated statement of operations.
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:
<TABLE>
<S> <C>
1995 $ 5,817
1996 19,156
1997 21,050
1998 137,546
1999 1,849
Thereafter 207,116
--------
$392,534
========
</TABLE>
<PAGE>
8. Capital and Other Leases:
Retail operations of Company Stores are conducted in 694 leased and 134
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 gross sales over a specified threshold.
The building portion of minimum rentals which meet the criteria of capital
leases is capitalized, and the related assets and obligations are recorded
using the rate implicit in the lease. The asset is amortized on a
straight-line basis over the lesser of the useful life of the building or
the lease term.
Assets under capital leases at January 1, 1995 and January 2, 1994 consist
of the following:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Buildings (manufacturing and distribution facilities) $ 5,612 $ 5,612
Buildings (retail stores) 40,010 37,470
Fixtures and equipment 13,983 10,852
---------- ----------
59,605 53,934
Less: accumulated amortization (32,041) (25,564)
---------- ----------
$27,564 $28,370
========== ==========
</TABLE>
Certain other noncancellable leases and the land portion of the minimum
rentals under building capital leases are accounted for as operating leases.
Total rental expense was as follows:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Minimum rentals $30,694 $29,906
Contingent rentals 775 696
Less: sublease rentals (9,111) (7,315)
--------- ---------
$22,358 $23,287
========= =========
</TABLE>
Minimum rental commitments are summarized as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1995 $7,374 $30,733
1996 6,073 29,295
1997 5,088 26,454
1998 3,194 23,889
1999 2,602 19,902
Thereafter 10,202 70,749
--------- --------
Total minimum lease payments 34,533 $201,022
Less: amount representing interest (10,399) ========
---------
$24,134
=========
</TABLE>
<PAGE>
Minimum payments for capital and operating leases have not been reduced by
minimum sublease rentals of approximately $3,305 for capital leases and
$38,012 for operating leases which are due in the future under
noncancellable subleases.
In addition, minimum payments do not include contingent rentals which may be
paid under certain store leases on the basis of a percentage of sales in
excess of stipulated amounts or future rental increases as periodically
determined.
9. Income Taxes:
The Company adopted Statement of Financial Accounting Standards No. 109,
("SFAS 109") "Accounting for Income Taxes," effective December 30, 1990.
Subsequently, the Company recognized a deferred income tax asset of $14,156.
In connection with the adoption of SFAS 109, the Company established a
valuation allowance which amounted to $35,323 against its deferred tax
asset, as of January 2, 1994.
During 1994, the Company reevaluated the potential for realization of the
Company's deferred income tax assets. As a result, the Company increased the
valuation allowance against those assets to $58,665, which reduced the net
deferred income tax asset to zero. The increase in the valuation allowance
was recorded through a charge to expense of $14,156. The increase in the
valuation allowance reflects the Company's assessment that ongoing operating
losses have jeopardized the realization of deferred income tax assets.
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 for income taxes consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
Current: ------ ------ ------
<S> <C> <C> <C>
Federal $544
State $732 $660 574
Foreign (19) 122
-------- ------ ------
Provision for income taxes 732 641 1,240
Provision for current taxes included in extraordinary item (309)
-------- ------ ------
732 641 931
Deferred:
Federal 14,156
-------- ------ ------
Provision for income taxes $14,888 $641 $931
======== ====== ======
</TABLE>
<PAGE>
The following is a reconciliation of income taxes at the Federal statutory
rate with income taxes recorded by the Company:
<TABLE>
<CAPTION>
1994 1993 1992
--------- ------- --------
<S> <C> <C> <C>
Tax (benefit) at federal statutory rates $(11,000) $(4,858) $(6,850)
Extraordinary item (309)
State income taxes, net of federal tax
benefit 484 429 379
Foreign income taxes (19) 122
Amortization of goodwill 1,791 1,791 1,406
Alternative minimum tax 235
Valuation allowance 23,342 3,437 1,287
Other 271 (139) 4,661
--------- ------- --------
Provision for income taxes $14,888 $ 641 $ 931
========= ======= ========
</TABLE>
The components of the net deferred income tax asset recognized as of
January 1, 1995 and January 2, 1994 are as follows:
<TABLE>
<CAPTION>
1994 1993
Deferred tax liability: ----------- ----------
<S> <C> <C>
Depreciation $(4,389) $(3,928)
Deferred tax asset: ----------- ----------
Tax net operating loss carry forward 43,010 37,121
Other, net 20,044 16,286
----------- ---------
63,054 53,407
Deferred tax asset, net 58,665 49,479
Valuation allowance (58,665) (35,323)
----------- ---------
Net deferred income tax asset $ -0- $14,156
=========== =========
</TABLE>
As a result of an ownership change, within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, that occurred with respect
to the Company on May 14, 1990, the Company's ability to utilize approxi
mately $57,579 of its net operating loss carryforwards for tax purposes is
limited to $4,977 per year. No limitation is currently required by Section
382 with respect to $65,307 of the Company's net operating loss
carryforwards.
As of January 1, 1995, the Company has net operating loss carryforwards of
approximately $122,886 and $91,422 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.
<PAGE>
10. Commitments and Contingencies (Continued):
The Company has a long-term purchase commitment 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 negotiation annually. In May 1994,
the Company completed such negotiations for the 1994 contract year. Due to
significant increased raw material costs passed through from the supplier,
the Company anticipates that the minimum purchase levels required by this
agreement will require the Company to sell these products at prices which
will yield lower margins than historically achieved to avoid the buildup of
significant inventory levels (in excess of prevailing market requirements)
during the remaining term of the agreement. The Company recorded a
write-down for inventory to be purchased under this agreement in the third
quarter of 1994 (See Note 12. Special Charges). This write-down was the
result of the impact of purchasing the minimum levels of inventory which
exceeded the Company's inventory needs under existing market conditions. The
Company recently obtained a concession in the minimum purchase commitments
under this agreement from its suppliers.
11. Redeemable Preferred Stock:
Redeemable preferred stock at January 1, 1995 and January 2, 1994 is
comprised of the following:
<TABLE>
<CAPTION>
1994 1993
Class B, Series A Senior Increasing --------- ---------
Rate Preferred Stock, $58,333
<S> <C> <C>
liquidation value at January 1, 1995 $55,439 $54,306
Senior Cumulative Preferred Stock,
$35,850 liquidation value
at January 1, 1995 35,504 32,532
--------- ---------
Redeemable preferred stock $90,943 $86,838
========= =========
</TABLE>
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 1, 1995 and January 2, 1994. 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 the quarter that commenced on
October 15, 1993 was equal to $.875 per Series A Share. This quarterly
dividend increased by $.03125 per share over the previously prevailing
quarterly dividend on each January 15 and July 15, commencing with the
quarterly dividend payable for the quarter beginning on January 15, 1994 up
to $.9375 per share beginning July 15, 1994. The quarterly dividend will
increase 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.
<PAGE>
11. Redeemable Preferred Stock (Continued):
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 1, 1995 and January 2, 1994, the carrying
amount of the Series A Shares has been increased $4,120 and $3,357,
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 1, 1995 and
January 2, 1994. 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 1, 1995 and January 2, 1994,
the carrying amounts of the Senior Cumulative Preferred Stock have been
increased by approximately $15,851 and $12,962, respectively, representing
cumulative dividends not currently declared or paid, but which are payable
under the mandatory redemption features.
12. Special Charges:
During the third quarter of fiscal 1994, following a detailed study of its
operations, the Company recorded a write-down for the impairment of certain
intangible assets and property, plant and equipment based upon discounted
cash flows, established provisions for future cash outflows for store
closures and conversions and provided for a write-down on an unfavorable
long term inventory purchase commitment and certain discontinued minor
product categories. These write-downs and provisions, which aggregated
$29,600 and are reflected as Special Charges in the Consolidated Statement
of Operations, consist of:
<TABLE>
<S> <C>
Impairment of Assets $14,500
Unfavorable Purchase Commitment/
product writedowns 9,700
Store closures and conversions 5,400
-------
$29,600
=======
</TABLE>
At January 1, 1995, approximately $9,000 of these provisions remained.
The Company has a wood inventory purchase agreement which requires the
Company to purchase minimum levels of inventory through May 1998 (See Note
10. Commitments and Contingencies). The impact of purchasing the minimum
levels of inventory, which exceed the
<PAGE>
12. Special Charges (Continued):
Company's inventory needs under prevailing market conditions has resulted,
and is anticipated to continue to result, in excess inventory levels.
Based on these circumstances and other provisions in the wood purchase
agreement, the Company initially recorded a write-down of $7,500 at the end
of the third quarter for inventory to be purchased under the contract and
an additional charge estimated at $2,100 for inventory in certain minor
product categories to be discontinued. Based on subsequent analysis, the
provision for the unfavorable purchase commitment has been reduced to $4,400
and $5,300 has been identified as applicable to the discontinued product
categories.
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 restructur
ing 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 elected to dispose of its wholly
owned Canadian subsidiary, Factory Carpet, which operated 37 retail stores
in Canada (including 8 franchised stores). On May 20, 1994, the Company sold
the Canadian operations. In connection with the disposition of Factory
Carpet, the Company recorded a charge to continuing operations of $8,651 in
the third quarter of 1993 and an additional estimated loss on sale of $2,500
in the second quarter of 1994. Factory Carpet's operations have been
eliminated from the individual line items of the 1993 Consolidated Statement
of Operations and the pre-tax loss of this line has been included on a
one-line basis in the loss on disposal of a line of business as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Net sales $23,661
Operating loss (849)
Estimated loss on disposal ($2,500) (8,651)
--------- --------
Loss on disposal of a line of business ($2,500) $(9,500)
========= ========
</TABLE>
Effective May 15, 1992, the Company completed the sale of its hardwood
flooring manufacturing plant (the "Wood Plant") located in Melbourne,
Arkansas and realized a pre-tax gain of $4,007. The proceeds of the sale,
before fees and related expenses, included $11,809 in cash and the buyer's
assumption of certain liabilities, including an agreement to defease $2,600
of industrial revenue bonds related to the Wood Plant.
<PAGE>
14. Supplemental Cash Flow Information:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
Supplemental disclosure of cash flow information:
<S> <C> <C> <C>
Interest paid $35,315 $18,192 $28,320
Income taxes paid $689 $444 $1,281
Non-cash investing and financing
activities:
Capital lease obligation incurred
for property, plant and equipment $7,044 $2,096 $3,400
Senior Increasing Rate Preferred Stock
unpaid dividends $763 $1,503 $1,854
Senior Cumulative Preferred Stock
dividends in kind $2,892 $2,895 $2,923
</TABLE>
15. Transactions With Related Parties:
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 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 acquisi tion 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 of 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
<PAGE>
15. Transactions With Related Parties (Continued):
to receive any additional compensation. 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 Investcorp International, Inc. $500 for management fees
during each of the fiscal years 1994, 1993 and 1992.
The Color Tile Employees Investment Plan ("Investment Plan"), which is under
the direct control of Company management, owns 43 properties leased by the
Company. During 1994, 1993 and 1992 the Company paid approximately $3,177,
$3,460 and $3,085, 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 $912, $829 and $846,
respectively, for 1994, 1993 and 1992.
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 partici pant's Family
Security Plan salary approximates the total compensation paid to the
participant by the Company during the plan year.
Officers and director employees participate in the Family Security Plan on
the same terms as other employees. For 1994, 1993 and 1992 the Company
contributed $236, $261 and $228, respectively, to the Family Security Plan.
<PAGE>
17. Supplemental Selected Quarterly Financial Data (Unaudited):
Unaudited summarized financial data by quarter for 1994 and 1993 was as
follows:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------
Year ended
January 1, 1995 April 3 July 2 October 2 January 1
- --------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net Sales $166,532 $169,388 $168,440 $169,168
Cost of sales 96,630 98,486 98,488 98,392
Selling, general and
administrative expenses 52,068 53,641 52,666 57,155
Depreciation and
amortization 6,910 7,071 7,360 7,355
Special charge - - 29,600 -
--------- --------- --------- ---------
Operating income (loss) 10,924 10,190 (19,674) 6,266
Loss on disposal of a line
of business - (2,500)
Interest expense, net (8,755) (8,518) (8,916) (10,445)
Income taxes (166) (176) (168) (14,378)
--------- --------- --------- ---------
Net income (loss) $ 2,003 $ (1,004) $(28,758) $(18,557)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------
Year ended
January 2, 1994 April 4 July 3 October 3 January 2
- ---------------- -------- ------- --------- ---------
<S> <C> <C> <C> <C>
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)
========= ========= ========== =========
</TABLE>
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 1994 and 1993 (see note 13 - Gain (Loss)
on Disposal of a Line of Business).
<PAGE>
18. Fair Value of Financial Instruments.
For certain of the Company's financial instruments (including, cash, accounts
and notes receivable, accounts payable and other accrued liabilities) the
carrying value approximates fair value due to their short maturity. Long term
floating rate loans are carried at amounts that approximate fair value.
At March 21, 1995, the fair value of the Senior Notes, excluding accrued
interest, was determined to be $164,000 based on quoted prices for the issue.
The estimated fair value for the Company's remaining long-term debt
approximates the carrying value based on cash flows and book values.
At January 1, 1995, 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 amounts based upon discounted cash flows and book values.
The estimated fair values may not be representative of actual values of
financial instruments that could have been realized as of year end or that
will be realized in the future.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
COLOR TILE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in Thousands)
Balance at Charged to Charged to Balance at
Beginning Cost and Other End of
of Period Expense Accounts Deductions Period
--------- ----------- --------- ---------- ---------
Valuation accounts deducted
from asset account to
which it applies:
Allowance for doubtful
accounts
<S> <C> <C> <C> <C> <C>
Year ended January 1, 1995 $ 369 $ 774(a) $ -0- $ (390)(b) $ 753
======= ======== ======= ======== ========
Year ended January 2, 1994 $ 415 $ 103(a) $ -0- $ (149)(b) $ 369
======= ======== ======= ======== ========
Year ended January 3, 1993 $ 305 $ 389(a) $ -0- $ (279)(b) $ 415
======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Deferred tax asset
valuation allowance
<S> <C> <C> <C> <C> <C>
Year ended January 1, 1995 $35,323 $14,156 $ 9,186(c) $ -0- $ 58,665
======= ======== ======= ======== ========
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
======= ======== ======= ======== ========
</TABLE>
(a) Additions charged to bad debt expense.
(b) Balances written-off, net of recoveries.
(c) Valuation allowance charged to deferred tax asset.
S-1
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF THE COMPANY
Name Incorporation
American Blind and Wallpaper Factory, Inc. Delaware
Color Tile Franchising, Inc. Delaware
Color Tile Manufacturing, Inc. Texas
C. Tile Transportation, Inc. Texas
CT Financial, Inc. Massachusetts
Second CT Financial, Inc. Massachusetts
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Color Tile,
Inc.'s consolidated financial statements for the year ended January 1, 1995 and
is qualified in its entirety by reference to such statements.
</LEGEND>
<CIK> 0000276780
<NAME> COLOR TILE, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Jan-01-1995
<PERIOD-START> JAN-02-1994
<PERIOD-END> JAN-01-1995
<CASH> 630
<SECURITIES> 0
<RECEIVABLES> 16785
<ALLOWANCES> 753
<INVENTORY> 87394
<CURRENT-ASSETS> 110418
<PP&E> 121667
<DEPRECIATION> 0
<TOTAL-ASSETS> 550098
<CURRENT-LIABILITIES> 103131
<BONDS> 386717
<COMMON> 0
90943
0
<OTHER-SE> (36748)
<TOTAL-LIABILITY-AND-EQUITY> 550098
<SALES> 673528
<TOTAL-REVENUES> 673528
<CGS> 391996
<TOTAL-COSTS> 665822
<OTHER-EXPENSES> (32100)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36634
<INCOME-PRETAX> (31428)
<INCOME-TAX> 14888
<INCOME-CONTINUING> (46316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46316)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
