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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
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _______ to _________
COMMISSION FILE NUMBER 0-25038
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THOMPSON PBE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4215913
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4553 GLENCOE AVENUE, SUITE 200
MARINA DEL REY, CALIFORNIA 90292
(Address of principal executive offices)
Registrant's telephone number, including area code: (310) 306-7112
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
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 as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: [ X ]
As of December 31, 1996 the aggregate market value of voting stock held
by non-affiliates was approximately $29,985,600 (based upon the last reported
sales price of the Common Stock as reported by Nasdaq). Shares of Common Stock
held by each executive officer, director and holders of greater than 10% of the
outstanding Common Stock of the Registrant have been excluded in that such
persons may be deemed to be affiliates. This assumption regarding affiliate
status is not necessarily a conclusive determination for other purposes.
As of December 31, 1996, there were 8,640,354 shares of the
Registrant's Common Stock outstanding.
Documents Incorporated by Reference: Proxy Statement for the 1997
Annual Meeting of Stockholders, incorporated partially in Part III hereof.
This Report contains a total of 81 pages. The Exhibit Index appears on
page 26.
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THOMPSON PBE, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended September 30, 1996
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Page
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PART I
Item 1. Business ............................................................................... 3
Item 2. Properties ............................................................................. 13
Item 3. Legal Proceedings ...................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders .................................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................................................... 14
Item 6. Selected Financial Data ................................................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................. 17
Item 8. Financial Statements and Supplementary Data ............................................ 24
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant ..................................... 25
Item 11. Executive Compensation ................................................................. 25
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 25
Item 13. Certain Relationships and Related Transactions ......................................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................... 26
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
The Company is the nation's leading independent aftermarket distributor of
automotive paint and related supplies to the automotive collision repair
industry based on annual revenues. As of September 30, 1996, the Company
operated 101 distribution sites, with 39 in the Southeast Division, 20 in the
Southern California Division, 11 in the Northern California Division, 11 in the
Rocky Mountain Division, 13 in the Mid-Atlantic Division and 7 in the Northeast
Division.
Information contained in this Report includes "forward-looking" statements
that are based largely on the Company's current expectations and are subject to
a number of risks and uncertainties. Forward-looking statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "anticipate," "estimate," "continue," "plans," "intends" or
other similar terminology. See "--Business Risks."
The Company maintains its principal executive offices at 4553 Glencoe
Avenue, Suite 200, Marina del Rey, California 90292. Its telephone number is
(310) 306-7112.
INDUSTRY OVERVIEW
The end users of the products distributed by the Company are principally
independent collision repair shops and automobile dealers. Additionally,
businesses and government entities that maintain their own automobile fleets,
sellers of automotive salvage, do-it-yourselfers and other commercial and
industrial users make up a smaller percentage of the Company's customer base.
Automotive paint and related supplies, in contrast to labor and parts, represent
only a small portion of the total cost of a typical repair job. However, while
paint is a relatively minor component of the total repair cost, it is a critical
factor in the customer's level of satisfaction.
The domestic wholesale aftermarket for automotive paint and related
supplies is characterized by a small number of manufacturers of paint and
supplies. The five predominant manufacturers of automotive paint distributed in
the United States are E.I. DuPont de Nemours & Co. ("DuPont"), PPG Industries,
Inc. ("PPG"), BASF Corporation ("BASF"), The Sherwin-Williams Company
("Sherwin-Williams") and Sikkens bv ("Sikkens"). In addition, several other
large foreign manufacturers have recently taken steps to expand the distribution
of their paint products in the United States. Minnesota Mining & Manufacturing
Co., Inc. ("3M") is the predominant manufacturer of related supplies which
include the most frequently used refinishing materials, supplies, accessories
and tools.
While manufacturing is highly concentrated, distribution and end use is
highly fragmented. The Company believes that a large number of independent
distributors of automotive paint serve up to 52,000 collision repair shops
nationwide. Based on published industry data, the Company believes that the
number of collision repair shops has decreased approximately 5% in each of the
last two years. Distributors, which tend to be family-owned with only one to
three distribution sites, typically serve a highly localized customer base with
each distribution site serving customers located within 5 to 10 miles of the
site depending upon demographics, road access and geography.
Because of the large number of end users, and their increasing demands for
personalized services such as multiple daily deliveries, assistance with
color-mixing and matching, and assistance with paint application techniques and
environmental compliance reporting, manufacturers typically sell through
distributors such as the Company. Not withstanding this fact, some of the
Company's paint vendors have elected to operate company-owned distribution
facilities in selected markets, including markets in which the Company operates.
However, the Company believes that the largest automotive paint manufacturers
have generally avoided the cost of operating their own distribution network due
in part to their ability to offer only a single line of paint which prevents
them from leveraging distribution site expenses across a market's entire
potential customer base. Consequently, the Company believes that independent
distributors such as the Company, which can sell the products of multiple paint
manufacturers, are better situated to service end users' needs than are
automotive paint manufacturers.
Distributors and collision repair shops are in the process of consolidation
due to, among other things, the declining number of collision repair jobs.
According to the estimates of one industry source, the total number of vehicles
on the road has increased from approximately 140 million in 1980 to 180 million
in 1990 and a projected 189 million in 1996, while the number of collision
repair jobs has declined from approximately 18.5 million in 1980 to 16.5 million
in 1990 and further declined to an estimated 13.0 million in 1995. This decline
has been due to, among other things, automotive safety improvements such as
anti-lock brakes, rear window-placed brakelights and more reliable radial tires.
Stricter drunk driving laws, more vigorous law enforcement and the increasing
percentage of drivers reaching middle age has also resulted in
<PAGE> 4
fewer accidents. Additionally, a growing number of collision damaged cars are
being declared a total loss in lieu of repair due to unit body construction and
rising repair and refinish costs. Over the past several years, the Company
believes that the industry has benefitted from warranty work to repair defective
paint finishes on certain domestic vehicles manufactured in the late 1980s and
early 1990s. However, the Company believes that the volume of warranty repair
work decreased significantly in 1995 and 1996 from the levels experienced in
prior years because of steps taken by the major U.S. automobile manufacturers to
substantially reduce multi-year warranty programs to repaint certain vehicles.
The Company does not expect to realize significant future benefits from this set
of warranty programs.
The Company believes that environmental and other regulatory pressures and
technological advancements in paints and coatings are also significant factors
leading to consolidation by distributors and collision repair shops.
Historically, the application of paints and coatings has released potentially
harmful emissions due to the products' high solvent content. In an effort to
reduce these emissions, environmental regulations have been proposed or
implemented at federal, state and local levels. Paint manufacturers have
responded to these regulations by introducing technologically advanced lower
volatile organic compounds ("VOC") and water-borne paints which require more
advanced application techniques. As a result, automotive refinishing has become
a complex process, often requiring advanced spray booths and air filtration
systems to reduce unwanted particulates and harmful emissions. This complexity
places new challenges on automotive refinishers who may not have the training or
expertise necessary to apply the new paints and coatings or the financial
resources to acquire the necessary equipment. The Company believes that its
experience in assisting certain customers in their regulatory compliance
reporting in California and Colorado will be applicable in other geographic
areas.
Further, insurance companies have begun to designate certain collision
repair shops as so-called "direct repair providers." As such, the designated
collision repair shop is directed business by the insurance carriers in return
for price concessions from customary rates. The Company believes that this trend
favors larger, more efficient repair shops.
BUSINESS STRATEGY
The Company's business strategy consists of two independent but
complementary strategies: an acquisition strategy and an operations strategy.
Acquisition Strategy
The Company's acquisition strategy is to continue to make add-on
acquisitions to augment its existing operations and to capitalize on
opportunities to enter new geographic markets. The Company is currently the
largest independent distributor in each of the markets it serves and would seek
to establish a leading position in new geographic markets it enters. Since its
inception in May 1989 through September 30, 1996, the Company has made a total
of 50 acquisitions of businesses, including 14 acquisitions completed since
September 30, 1995. From time to time, the Company also purchases inventory,
equipment and customer lists from distributors going out of business.
The following tables show the date, company and location of distribution
sites of each add-on acquisition (other than inventory buyouts) made by the
Company since its inception in May 1989 through September 30, 1996. Acquired
locations shown below include locations that may have subsequently been
consolidated into other locations.
SOUTHEAST DIVISION ACQUISITIONS
(in Florida, except as noted)
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DATE OF ACQUISITION COMPANY LOCATIONS
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<S> <C> <C>
November 1990 AMP Distributors of Sanford, Inc. Orlando
November 1990 Central Auto Paint & Bumpers, Inc. Lakeland
April 1991 Gulf Automotive Co. of Clearwater, Inc. Clearwater, New Port Richey, Largo
December 1992 Harold's Auto Paints & Body Supplies, Inc. Fort Myers
January 1993 Griffin Auto Glass & Paint Co. Palatka
January 1993 CSR of Jacksonville, Inc. Jacksonville
May 1993 Cadenhead's Auto Paint & Supply, Inc. Vero Beach, Fort Pierce
December 1993 Sophers Auto Paint & Supply, Inc. St. Petersburg, Clearwater
January 1995 Arnold Paint Company Jacksonville (4 locations), Tampa (3 locations),
St. Augustine, Brunswick, GA, Savannah, GA
March 1995 D&S Auto Color, Inc. Hollywood, Delray Beach, Pompano, Plantation,
West Palm Beach
June 1995 Hill Supply Co. Gainesville, Lake City
September 1995 Burton and Dunlap Melbourne
September 1995 Ole Sarge Paint & Equipment Co., Inc. Cocoa, Titusville
</TABLE>
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SOUTHEAST DIVISION ACQUISITIONS (CONTINUED)
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DATE OF ACQUISITION COMPANY LOCATIONS
- ------------------- ------------------------------------------ ------------------------------------------------------
<S> <C> <C>
March 1996 Auto Colorco, Inc. Huntsville, Decateur, Sheffield, Cullman, AL
April 1996 Ralco Equipment Company Tallahasee, Ft. Walton, Valdosta,GA, Dothan, AL
June 1996 Hialeah Painters, Inc. Hialeah, South Miami
</TABLE>
SOUTHERN CALIFORNIA DIVISION ACQUISITIONS
<TABLE>
<CAPTION>
DATE OF ACQUISITION COMPANY LOCATIONS
- ------------------- ------------------------------------------ ------------------------------------------------------
<S> <C> <C>
February 1990 R.A. Roberts Pasadena
August 1990 Automotive Colours, Inc. Marina del Rey, Beverly Hills
October 1990 San Diego Auto Body Specialties, Inc. San Diego
October 1990 Bob's Automotive Paint and Body Santa Monica
July 1991 Auto Refinishers Supply, Inc. North Hollywood
April 1993 DeWitt's A to Z Paint Supply, Inc. San Bernardino, Corona, Hemet, Hesperia, Cathedral
City, Montclair
May 1994 Don's Automotive Paint and Supplies, Inc. Bakersfield
October 1994 K&K Color and Supply, Inc. Bellflower
January 1995 Refinishers Supply and Equipment, Inc. Visalia, Hanford
February 1995 Vernon G. Nelson Paint & Supply, Inc. Bellflower
February 1995 California Car Colours Torrance
February 1995 Anaheim Paint Center Anaheim
April 1996 A & H Paint & Equipment, Co. Gardena
August 1996 Hunter & Price, Inc. Fresno
September 1996 Tim's Paint & Wallpaper, Inc. Hanford
</TABLE>
NORTHERN CALIFORNIA DIVISION ACQUISITIONS
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<CAPTION>
DATE OF ACQUISITION COMPANY LOCATIONS
- ------------------- ------------------------------------------ ------------------------------------------------------
<S> <C> <C>
June 1992 Matley's, Inc. and Pikes Services Oakland, Hayward, Dublin
August 1993 R.H. Wood Company, Inc. Walnut Creek
August 1993 Concord Color Service, Inc. Concord
May 1995 SEV Corporation San Francisco, San Rafael, South San Francisco,
Campbell
September 1995 HEB Autocolor, Inc. Redwood City
December 1995 Santa Clara Color, Inc. Mountain View, San Jose, Morgan Hill
</TABLE>
ROCKY MOUNTAIN DIVISION ACQUISITIONS
(in Colorado, except as noted)
<TABLE>
<CAPTION>
DATE OF ACQUISITION COMPANY LOCATIONS
- ------------------- ------------------------------------------ ------------------------------------------------------
<S> <C> <C>
April 1994 F.A. Heckendorf, Inc. Denver (4 locations), Boulder, Colorado Springs,
Grand Junction
April 1994 Al West Paint Co. Denver (4 locations)
March 1995 Border Paint & Supply, Inc. Phoenix, AZ, Mesa, AZ
April 1995 Car Color Specialists, Inc. Fort Collins
April 1995 Auto Paint Specialties, Inc. Tucson, AZ
</TABLE>
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NORTHEAST DIVISION ACQUISITIONS
(in Massachusetts, except as noted)
<TABLE>
<CAPTION>
DATE OF ACQUISITION COMPANY LOCATIONS
- ------------------- ------------------------------------------ ------------------------------------------------------
<S> <C> <C>
February 1996 McNeil & Sons Auto Paint, Inc. Worcester, Lunenberg, Fall River,
Marlboro, Hartford, CN
September 1996 Greenwich Car Color, Inc. Stamford, CN
September 1996 A & M Distributors, Inc. Norwalk, CN
</TABLE>
MID-ATLANTIC DIVISION ACQUISITIONS
<TABLE>
<CAPTION>
DATE OF ACQUISITION COMPANY LOCATIONS
- ------------------- ------------------------------------------ ------------------------------------------------------
<S> <C> <C>
June 1995 State Auto Paint & Supply Co., Inc. Columbia (2 locations), West Columbia, Sumter,
Florence, Lancaster; South Carolina
January 1996 Central Oil & Supply, Inc. Florence, South Carolina
February 1996 Automotive Paint & Supply, Inc. Myrtle Beach, Conway, South Carolina
January 1996 Automotive Paint & Equipment Co., Inc. Winston Salem, Highpoint, Greensboro,
Hickory, Charlotte, Statesville, North Carolina
April 1996 Automotive Paint & Supply, Inc. Roanoke, Virginia; Charlotte, Greensboro,
Raleigh, North Carolina
</TABLE>
Subsequent to September 30, 1996, the Company has also acquired large,
single-site distributors located in Boston, Massachusetts (Northeast Division)
and San Leandro, California (Northern California Division).
After the Company completes an acquisition, it seeks to integrate the
operations of the acquired business while assuring consistent, high quality
service to the acquired business' customers. The Company incorporates the
acquired operations into its information systems, consolidates its purchasing
and centralizes its financial and inventory controls. The Company may also
integrate the acquired business by consolidating redundant distribution sites
and by serving the acquired company's customers from either the Company's
existing distribution sites serving the same local area or the acquired
business' distribution site, when preferable. The Company has consolidated
operations by closing 55 distribution sites from May 1989 through September 30,
1996. During 1996, the Company encountered delays and other complications in the
integration of certain acquired businesses with its existing operations,
particularly in the Southeast and Mid-Atlantic Divisions. See"--Business Risks"
and "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The Company's plan is to continue to make complementary add-on acquisitions
to its existing operating divisions. In addition, the Company may seek to
establish new operating hubs by acquiring distributors with significant market
share in strategically located geographic areas and to supplement such
acquisitions with appropriate local add-on acquisitions in an effort to capture
the operating efficiencies which the Company has benefitted from in its present
markets. In evaluating new operating hubs and add-on acquisitions, the Company
seeks to identify well-established local distributors (with strong management,
customer bases and locations) which are situated in markets which the Company
believes will provide additional growth and acquisition opportunities. The
Company believes that an opportunity continues to exist to grow through
acquisition as its industry consolidates. Although the Company will continue
actively to seek acquisitions, during fiscal 1997 it presently expects to
emphasize the acquisition of sites in existing markets.
The Company's future growth and financial success will continue to be
dependent upon a number of factors including, among others, the Company's
ability to identify acceptable acquisition candidates, consummate the
acquisition of such businesses on terms which are favorable to the Company,
promptly and profitably integrate the acquired operations into the Company,
retain the key vendor arrangements of the acquired businesses and attain
customer retention levels at acquired businesses that are advantageous to the
Company. As noted above, the Company has in the past encountered unexpected
difficulties in respect of the acquisition and integration process and,
accordingly, there can be no assurance that the Company will not encounter such
difficulties in the future. To manage its expansion, the Company is continuously
evaluating the adequacy of its existing systems and procedures, including, among
others, its financial and reporting control systems, data processing systems and
management structure. In particular, the Company is currently engaged in a
significant multi-year project to upgrade its management information systems
including the replacement of its financial and operations systems and the
adoption of a common platform across the entire Company. There can be no
assurance that the Company will adequately anticipate all of the changing
demands its growth will impose on such systems, procedures
<PAGE> 7
and structure. Any failure to anticipate and respond to such changing demands
could have a material adverse effect on the Company.
The Company, in the ordinary course of its business, regularly evaluates
and enters into negotiations relating to potential acquisition opportunities.
OPERATIONS STRATEGY
The goal of the Company's operations strategy is to be the leading
distributor in each geographic market the Company serves and to grow internally
by increasing the profitability of its existing distribution sites. The Company
seeks to implement its operations strategy based upon the following strengths:
Industry Leadership. The Company is the nation's leading independent
aftermarket distributor of automotive paint and related supplies to the
automotive collision repair industry based on annual revenues. The Company's
total sales for the fiscal year ended September 30, 1996 were $178.1 million,
which management believes are the largest sales of any domestic independent
distributor in its industry.
Commitment to Service. The Company believes that its dedication to superior
customer service is fundamental to maintaining long-term customer relationships
and continued growth. The Company offers several value-added services to its
customers, including multiple daily deliveries, technical support and inventory
management, as well as assistance with environmental compliance reporting
(Southern California, Northern California and Rocky Mountain Divisions), and
personnel placement. While some of its competitors provide some of these
services, the Company believes that it has a competitive advantage over its
smaller competitors that lack the resources and economies of scale to provide,
on a consistent basis, all of the services which the Company provides. See
"--Services."
Volume Purchasing. The Company consolidates its purchases on a regional
basis to take advantage of the lowest published prices offered by its suppliers.
In addition, the Company's size generally permits it to take advantage of
periodic supplier special incentive programs which provide additional purchase
discounts and extend the due date of purchases beyond normal terms with large
volume purchases. Due to the Company's position as the largest independent
automotive aftermarket paint distributor, it benefits from such volume discounts
which its smaller competitors are either unable to obtain or are able to obtain
only in conjunction with high related inventory carrying costs. The Company also
benefits from manufacturer provided discounts upon early payment of certain
accounts and from other supplier-supported programs.
Large Dedicated Sales Force. As of September 30, 1996, the Company's
professional sales force consisted of 214 persons. Unlike the sales personnel of
many of the Company's smaller competitors, which tend to be owner operated, the
Company's sales personnel devote their time exclusively to new customer
development and customer maintenance and are relatively free from administrative
and managerial responsibilities. As a result, the Company believes that it is
able to attract and retain high quality sales professionals that are
knowledgeable of product applications and effective at servicing the Company's
customers.
Management Systems. Accounting, credit, purchasing and management
information systems' functions have generally been consolidated into the
Company's administrative headquarters in Los Angeles and Clearwater/Tampa. Most
of the Company's operations are computerized, from invoicing to inventory
control and including all general ledger functions. As a result, employees at
the distribution sites and sales personnel are able to focus their attention on
servicing the customer and the Company is able to leverage its general and
administrative resources across all of its distribution sites. The Company
commenced an upgrade of its management information systems in fiscal year 1996
to, among other things, adopt a common platform across the entire Company.
Implementation of the new management information system will occur during fiscal
year 1997. See "-- Business Risks."
<PAGE> 8
PRODUCTS
Each of the Company's distribution sites functions as a convenient "one
stop" source for the paint and related supply needs of collision repair shops
and other customers. The Company's primary emphasis is the supply of paint and
paint products which accounted for approximately 70% of sales for the fiscal
year ended September 30, 1996. The Company generally supplies paint in all
available colors, as well as a wide variety of paint products such as metal
washes, primers, sealers and clear coats. The Company also distributes
materials, supplies, accessories and tools used in the automotive collision
repair industry. Materials and supplies include sandpaper, abrasives, buffing
pads and cloths, reusable and disposable towels, masking products and plastic
filler. Accessories and tools include spray guns, small hand tools, jacks,
hoists, grinders, sanders, polishers and compressors. In addition, the Company
is carrying a limited number of auto body repair parts in certain of its
distribution sites. If successful, the Company may expand this program. As of
September 30, 1996, the stock keeping units available for sale from the
Company's various distribution sites ranged from approximately 2,500 to 10,000.
SERVICES
The Company provides its customers with a number of value added services,
including:
Multiple Daily Deliveries. The Company has a fleet of approximately 700
delivery trucks. The Company offers multiple daily deliveries per customer to
meet its customers' just-in-time inventory needs.
Training and Technical Support. Automotive paint manufacturers are
continually developing a greater variety of colors and styles with more complex
physical properties that require more sophisticated application techniques. The
Company's sales personnel and technical support people in each of its operating
divisions provide customers with training, demonstrations of new products and
application techniques, and also coordinate such activities by automotive paint
manufacturers. In addition, the Company maintains technical support vehicles
which visit customers to provide this service. The technical support vehicles
also provide computerized color mixing at the customer's site.
Inventory Management. The Company performs monthly physical inventories for
customers in California and Colorado who request this service. The Company also
provides its California and Colorado customers with management information
reports on product usage. These services permit the Company's customers to
reduce their inventory and related costs.
Assistance with Environmental Compliance Reporting. California air quality
regulations mandate paint and application methods which result in reduced
atmospheric emissions of paint and other related materials. In California, the
Company provides information to its customers with respect to air quality
reporting and arranges demonstrations of new products and applications designed
to comply with air quality regulations. In addition, in California and in
Colorado, the Company assists its customers with environmental reporting
requirements by providing special reports designed to simplify their compliance.
The EPA proposed regulations controlling VOC emissions from automobile
refinishing nationwide in 1996, and, accordingly, the Company is considering an
expansion of these programs. See "--Government Regulation."
Personnel Placement. Certain of the Company's divisions maintain an
employment data base which includes employment openings and/or persons seeking
employment with collision repair shops located in those markets. Upon request
from a customer to fill an opening, the Company may provide the names of one or
more qualified persons for the position. Similar services are available to
persons seeking employment.
MARKETING, SALES AND CUSTOMERS
The Company believes that its large sales force, its reputation for a high
level of customer service and its ability to provide a "one-stop" distribution
source are its primary marketing tools. As of September 30, 1996, the Company
had a professional sales staff of 214 persons, of whom 76 worked out of the
Southeast Division, 55 worked out of the Southern California Division, 24 worked
out of the Northern California Division, 23 worked out of the Rocky Mountain
Division, 25 worked out of the Mid-Atlantic Division, and 11 worked out of the
Northeast Division. See "--Services."
The Company sponsors trade fairs and participates in industry trade shows
and conferences. In addition, the Company advertises in trade journals and
publishes and distributes a periodic newsletter.
<PAGE> 9
For its most recent fiscal year, the Company regularly served
approximately 12,000 customers, none of which accounted for more than 1% of
the Company's sales. The Company believes that it is the principal source of
supply of automotive paint and related supplies for most of its customers. In
addition to independent collision repair shops and automobile dealers, which are
the Company's largest category of customers, the Company's customers include
trucking companies, schools, municipalities, government agencies, sellers of
automotive salvage, refinishers, do-it-yourselfers, marine and aviation
refinishers and other commercial and industrial users.
SUPPLIERS
The Company is highly dependent on a small number of key suppliers of
automotive paint. DuPont, PPG and BASF, together with Sikkens, have historically
supplied substantially all of the Company's automotive paint and paint products,
and the Company believes that in fiscal 1996 it was the largest purchaser of
aftermarket automotive paint in the United States from each of these
manufacturers. The Company also acquires a modest amount of its paint
requirements from several other foreign manufacturers which have recently taken
steps to expand the distribution of their paint products in the United States.
As is common industry practice, the Company does not maintain long-term supply
contracts with any of its key suppliers. Although each of these suppliers
generally competes with the others along product lines, the Company does not
believe the products are completely interchangeable because of high brand
loyalty among customers. For this reason, the Company's acquisition program is
also dependent on the willingness of the principal paint vendors to continue to
supply acquired businesses. In November 1995, the Company became aware that
Sikkens was advising its existing distributors that it may not consent to
transfers by them of its product line upon sale of a business to the Company or
at least one other national distributor. Sikkens took this position in
connection with several acquisitions effected by the Company during fiscal 1996
in response to which the Company provided alternative products manufactured by
other vendors in these markets. In addition, certain other vendors have on
occasion objected to specific acquisitions being considered by the Company. See
"--Business Risks."
In November 1996, the Company was advised that its exclusive wholesaler
agreement to distribute the Sikkens paint line in Southern California and
Arizona would not be renewed after its expiration on December 31, 1996. As of
the date of this Report, Sikkens has stated that the Company will be allowed to
distribute the paint line on a non-exclusive basis for a limited transition
period. The Company presently offers paint products manufactured by other
vendors in the ten locations covered by these agreements and will continue to do
so. The Company is evaluating its alternatives to the Sikkens action. Sales to
customers using the Sikkens paint line amount to approximately three to four
percent of the Company's total revenues. While the impact of this development on
the Company's business is dependent on many factors and cannot be predicted at
this time, the Company expects, based on its experience with similar situations
in connection with acquisition transactions, that this decision by Sikkens will
have at least a modest adverse effect on its results of operations.
Whenever practical, vendor purchases are made in large volumes to maximize
manufacturer volume discounts and optimize payment terms. In addition, the
Company's size generally permits it to take advantage of periodic supplier
special incentive programs which provide additional purchase discounts and
extend the due date of purchases beyond normal terms with large volume
purchases. The Company also benefits from manufacturer provided discounts upon
early payment of certain accounts and from other supplier-supported programs.
Branded products carry the manufacturers' guaranties. Defective products
typically may be returned to manufacturers at no charge to the Company and
obsolete products generally may be returned for a slight restocking fee. Due to
the manufacturers' favorable return policies, the Company also accepts customer
returns of defective or obsolete products. The Company has arrangements with its
suppliers to balance inventory and credit the Company for a certain percentage
of returned merchandise.
The Company receives reimbursement from its vendors in the form of products
or credits for qualifying services, equipment and discounts provided to its
customers. Failure to receive expected reimbursements as a result of changes in
vendor policies and practices may have a material adverse effect on the Company.
The Company purchases substantially all of its automotive refinishing
materials and related supplies directly from 3M, although such supplies are also
generally available from independent warehouse distributors at somewhat higher
costs. The Company regularly purchases a small number of products not available
directly from the manufacturers and certain slow moving items from independent
warehouse distributors. Warehouse distributors are intermediate wholesalers that
typically purchase products directly from the manufacturer for resale to smaller
distributors.
<PAGE> 10
In connection with the sale of its warehouse distributor in California in
April 1993, the Company entered into a minimum purchase contract which expires
in 2003. In connection with the acquisition of a distributor in Colorado in
1994, the Company entered into an agreement with a warehouse distributor
providing that such warehouse distributor shall be the Company's primary
supplier of certain non-paint supplies sold by the Company in Colorado and
neighboring states. The agreement contains a minimum purchase obligation and
expires on March 31, 1999. During the fiscal year ended September 30, 1996, the
Company sold substantially all of the assets of its Florida wholesale
distribution business and in connection with the sale agreed to make annual
purchases of at least $5,000,000 from the buyer through fiscal year 2000. None
of these agreements are expected to have a material effect on the Company's
future results of operations.
COMPETITION
The automotive paint and related supply distribution system in the United
States is highly fragmented and the cost of entry is relatively low. Typical
competitors of the Company are owner-managed distributors having one to three
distribution sites in the same vicinity as the Company's distribution sites. The
Company is the largest independent distributor in each of its principal
geographic markets.
The Company may encounter significant competition from new market entrants,
automotive paint manufacturers, buying groups, or from other large distributors
which may seek to enter such markets or may seek to compete with the Company for
attractive acquisition candidates. One other domestic automotive paint
distributor, FinishMaster, Inc., is publicly held and the Company faces possible
competition for acquisition opportunities in some markets from that company or
affiliated companies. Although the largest automotive paint manufacturers have
generally not operated their own distributors, or have done so only on a limited
basis, they may decide to expand such activity in the future.
The Company competes primarily on the basis of product availability,
service and price. The Company believes that it maintains a competitive
advantage over most of its competitors due to its ability to take advantage of
high volume discount buying, professional management and economies of scale in
providing customer services, specialized employee functions and centralized
administration and management information services.
GOVERNMENT REGULATION
The Company and its customers are subject to increasing environmental
regulations which affect the Company's operations and the demand for its
services. These regulations impose requirements on the Company and its customers
and provide opportunities to the Company for providing services to customers
with respect to the use of new products and applications designed to comply with
air quality regulations. Although the Company believes that it has been and is
currently in substantial compliance with the applicable standards imposed
pursuant to environmental and worker safety laws, there can be no assurance that
in the future the Company will not be adversely affected by such requirements or
incur materially increased operating costs in complying therewith. The Company
believes that, on balance, these regulations favorably affect the Company, as it
is better able than its smaller competitors to comply with such regulations and
to assist its customers with compliance.
The principal environmental legislation presently affecting the Company and
its customers in a significant manner is described below.
Resource Conservation and Recovery Act of 1976 ("RCRA"). RCRA regulates the
treatment, storage and disposal of hazardous and solid wastes. Under RCRA,
liability and stringent management standards are imposed on a person who is a
generator or transporter of a hazardous waste or an owner or operator of a waste
treatment, storage or disposal facility. At some of its locations, the Company
is subject to RCRA requirements as a small quantity generator.
Comprehensive Environmental Response, Compensation and Liability Act of
1980 ("CERCLA"). CERCLA addresses cleanup of sites at which there has been or
may be a release of hazardous substances into the environment. CERCLA assigns
liability for costs of cleanup and for damage to natural resources (i) to any
person who, currently or at the time of disposal of a hazardous substance, owned
or operated any facility at which hazardous substances were deposited; (ii) to
any person who by agreement or otherwise arranged for the disposal or treatment,
or arranged with a transporter for transport for disposal or treatment of
hazardous substances owned or possessed by such person; and (iii) to any person
who accepted hazardous substances for transport to disposal or treatment
facilities or sites selected by such person from which there is a release or
threatened release of hazardous substances. The Company has acquired a number of
businesses which may, in the past, have sent waste to sites which have become
subject to government cleanup under CERCLA. To date the Company has not been
named as a potentially responsible party at any Superfund site.
<PAGE> 11
Clean Air Act and 1990 Amendments. The Clean Air Act requires compliance
with national ambient air quality standards ("NAAQS") and empowers the EPA to
establish and enforce limits on the emission of various pollutants from specific
types of facilities. The Clean Air Act Amendments of 1990 (the "Amendments")
modify the Clean Air Act in a number of significant areas. The Amendments, among
other things, establish new programs and deadlines for achieving compliance with
NAAQS, establish controls for hazardous air pollutants, establish a new national
permit program for all major sources of pollutants and create significant new
penalties, both civil and criminal, for violations of the Clean Air Act. The
Amendments specifically require a review of VOC emissions from commercial
products (which encompasses emissions relating to the application of paint to
automobiles). Pursuant to this review, the EPA decided to develop regulations
controlling automotive refinishing coatings. At some of its locations the
Company is subject to the Clean Air Act because it uses paint spraying equipment
for paint matching and for training of customers.
Other Federal and State Environmental Laws. The Company's operations are
subject to regulation under, among others, the following federal laws: the Clean
Water Act, the Safe Drinking Water Act, the Occupational Safety and Health Act
and the Hazardous Materials Transportation Act. In addition, many states have
other regulations and policies to cover more detailed aspects of hazardous
materials management. To date, the impact of these regulations on the Company
has not been material.
Local Air Quality Regulations. The South Coast Air Quality Management
District (the "SCAQMD") (Southern California) and the Bay Area Air Quality
Management District (the "BAAQMD") (San Francisco Bay Area) have detailed
regulations pertaining to metal coating and the use of VOCs. These regulations
prohibit the sale of nonconforming automobile paint at the distributor level,
which increases somewhat the compliance obligations of the California Divisions'
distribution sites. Subsequently, based on published industry data, 15 states
have adopted VOC regulations through June 1996. Most of these states have VOC
limits similar to the VOC limits proposed by the EPA. The national regulations
proposed by the EPA will not override more restrictive state and local
regulations such as California's regulations, which have the lowest VOC limits
in the country. The Company believes its experience with such regulations,
including compliance reporting and the use of paints and equipment designed to
meet such regulations, is not matched by smaller competitors.
TRADE NAMES
The Company currently does business principally under the name "Thompson
PBE" and, in certain cases, under the names of other businesses it has acquired.
In the future, the Company intends to operate under the name "Thompson PBE" in
most markets.
EMPLOYEES
At September 30, 1996, the Company employed approximately 1,180 persons on
a full-time basis. Of these employees, approximately 488 were employed in the
Southeast Division, approximately 283 were employed in the Southern California
Division (including approximately 38 employees at the corporate level),
approximately 108 were employed in the Northern California Division,
approximately 110 were employed in the Rocky Mountain Division, approximately
132 were employed in the Mid-Atlantic Division, and approximately 59 were
employed in the Northeast Division. The Company is not subject to any collective
bargaining agreement and believes that its relationships with its employees are
good.
<PAGE> 12
BUSINESS RISKS
The following factors should be considered in addition to the other
information contained in this Report or incorporated herein by reference in
evaluating the Company and its business.
Acquisition Strategy; Risks Related to Rapid Growth. The principal
component of the Company's business strategy is to continue to grow by making
additional acquisitions to augment its present Southeast, Southern California,
Northern California, Rocky Mountain, Mid-Atlantic and Northeast Divisions as
well as to make entry and add-on acquisitions in new geographic markets. The
Company's future growth and financial success will be dependent upon a number of
factors including, among others, the Company's ability to identify acceptable
acquisition candidates, consummate the acquisition of such businesses on terms
which are favorable to the Company, promptly and profitably integrate the
acquired operations into the Company, retain the key vendor arrangements of the
acquired businesses and attain customer retention levels at acquired businesses
that are advantageous to the Company. There can be no assurance that the Company
will be successful with respect to such factors. During 1996, the Company
encountered delays and other complications in the integration of certain
acquired businesses with its existing operations, particularly in the Southeast
and Mid-Atlantic divisions, and there can be no assurance that it will not
encounter such difficulties in the future. To manage its expansion, the Company
is continuously evaluating the adequacy of its existing systems and procedures,
including, among others, its financial reporting and control systems, data
processing systems and management structure. The Company is presently involved
in a significant project to upgrade its management information systems. There
can be no assurance that the Company will adequately anticipate all of the
changing demands its growth will impose on such systems, procedures and
structure. Any failure to adequately anticipate and respond to such changing
demands would have a material adverse effect on the Company. See "--Business
Strategy", "--Installation of New Computer System" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Competition. The automotive paint and related supplies distribution
industry in the United States is highly fragmented and the cost of entry is
relatively low. The Company may encounter significant competition from new
market entrants, automotive paint manufacturers, buying groups or from other
large distributors which may seek to enter such markets or may seek to compete
with the Company for attractive acquisition candidates. Sherwin-Williams,
Sikkens and BASF own and operate distribution sites in certain geographic
markets. One other independent automotive paint distributor, FinishMaster, Inc.,
is publicly held and the Company faces possible competition for acquisition
opportunities in some markets from that company or affiliated companies.
Although the largest automotive paint manufacturers generally have not operated
their own distributors, or have done so only on a limited basis, they may decide
to expand such activity in the future. Existing or new competitors, including
automotive paint manufacturers, may be significantly larger and have greater
financial and marketing resources than the Company. See "--Competition."
Consolidation of Customer Base; Trend Toward Fewer Collision Repair Jobs.
The Company believes that its customer base of collision repair shops is
experiencing significant consolidation. According to one industry publication,
the number of annual collision repair jobs declined from approximately 18.5
million to 16.5 million (or approximately 11%) from 1980 to 1990, and further
declined to an estiamted 13.0 million repair jobs in 1995. This decrease has
been due to, among other things, automotive safety improvements and more
rigorous enforcement of stricter drunk driving laws, resulting in fewer
accidents. Moreover, unit body construction and higher repair costs have
resulted in a larger number of cars being declared a total loss in lieu of
repair. Further, insurance companies have begun to require price concessions
from collision repair shops which are thereby required to become more efficient
and seek concessions from their suppliers, such as the Company. In addition, the
Company believes that during 1995 the major U.S. automobile manufacturers took
steps to substantially reduce a multi-year warranty program to repaint certain
car models that were prone to peeling. Due to a combination of these factors,
many of the smaller collision repair shops are either ceasing operations or are
being consolidated into larger businesses. To the extent the Company's current
customers cease operations or are consolidated into larger businesses,
competition for the remaining accounts will increase and may have a material
adverse effect on the Company's margins and profits. See "--Industry Overview"
and "--Government Regulation."
Dependence on Key Suppliers. The Company is highly dependent on a small
number of key suppliers of automotive paint. The Company has historically
purchased substantially all of its automotive paint from DuPont, PPG and BASF,
and a smaller portion from Sikkens. The Company also acquires a modest amount of
its paint requirements from several other foreign manufacturers. As is common
industry practice, the Company does not maintain long-term supply contracts with
any of its key suppliers. Although each of these suppliers generally competes
with the others along product lines, the Company does not believe the products
are completely interchangeable because of high brand loyalty among customers.
For this reason, the Company's acquisition program is also dependent on the
willingness of the principal paint vendors to continue to supply acquired
businesses. As discussed above, Sikkens has advised the Company that its
exclusive right to distribute the paint line in
<PAGE> 13
certain parts of Southern California and Arizona will be not be renewed after
its expiration on December 31, 1996 and that it will generally prevent the
transfer of acquired Sikkens distributors to the Company or at least one other
national distributor. While the impact of this development on the Company's
business is dependent on many factors and cannot be predicted at this time, the
Company expects, based on its experience with similar situations in connection
with acquisition transactions, that this decision by Sikkens will have at least
a modest adverse effect on its results of operations. More generally, any
disruption in the supply of paint products provided by its vendors (whether at
existing sites or in connection with an acquisition) has in the past and could
in the future have a material adverse effect on the Company. The Company
purchases substantially all of its automotive refinishing materials and supplies
directly from 3M; as such, the loss of 3M as a direct supplier could have an
adverse effect on the Company. In addition, the Company's size generally permits
it to take advantage of periodic supplier incentive programs which provide
additional purchase discounts, extend the due date for purchases beyond normal
terms with large volume purchases. The Company also benefits from manufacturer
provided discounts upon early payment of certain accounts and from other
supplier- supported programs. To the extent these programs are changed or
terminated, there could be a material adverse effect on the Company. See
"--Suppliers." and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Seasonality, Quarterly Fluctuations and Other Variations in Business
Results. The Company's revenues and operating results have historically varied
substantially from quarter to quarter due to certain factors and the Company
expects certain of these fluctuations to continue. Among these factors have been
the timing of acquisitions, the promptness with which the Company integrates
acquired businesses, seasonal buying patterns of the Company's customers,
weather and the timing of supplier price increases. Historically, sales have
slowed in the fall and early winter of each year largely due to weather and the
reduced number of business days during the holiday season. As a result,
financial performance for the Company's distribution sites is generally lower
during the first and second fiscal quarters than during the other quarters of
the fiscal year. In addition, the timing, location and structure of acquisitions
(including the accounting treatment of transactions costs and intangible assets)
may cause substantial fluctuations of operating results from quarter to quarter.
The Company's revenues and operating results also vary due to other factors
affecting the domestic wholesale aftermarket for automotive paint and related
supplies, such as the volume of warranty repair work and the level of new and
used car sales. The Company takes advantage of periodic supplier special
incentive programs that extend the payment date for purchases beyond normal
terms with large volume purchases and other supplier supported programs. The
Company may also significantly increase its purchases from time to time in
advance of expected supplier price increases. The timing of these purchases can
contribute to fluctuations in the Company's quarterly cash flow and inventory
levels. See "--Industry Overview", "--Suppliers" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Installation of New Computer System. The Company commenced an upgrade of
its management information systems in fiscal year 1996. The new system will
provide a common platform throughout the Company's operations and will be used
for all operations and accounting functions. These functions include sales order
processing, credit and collection activities, purchasing, inventory management,
and accounting and reporting activities. Implementation of the new system will
encompass training of company personnel on use of the new system, changes in
certain operating procedures and development of various new procedures and
policies. In addition, computer hardware, wiring configurations and
telecommunications equipment of the Company's operating sites will be changed or
modified. The Company's operations may be adversely affected and could suffer
significant disruption if the implementation of the new system is not
successful, or if significant problems are encountered and not resolved on a
timely basis.
Need for Additional Financing. To implement its acquisition strategy, the
Company expects to incur additional indebtedness or issue additional equity
securities in the future. There can be no assurance that such additional
capital, if and when required, will be available on terms acceptable to the
Company, or at all. See "-- Business Strategy" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Forward-looking Statements and Associated Risks. This Report contains
certain forward-looking statements pertaining to, among others things, the
Company's future results of operations, growth plans, sales, gross margin and
expense trends, capital requirements, compliance with contractual obligations
and general business, industry and economic conditions applicable to the
Company. These statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties. Actual
results could differ materially from these forward-looking statements. In
addition to the other risks described elsewhere in this "Business Risks"
discussion, important factors to consider in evaluating such forward-looking
statements include changes in external market factors, changes in the Company's
business strategy or an inability to execute its strategy due to changes in its
industry or the economy generally, the emergence of new or growing competitors
and various
<PAGE> 14
other competitive factors. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this Report will in fact occur.
ITEM 2. PROPERTIES
As of September 30, 1996, the Company conducted its operations through
distribution sites and warehouses in the following states:
<TABLE>
<CAPTION>
Number of Number of
State distribution sites warehouses
------ ------------------ ----------
<S> <C> <C>
Alabama 4
Arizona 3
California 31 2
Colorado 8
Connecticut 3
Florida 34 2
Georgia 2
Massachusetts 4
North Carolina 5
South Carolina 5
Virginia 2
</TABLE>
Distribution sites and warehouses are located in proximity to customer
concentrations, typically in industrial, commercial or mixed-use zones. The
Company's executive offices are located in approximately 11,000 square feet of
leased space in Marina del Rey, California.
The Company's distribution sites range from approximately 2,000 square feet
to 10,000 square feet, consisting mostly of warehouse space, as well as a
counter, display space and, in some cases, office space. The warehouses range
from approximately 5,000 square feet to 20,000 square feet. All of the Company's
properties are leased for terms expiring from 1996 to 2002, many with options to
extend the lease terms. In a number of instances, the Company's distribution
sites are leased from the former owners of businesses acquired by the Company.
The Company believes that all of its leases were at fair market rates when
entered into, that presently no single lease is material to its operations, and
that alternative sites are presently available at market rates. See Note 9 to
the Company's Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is involved in legal
proceedings from time to time. At September 30, 1996 a liability to the Florida
Department of Revenue for sales and use taxes was recorded to reflect the
results of an audit of the sales and operations of a certain predecessor
company for the period September 1989 through August 1994. The Florida
Department of Revenue is currently claiming amounts due of approximately $1.8
million. The Company is contesting the manner in which the audit was conducted
and the alleged deficiency calculated and assessed. The Company recorded a
charge to earnings in fiscal 1996 to establish a reserve sufficient for the
assessed amount, although the ultimate amount to be paid can not yet be
predicted pending the outcome of the Company's efforts to appeal this matter.
As of the date of this Report, management presently believes that all other
existing claims will ultimately be resolved without a material effect on the
Company's financial position. See Note 9 to the Company's Consolidated
Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
fiscal quarter ended September 30, 1996.
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company effected its initial public offering on November 8, 1994 at a
price of $11.00 per share. The Company's Common Stock is quoted on the Nasdaq
National Market under the symbol "THOM." The following table sets forth for the
periods indicated the high and low last reported sales prices for the Common
Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal 1995 Quarters Ended
--------------------------
Dec. 31 March 31 June 30 Sept. 30
-------------------------------------------------
<S> <C> <C> <C> <C>
Low......................................... $10 3/4 $12 7/8 $14 1/2 $15 3/4
High........................................ $13 1/4 $15 $18 1/8 $18 1/4
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996 Quarters Ended
--------------------------
Dec. 31 March 31 June 30 Sept. 30
-------------------------------------------------
<S> <C> <C> <C> <C>
Low......................................... $13 3/4 $12 $ 9 7/8 $ 9 3/8
High........................................ $19 1/2 $15 1/4 $14 1/4 $13
</TABLE>
As of December 31, 1996, there were approximately 200 holders of record of
the Company's Common Stock. Based on the broker searches conducted for the
annual meeting of stockholders, the Company believes that the number of
beneficial owners approximates 1,500, because a large portion of the Common
Stock is held of record in "street name" for the benefit of individual
investors.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
formation and does not anticipate paying such dividends in the foreseeable
future. Management anticipates that all earnings and other cash resources of the
Company, if any, will be retained by the Company for investment in its business
or, subject to lender consent, used to fund the repurchase of Common Stock. The
Company's debt agreements, including its Credit Agreement, dated as of January
6, 1995, between the Company, Heller Financial, Inc ("Heller") and the other
banks named therein, as amended (the "1995 Credit Agreement"), have in the past
and are likely in the future to contain significant restrictions or
prohibitions on its ability to pay dividends or repurchase shares.
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial information with respect to
the Company's financial position as of September 30, 1995 and 1996, and its
results of operations for the years ended September 30, 1994, 1995 and 1996, has
been derived from the audited consolidated financial statements of the Company
appearing elsewhere in this Report. This information should be read in
conjunction with such consolidated financial statements and the notes thereto.
The selected consolidated financial information with respect to the Company's
financial position as of March 31, 1992 and September 30, 1992, 1993 and 1994
and with respect to the Company's results of operations for the fiscal year
ended March 31, 1992, the six months ended September 30, 1992 and the fiscal
year ended September 30 , 1993 has been derived from audited financial
statements of the Company which are not included herein. The selected
consolidated financial information of the Company for the twelve months ended
September 30, 1992 has been derived from unaudited consolidated financial
statements of the Company which, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Fiscal Year Six Months Twelve Months
Ended ended ended
March 31, September 30, September 30, Fiscal Year Ended September 30,
--------- --------- --------- ------------------------------------------------
1992 1992 1992 1993 1994 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(in thousands, except acquisition data and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales ............................... $ 62,546 $ 35,092 $ 64,600 $ 77,292 $ 97,271 $ 131,827 $ 178,139
Cost of revenues ........................ 39,680 22,150 40,816 49,341 60,840 82,562 113,210
--------- --------- --------- --------- --------- --------- ---------
Gross profit ............................ 22,866 12,942 23,784 27,951 36,431 49,265 64,929
Selling, general and administrative ..... 18,246 9,936 18,831 22,786 28,463 36,996 55,831
Depreciation expense .................... 858 424 848 991 1,143 1,387 1,848
Amortization of goodwill and
other intangible assets (1) ........... 2,352 1,280 2,455 2,700 1,504 1,679 2,267
Interest expense ........................ 2,162 916 2,049 2,094 2,546 2,918 2,600
Certain charges (2):
Consulting expense (3) .................. 685 340 699 736 102
Changes in estimated lives of certain
intangible assets (4) ................. 1,474
Interest on warrant purchase
obligation (5) ........................ 60 30 30 370 2,870
Special incentive stock
compensation (6) ....................... 1,472
Merger costs ............................ (7) 340 1,146
--------- --------- --------- --------- --------- --------- ---------
Subtotal of certain charges ............. 745 370 729 2,920 5,590
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary item ................ (1,497) 16 (1,128) (3,540) (2,815) 6,285 2,383
Provision (benefit) for income taxes .... 113 103 160 423 805 1,310
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before
extraordinary item .................... (1,610) (87) (1,288) (3,963) (2,815) 5,480 1,073
Extraordinary item - early
extinguishment of debt ................ (483) (445)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ....................... $ (1,610) $ (87) $ (1,288) $ (3,963) $ (3,298) $ 5,035 $ 1,073
========= ========= ========= ========= ========= ========= =========
HISTORICAL PER SHARE DATA (8): ..........
Income before extraordinary item ........ $ 0.70 $ 0.12
Extraordinary item- early
extinguishment of debt ................ $ (0.07)
Net income per share .................... $ 0.63 $ 0.12
Weighted average common and
common equivalent shares ............... 6,317 8,850
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
March 31, September 30,
----------- ---------------------------------------------------------------
1992 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital ............................ $ 4,625 $ 4,967 $ 6,084 $ 10,279 $ 21,617 $ 30,249
Total assets ............................... 28,088 29,607 33,452 44,440 81,908 124,380
Long term debt ............................. 17,505 17,710 21,605 31,575 46,084 44,307
Heller Warrant purchase obligation ......... 490 500 870 3,740 - -
Redeemable stock ........................... 7,602 8,073 9,058 9,704 - -
Stockholders' equity (deficit) ............. (7,055) (7,040) (11,487) (13,925) 16,956 51,234
</TABLE>
<TABLE>
<CAPTION>
Six Months
Fiscal Year ended Total
Ended March 31, September 30, Fiscal Year Ended September 30, Since
--------------- ------------ ------------------------------------ May,
1992 1993 1993 1994 1995 1996 1989
<S> <C> <C> <C> <C> <C> <C> <C>
ACQUISITION DATA (9):
Companies acquired................. 1 1 7 4 16 14 50
Starting sites..................... 36 33 36 45 53 74
Sites acquired................. 6 3 14 14 41 38 123
Sites consolidated............. 9 0 5 6 20 11 55
Ending sites....................... 33 36 45 53 74 101
</TABLE>
(1) Includes amortization of goodwill and covenants not to compete resulting
primarily from the Company's business acquisitions and amortization of debt
issuance costs.
(2) Certain charges represents significant costs which are of an unusual or
nonrecurring nature. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition Accounting."
(3) Reflects amounts, and amortization of amounts, paid to the former owners of
businesses acquired for consulting services provided to the Company.
(4) In the year ended September 30, 1993, the Company recorded a non-cash
charge of $1.5 million to reflect the revised estimate of the economic
useful lives of its covenants not to compete and consulting agreements
related to certain business acquisitions. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition Accounting" and Note 2 to the Company's
Consolidated Financial Statements.
(5) Consists of a non-cash charge to record the increase in the estimated fair
market value of the Heller Warrant (as defined herein). Includes a final
charge of approximately $1.1 million recorded in the fiscal quarter ended
September 30, 1994. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition Accounting" and
Note 7 to the Company's Consolidated Financial Statements.
(6) Consists of non-cash, nonrecurring charges related to the transfer of
certain options and shares of capital stock of the Company by certain
stockholders to certain officers of the Company, which transactions were
imputed to the Company for financial reporting purposes. The Company has
not, and will not, incur any obligation in connection with such
arrangements. See Note 12 to the Company's Consolidated Financial
Statements.
(7) Consists primarily of nonrecurring costs incurred for legal, accounting,
consulting and other services to effect the Company's merger (the "New
Horizon Merger") with New Horizon Auto Paint Holdings, Inc. ("New
Horizon.")
(8) Historical income per share before extraordinary item and historical net
income per share have each been computed assuming a charge of $1,078,000
related to the redemption of the Company's redeemable stock and dividends
accrued thereon. All outstanding shares of the Company's redeemable stock
were redeemed with a portion of the net proceeds from the Company's
November 1994 initial public offering. See the Company's Consolidated
Financial Statements.
(9) New Horizon commenced operations in August 1990 with 21 distribution sites.
Accordingly, for all periods, acquisition data includes the acquisition
activity of New Horizon.
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND OF THE COMPANY
The Company was organized in 1989 as "Thompson Capital Corporation" to
acquire "Thompson Lacquer Company," a family-owned business that was founded in
1931. As a result of the acquisition in May 1989, the Company commenced
operations with 12 distribution sites in Southern California. Since its
inception in May 1989 through September 30, 1996 the Company has made a total of
50 acquisitions of businesses, including 14 acquisitions completed since
September 30, 1995. With the exception of the merger with New Horizon, all such
acquisitions were accounted for as purchases for financial reporting purposes.
The Company's merger with New Horizon was consummated on October 14, 1993.
New Horizon, now the core of the Company's Southeast Division, was organized in
June 1990 to acquire the assets and businesses of two companies, one of which
was founded in 1949 and the other of which was founded in 1977. As a result of
the acquisitions, New Horizon commenced operations in August 1990 with 21
distribution sites and two warehouses. The New Horizon Merger was accounted for
as a "pooling of interests" for financial reporting purposes. This method
assumes that the Company and New Horizon have been merged since inception.
Accordingly, the recorded assets and liabilities of the Company and New Horizon
are carried forward at their historical amounts. The historical financial
statements for periods prior to the consummation of the New Horizon Merger (for
the combined entity) have been restated as though the Company and New Horizon
had been combined for all periods presented. Such restated financial statements
have also been adjusted to conform the accounting policies of the separate
companies. Prior to the New Horizon Merger, New Horizon used an August 31 fiscal
year end for financial reporting purposes.
The Company's operations are currently organized into six divisions,
including the Northern California Division, the Southern California Division,
the Rocky Mountain Division (encompassing Colorado and Arizona), the Southeast
Division (encompassing Florida, Georgia and Alabama), the Mid-Atlantic Division
(encompassing North Carolina, South Carolina and Virginia) and the Northeast
Division (encompassing Massachusetts and Connecticut). At September 30, 1996,
the Company operated 101 distribution sites.
Subsequent to September 30, 1996, the Company acquired two additional
businesses operating two distribution sites. The acquired businesses had
historical annual revenues of approximately $8.0 million.
ACQUISITION ACCOUNTING
The Company's acquisitions have enabled it to enter new markets and
increase its penetration of existing markets, resulting in significant revenue
growth and cost efficiencies related to the higher sales volumes. Since its
inception through September 30, 1996, the Company has acquired or opened 123
distribution sites and has closed or consolidated 55 sites (including
transactions effected by New Horizon). Acquisitions have generally been financed
through the incurrence of debt and, in the case of certain larger acquisitions,
the issuance of equity securities.
During the initial integration phase of an acquisition, the Company
typically has incurred integration-related selling, general and administrative
expenses for training of staff members, for the conversion of information
systems and for duplicate rents and other operating costs in connection with the
consolidation of distribution sites. Depending upon the size of the acquisition,
the Company expects such integration costs to be incurred primarily during the
first six months after closing, although it has encountered delays and other
complications in this process on certain occasions.
Material amounts of goodwill and other intangibles have also been recorded
and amortized against earnings as a result of the application of the purchase
method of accounting for acquisitions other than the New Horizon Merger. In
addition, to protect its purchased market share and to facilitate integration
of the acquisition, the Company has also entered into various covenants not to
compete and consulting agreements with the former owners of the acquired
businesses.
19
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In connection with a $10.0 million term loan and credit facility provided
by Heller in May 1989, the Company's predecessor issued to Heller a warrant (the
"Heller Warrant"). The Heller Warrant had a "put" feature which provided Heller
with the option to require the Company to repurchase the Heller Warrant at fair
market value. For financial reporting purposes, the Company was required to
record a non-cash charge (equal to the increased difference between the exercise
price and the estimated fair market value of the Heller Warrant) during all
periods through September 30, 1994 as interest expense, resulting in substantial
charges to income over the period the Heller Warrant was outstanding. In
connection with the closing of the Company's initial public offering, the Heller
Warrant was exercised in full for 365,609 shares of Common Stock, thereby
terminating the requirement that such charges be recognized after the recording
of a final $1.1 million charge in the fiscal quarter ended September 30, 1994.
See Note 7 to the Company's Consolidated Financial Statements.
The Company recorded non-cash, nonrecurring charges aggregating $1.5
million in the fiscal year ended September 30, 1994 as a result of the transfer
of certain options and shares of capital stock of the Company by certain
stockholders to certain officers of the Company, which transactions were imputed
to the Company for financial reporting purposes. The Company has not, and will
not, incur any obligation in connection with such arrangements. See Note 12 to
the Company's Consolidated Financial Statements.
In connection with the New Horizon Merger, which was accounted for as a
pooling of interests, the Company incurred and expensed in the September 1993
and December 1993 fiscal quarters significant nonrecurring costs for legal,
accounting, consulting and other services related to that transaction. For
financial reporting purposes, transaction costs related to a business
combination accounted for as a pooling of interests are charged to expense as
incurred. Also in connection with the New Horizon Merger, the existing debt of
New Horizon was refinanced with the Company's principal lender, Heller,
resulting in a charge of $483,000 that was recorded as an extraordinary item in
the December 1993 quarter.
In the fiscal quarter ended December 31, 1994, the Company recorded a
non-cash extraordinary charge of $445,000 as a result of the write-off of a
portion of unamortized debt issuance costs and discounts related to debt repaid
with a portion of the net proceeds to the Company from its initial public
offering. See "-- Liquidity and Capital Resources." In the fiscal quarter ended
September 30, 1996, the Company recorded charges to income totaling
approximately $3.5 million related to a sales and use tax audit of a predecessor
company, write-down of inventory carrying value, disputed reimbursements from
vendors and other charges.
OVERVIEW
In recent years, the Company has experienced significant growth in revenues
derived principally from an aggressive acquisition program. The Company's
revenues are derived primarily from the sale of automotive paint and related
supplies to independent collision repair shops and automobile dealers.
Additionally, trucking companies, schools, municipalities, government agencies,
sellers of automotive salvage, refinishers, do-it-yourselfers, marine and
aviation refinishers and other commercial and industrial users make up a smaller
percentage of the Company's customer base. Historically, the mix of the
Company's revenues has been relatively consistent. Approximately 70% of net
sales were attributable to paint and paint products and approximately 30% of net
sales were attributable to all related supplies for the fiscal year ended
September 30, 1996. The margins on automotive paint and paint products are
generally higher than those realized in the sale of related supplies, which
include refinishing materials, supplies, accessories and tools. See "Item 1.
Business--Industry Overview."
20
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated information
derived from the Company's consolidated statements of operations expressed as a
percentage of net sales, and the percentage change in such items compared to the
same period in the prior year. There can be no assurance that the trends in
sales growth or operating results will continue in the future.
<TABLE>
<CAPTION>
Fiscal Fiscal
Year Ended Year Ended
September 30, September 30,
1995 over 1996 over
Fiscal Year Fiscal year
Year Ended September 30, Ended Ended
-------------------------- September 30, September 30,
1994 1995 1996 1994 1995
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0% 35.5% 35.1%
Cost of sales ..................... 62.5 62.6 63.6 35.7 37.1
----- ----- -----
Gross profit .................... 37.5 37.4 36.4 35.2 31.8
Selling, general and administrative 29.3 28.1 31.3 30.0 50.9
Depreciation expense .............. 1.2 1.0 1.0 21.3 33.2
Amortization of goodwill and
other intangible assets ......... 1.5 1.3 1.3 11.6 35.0
Interest expense, net ............. 2.6 2.2 1.5 14.6 (10.9)
Total of certain charges ........ 5.8 -- -- NM --
----- ----- -----
Income (loss) before income taxes
and extraordinary item .......... (2.9%) 4.8% 1.3% NM (62.1)
===== ===== =====
</TABLE>
Fiscal year ended September 30, 1996 compared to Fiscal year ended
September 30, 1995
Net sales for the fiscal year ended September 30, 1996 increased $46.3
million, or 35.1%, to $178.1 million from $131.8 million for the same period in
1995. This increase was primarily attributable to net sales of 14 businesses
acquired since September 30, 1995. Sales in existing operations were
approximately flat compared to the same period in 1995, with increased selling
prices offsetting a slight decrease in volume. See "--Quarterly Information and
Seasonality," "--Inflation" and Item 1. " Businesss--Industry Overview."
Gross profit for the fiscal year ended September 30, 1996 increased to
$64.9 million from $49.3 million for the fiscal year ended September 30, 1995.
Gross profit as a percentage of net sales of 36.4% for the fiscal year ended
September 30, 1996 decreased from gross profit as a percentage of net sales of
37.4% for the fiscal year ended September 30, 1995. The decrease in gross profit
as a percentage of net sales is due primarily to increased write-downs of
inventory values for obsolescence, shrinkage and the effects of increased
customer discounts. Gross profit may vary from period to period as a result of,
among other factors, increased purchases of inventory in anticipation of vendor
price increases, discount and rebate programs of large suppliers to the Company
and fluctuations in discounts granted to large customers in certain geographic
markets in which the Company operates.
21
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Selling, general and administrative expenses increased by $18.8 million, or
50.9%, to $55.8 million for the fiscal year ended September 30, 1996 as compared
to $37.0 million for the fiscal year ended September 30, 1995. For the fiscal
year ended September 30, 1996, selling, general and administrative expenses were
31.3% of net sales as compared to 28.1% of net sales for the fiscal year ended
September 30, 1995. The absolute increase in selling, general and administrative
expenses reflects the increase in costs necessary to support the Company's rapid
growth through its acquisition program. Included in fiscal year 1996 selling,
general and administrative expenses were costs totaling approximately $3
million relating to reserves for a sales and use tax audit of a certain
predecessor company, and disputed reimbursements due from vendors. The increase
in selling, general and administrative expenses as a percentage of net sales
also reflects increased costs relating to the Company's expansion and
development of its administrative and marketing infrastructure, costs of
integrating certain acquisitions in the Mid-Atlantic and Southeast Divisions in
which paint lines distributed by certain acquired businesses were switched to
other manufacturer' product lines, and the effect of increases in operating
costs without a corresponding increase in sales of existing distribution sites.
Depreciation expense increased to $1.8 million in the fiscal year ended
September 30, 1996 from $1.4 million in the fiscal year ended September 30,
1995. The increase in depreciation expense is attributable to an increase in
fixed assets related to the expanded operations of the Company.
Amortization expense increased to $2.3 million in the fiscal year ended
September 30, 1996 from $1.7 million in the fiscal year ended September 30,
1995. The increase in amortization expense reflects additions to intangible
assets of $24.3 million during the year ended September 30, 1996. Depreciation
and amortization expenses are expected to continue to increase from period to
period as a result of continued acquisition activity by the Company.
Interest expense decreased to $2.6 million for the fiscal year ended
September 30, 1996 from $2.9 million in the fiscal year ended September 30,
1995. The decrease in interest expense as compared to the prior period is
primarily attributable to lower average debt balances outstanding during the
fiscal year ended September 30, 1996 as compared to the year earlier period. The
lower average debt balances outstanding is attributable primarily to a reduction
in October 1995 in senior debt outstanding from the application of the net
proceeds of a secondary offering of common stock, and to the timing and amount
of debt balances incurred in connection with business acquisition activity
during the year ended September 30, 1996. At September 30, 1996, senior debt
outstanding under the Company's 1995 Credit Agreement totaled $36.9 million,
bearing interest at an effective rate of 7.1%. Interest expense in future
periods will be dependent upon fluctuations in outstanding debt balances,
prevailing interest rates and changes in the Company's ratio of senior debt to
operating cash flow. See "--Liquidity and Capital Resources."
22
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Income tax expense increased to $1.3 million for the fiscal year ended
September 30, 1996 from $805,000 for the fiscal year ended September 30, 1994.
The Company's effective tax rate increased to 55.0% for the fiscal year ended
September 30, 1996 from 12.8% for the fiscal year ended September 30, 1995. The
effective tax rate for fiscal year 1996 increased as a result of the effect of
an increase in amortization of non-deductible intangible assets as a percentage
of taxable income as compared to the year earlier period. In fiscal year 1995,
the Company's effective tax rate was reduced as a result of changes in its
valuation allowance for deferred taxes, which did not recur in fiscal year 1996.
Fiscal year ended September 30, 1995 compared to Fiscal year ended September 30,
1994
Net sales for the fiscal year ended September 30, 1995 increased $34.6
million, or 35.5%, to $131.8 million from $97.3 million for the same period in
1994. This increase was primarily attributable to net sales of 16 businesses
acquired since September 30, 1994. Sales in existing operations were
approximately flat compared to the same period in 1994, with increased selling
prices offsetting a slight decrease in volume. See "--Quarterly Information and
Seasonality," and "--Inflation" and Item 1. " Businesss--Industry Overview."
Gross profit for the fiscal year ended September 30, 1995 increased to
$49.3 million from $36.4 million for the fiscal year ended September 30, 1994.
Gross profit as a percentage of net sales of 37.4% for the fiscal year ended
September 30, 1995 decreased slightly from gross profit as a percentage of net
sales of 37.5% for the fiscal year ended September 30, 1994. Gross profit may
vary from period to period as a result of, among other factors, increased
purchases of inventory in anticipation of vendor price increases, discount and
rebate programs of large suppliers to the Company and fluctuations in discounts
granted to large customers in certain geographic markets in which the Company
operates.
Selling, general and administrative expenses increased by $8.5 million, or
30.0%, to $37.0 million for the fiscal year ended September 30, 1995 as compared
to $28.5 million for the fiscal year ended September 30, 1994. For the fiscal
year ended September 30, 1995, selling, general and administrative expenses were
28.1% of net sales as compared to 29.3% of net sales for the fiscal year ended
September 30, 1994. The absolute increase in selling, general and administrative
expenses reflects the increase in costs necessary to support the Company's rapid
growth through its acquisition program. The decrease in selling, general and
administrative expenses as a percentage of net sales reflects growth of revenues
through acquisitions of businesses without a corresponding increase in
administrative costs or headcount, as well as other cost savings achieved
through the consolidation of distribution sites. The Company's increased costs
for fiscal 1995 reflect the fact that as of the end of the fourth quarter the
Company had not completed the integration of certain acquisitions in the
Southeast Division where volume more than doubled over the prior year.
Depreciation expense increased to $1.4 million in the fiscal year ended
September 30, 1995 from $1.1 million in the fiscal year ended September 30,
1994. The increase in depreciation expense is attributable to an increase in
fixed assets related to the expanded operations of the Company.
Amortization expense increased slightly to $1.7 million in the fiscal year
ended September 30, 1995 from $1.5 million in the fiscal year ended September
30, 1994. This result reflects the net effect of an increase in amortization
expense relating to goodwill, offset by a decrease in amortization expense
relating to consulting agreements and covenants not to compete with former
employees of certain acquired businesses. Depreciation and amortization expenses
are expected to continue to increase from period to period as a result of
continued acquisition activity by the Company.
Interest expense increased to $2.9 million for the fiscal year ended
September 30, 1995 from $2.5 million in the fiscal year ended September 30,
1994. The increase in interest expense as compared to the prior period was
attributable to a net increase in the Company's debt as a result of acquisitions
subsequent to September 30, 1994. At September 30, 1995, senior debt outstanding
under the Company's 1995 Credit Agreement totaled $40.3 million, bearing
interest at an effective rate of 7.87%. Interest expense in future periods will
be dependent upon fluctuations in outstanding debt balances, prevailing interest
rates and changes in the Company's ratio of senior debt to operating cash flow.
See "--Liquidity and Capital Resources."
23
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company incurred certain charges in the fiscal year ended September 30,
1994 that did not recur in the 1995 period. During the 1994 period, the Company
recorded a non-cash charge of $2.9 million (the interest on the Heller warrant
purchase obligation) to recognize the increased difference between the exercise
price and the fair market value of the Heller Warrant, and a one-time charge of
$1.5 million related to certain special incentive stock compensation
arrangements between certain stockholders and officers of the Company, which
were imputed to the Company for financial reporting purposes. Also during the
1994 period, the Company recorded a charge of $1.1 million representing certain
non-recurring legal, accounting, consulting and other services related to the
New Horizon Merger. See "--Acquisition Accounting."
A non-cash extraordinary charge in the amount of $445,000 was recorded in
the fiscal year ended September 30, 1995 in connection with the writeoff of
certain unamortized deferred financing costs related to loans which were repaid
from proceeds of the Company's initial public offering. The Company also
recorded an extraordinary item in the amount of $483,000 in the fiscal year
ended September 30, 1994 in connection with the repayment of certain debt of New
Horizon as a result of its merger with the Company in October 1993.
At September 30, 1994, the Company had deferred tax assets of approximately
$2.5 million that were offset by a valuation allowance. During the fiscal year
ended September 30, 1995, the Company recognized substantially all of such
deferred tax assets through the reduction of the deferred tax assets' valuation
allowance to the extent that deferred taxes were anticipated to be realizable.
As a result of utilizing available deferred tax assets, the Company's effective
tax rate for the fiscal year ended September 30, 1995 was 12.8%. The Company
presently anticipates that it will recognize a provision for income taxes in
future periods which will approximate currently enacted federal and state
statutory rates.
SEASONALITY AND OTHER VARIATIONS IN BUSINESS RESULTS
The Company's revenues and operating results have historically varied
substantially from quarter to quarter due to certain factors and the Company
expects certain of these fluctuations to continue. Among these factors have been
the timing of acquisitions, the promptness with which the Company integrates
acquired businesses, seasonal buying patterns of the Company's customers,
weather and the timing of supplier price increases. Historically, sales have
slowed in the fall and early winter of each year largely due to weather and the
reduced number of business days during the holiday season. As a result,
financial performance for the Company's distribution sites is generally lower
during the first and second fiscal quarters than during the other quarters of
the fiscal year. Such fluctuations should be reduced somewhat in the future as
the Company continues to become more geographically diversified. In addition,
the location, timing and structure of acquisitions may cause substantial
fluctuations of operating results from quarter to quarter. The Company's
revenues and operating results also vary due to changes affecting the domestic
wholesale aftermarket for automotive paint and related supplies, such as the
volume of warranty repair work and the level of new and used car sales. See Item
1. "Businesss--Industry Overview."
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources have been significantly
impacted by acquisitions commencing with the initial acquisition of Thompson
Lacquer Company in May 1989. The Company historically has financed its business
activities and acquisitions through a combination of secured, subordinated and
seller-provided borrowings, augmented by internally generated cash flow. In
addition, the Company has financed certain of its larger acquisitions partially
through the issuance of equity securities. The Company has expended
approximately $80.0 million since 1989 and through September, 1996 to acquire
businesses. See Notes 7, 10 and 11 to the Company's Consolidated Financial
Statements.
24
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company raised approximately $25.1 million in gross proceeds (after
payment of underwriting discounts) in its initial public offering which closed
November 16, 1994. In that offering, the Company issued and sold 2,450,000
shares of common stock (including the full 330,000 shares covered by the
underwriters' overallotment option), and a selling stockholder sold 80,000
shares. The net proceeds from the offering received by the Company were used to
repay debt and retire its various classes of redeemable capital stock. In
October 1995, the Company completed a secondary public offering in which the
Company realized gross proceeds of approximately $34.3 million (after payment of
underwriting discounts.) In that offering, the Company sold 2,271,475 shares of
Common Stock (including the full 271,475 shares covered by the underwriters'
overallotment option) and selling stockholders sold an aggregate of 1,178,525
shares (including the full 178,525 covered by the underwriters' overallotment
option). The net proceeds received by the Company were used to prepay debt
outstanding under the 1995 Credit Agreement.
Cash used by operating activities was $1.4 million for the fiscal year
ended September 30, 1996 as compared to cash provided by operating activities of
$2.7 million for the fiscal year ended September 30, 1995. The decrease in cash
provided by operations is primarily attributable to a decrease in net income and
to cash used for increased levels of accounts receivable and inventories. The
increase in net income during the 1995 period was substantially offset by
increases in the Company's working capital which required a use of cash. The
increased level of working capital at September 30, 1996 is primarily the result
of the increased level of operations of the Company.
The Company's investing activities used cash totaling $22.1 million to
acquire 14 businesses during the fiscal year ended September 30, 1996, as
compared to a use of cash of $23.2 million to acquire 16 businesses during the
fiscal year ended September 30, 1995. In addition, the Company had capital
expenditures of $1.9 million and $1.7 million in the fiscal year ended September
30, 1996 and 1995, respectively. Capital expenditures were primarily for
refurbishment of distribution sites, upgrades of computer systems and the
replacement of delivery vehicles. The Company expects the absolute level of its
capital expenditures to increase in fiscal 1997 in connection with the planned
upgrade of its management information system and as a result of the increased
size of the Company.
The Company bills its customers upon delivery of products. The Company's
standard payment terms provide for a 2% cash discount if current purchases are
paid for by the tenth of the following month; unpaid invoices are generally due
by the thirtieth of such month. The average days' sales outstanding for accounts
receivable at September 30, 1996 of approximately 38 days increased from the
average days' sales outstanding of approximately 33 days at September 30, 1995.
The increase in average days sales reflects a slower collection experience at
certain acquired businesses, and a change in the mix between customers with
COD and weekly credit terms and customers with monthly accounts. The percentage
of customers with account balances more than 60 days past due at September 30,
1996 was consistent with the prior year.
The Company's inventories at September 30, 1996 represented approximately
89 days' sales, as compared to approximately 83 days' inventory on hand at
September 30, 1995. The increase is attributable primarily to increased
inventory levels in the Company's Southeast region arising from a transition
from a warehouse replenishment (hub and spoke) process to a process whereby
large paint orders are shipped directly to distribution sites by vendors. Days'
inventory on hand varies based upon, among other factors, the effect of acquired
businesses having inventory levels which vary from existing Company operations
and the effect on inventory levels of volume buying at various times during a
fiscal year to maximize supplier discounts.
The Company's accounts payable at September 30, 1996 represented
approximately 47 days' purchases, compared to 47 days' at September 30, 1995. As
a general matter, the Company's level of accounts payable is favorably impacted
by the Company's ability to take advantage of periodic supplier incentive
programs, which programs often extend the payment date beyond normal terms with
large volume purchases. Accounts payable levels will continue to vary from
period to period depending on which vendor payment programs are available.
Although there can be no assurance that such vendor payment programs will be
continued, they have been commonplace in the Company's industry for many years
and have routinely been offered by each of its principal suppliers. If, however,
these programs were changed or terminated, the Company's liquidity requirements
could change materially.
25
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company had working capital of $30.2 million at September 30, 1996. In
addition to working capital, the Company's principal source of liquidity was the
1995 Credit Agreement. In fiscal year 1996, the 1995 Credit Agreement was
amended to increase the maximum amount available to $75 million from $50
million. The maximum amount available under the 1995 Credit Agreement consists
of (i) a revolving credit facility of $18 million, limited to a borrowing base,
(ii) a term loan of $30 million, and (iii) an acquisition loan facility of $27
million. Advances under the 1995 Credit Agreement bear interest based upon
either a "base rate" or LIBOR at the election of the Company, plus a spread
which is determined based on the Company's ratio of senior debt to operating
cash flow for the prior twelve months. As of September 30, 1996, borrowings
under the 1995 Credit Agreement bore interest at a rate of 7.1% per annum.
Borrowings under the 1995 Credit Agreement are secured by substantially all
of the Company's assets and such agreement contains significant restrictive
covenants which require the Company to maintain certain financial ratios and
limit, among other things, capital expenditures, the incurrence of indebtedness
and the payment of cash dividends. Certain of the financial covenant ratios and
certain other provisions of the 1995 Credit Agreement were amended (the Third
Amendment to Credit Agreement) effective September 30, 1996. As a result of
the operating results reported by the Company in the fourth quarter of fiscal
1996, the Company was near the amended limit of several covenant ratios;
failure to satisfy the financial covenants under the 1995 Credit Agreement could
result in a material adverse affect on the Company's financial position and
results of operations. In the event that the Company does not meet the financial
covenants contained in the 1995 Credit Agreement in future periods, it is likely
that the terms of the Credit Agreement would be renegotiated, the outcome of
which could result in higher interest rates on debt outstanding under the 1995
Credit Agreement, a reduction of amounts available under the agreement and other
adverse changes in the terms under which outstanding debt is repaid, which could
be material.
The 1995 Credit Agreement requires annual prepayments in an amount equal to
50% of the Company's excess cash flow (as defined) commencing in 1997, and
annual repayments, payable quarterly, of the $29.5 million term loan of: $2.25
million in fiscal 1997, $3.50 million in fiscal 1998, $5.25 million in fiscal
1999, $6.25 million in fiscal 2000, $7.00 million in fiscal 2001 and $5.25 in
fiscal 2002. Annual repayments of the acquisition loan, payable quarterly,
commence in fiscal 1998 based on the following percentages of the aggregate
amount of acquisition loans extended to the Company as of July 1998: 3.75% in
fiscal 1998, 16.25% in fiscal 1999, 22.50% in fiscal 2000, 31.25% in fiscal 2001
and 26.25% in fiscal 2002. At September 30, 1996, the Company had approximately
$852,000 in deferred fees and other origination costs, net of related
accumulated amortization, related to the 1995 Credit Agreement. See Notes 2, 4
and 7 to the Company's Consolidated Financial Statements.
In October, 1995 the Company completed a secondary public offering in which
the Company realized gross proceeds, net of underwriter discounts, of
approximately $34.3 million. The net proceeds from the offering were used to
prepay debt outstanding under the 1995 Credit Agreement. In connection with the
prepayment of such debt, the 1995 Credit Agreement was amended to permit the
Company to reborrow amounts under its $25 million acquisition loan facility
which were prepaid with the proceeds of the secondary offering. As of November
30, 1996, the maximum amount available to borrow, in circumstances in which the
Company did not exceed the resultant ratios of senior total indebtedness to pro
forma operating cash flow, were revolving credit loans of up to $10.1 million
and acquisition loans of $24.6 million. However, as noted above, the Company was
near the limit of certain covenant ratios, and accordingly, in the absence of
increases in operating cash flow, future borrowings may be restricted or may
not be available.
On December 5, 1996, the Company announced that its Board of Directors had
approved a stock repurchase program of up to 500,000 shares of the Company's
Common Stock. This program does not obligate the Company to acquire any
particular amount of Common Stock, has no set time limit and may be suspended at
any time at the Company's discretion. Through December 16, 1996, the Company had
repurchased 63,700 shares at an average price of $6.69 per share under the
program. Any further repurchases would, among other things, require the prior
consent of the lenders under the 1995 Credit Agreement, and there can be no
assurance that the lenders would grant such consent if requested. Accordingly,
the Company can not predict whether or when additional shares, if any, will
be repurchased.
26
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Following the application of the net proceeds from the Company's public
offerings in November 1994 and October 1995, the Company has benefitted from
significantly improved liquidity and capital resources because of the
replacement of a significant portion of its secured debt, and all of its
subordinated debt and redeemable stock (as well as the related interest and
dividend obligations), with Common Stock. Management of the Company presently
believes that cash flow from operations, together with its present sources of
liquidity and its anticipated borrowing capacity will be sufficient to support
its operations and general business and capital liquidity requirements for the
next twelve months. To finance future acquisitions, the Company expects to
utilize its borrowing capacity and cash flow from operations. Depending on
market conditions, the Company may also incur additional indebtedness or issue
equity securities. There can be no assurance that such additional capital, if
and when required, will be available on terms acceptable to the Company, or at
all. See Item 1. "Business--Business Risks."
INFLATION
The Company believes that, to date, inflation has not had a material
adverse effect on its business. In recent years, however, automotive paint
prices have generally risen at rates in excess of the overall inflation rate
due, in part, to the changing paint formulations and related costs incurred by
manufacturers to comply with environmental regulations, particularly in
California. Historically, the Company has been successful in passing most, if
not all, of such increases on to the customer. In addition, price increases have
at times created profit opportunities to large distributors (such as the
Company) with the resources to buy inventory in anticipation of price increases,
which opportunities may or may not be available in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference from the
information under the captions "Election of Directors," "Certain Information
With Respect to Executive Officers" and "Compliance With Section 16(a) Under the
Securities Exchange Act of 1934" contained in the Proxy Statement relating to
the Company's 1997 Annual Meeting of Stockholders, which will be filed within
120 days of the end of the fiscal year covered by this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement relating to the Company's 1997 Annual Meeting of Stockholders, which
will be filed within 120 days of the end of the fiscal year covered by this
Report.
27
<PAGE> 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Holders
and Management" contained in the Proxy Statement relating to the Company's 1997
Annual Meeting of Stockholders, which will be filed within 120 days of the end
of the fiscal year covered by this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement relating to the Company's 1997 Annual Meeting of Stockholders, which
will be filed within 120 days of the end of the fiscal year covered by this
Report.
28
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. The following consolidated financial statements for the Company and its
predecessor are included as part of this report:
Index to Consolidated Financial Statements.................. Page F-1
2. Results of Operations - Unaudited Quarterly Financial
Information................................................. Page F-19
3. The following financial statement schedules for the Company and its
predecessor are included as part of this report:
Independent Auditors' Report on Supplemental Schedule....... Page S-1
Schedule II - Valuation and Qualifying Accounts............. Page S-2
All other schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the
consolidated financial statements.
4. The following exhibits to this report are filed or incorporated by
reference herein as indicated. Management contracts or compensatory
plans or arrangements required to be filed as exhibits to this report
are identified by an asterisk (*). Exhibits are numbered in accordance
with Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
+2.1 Agreement and Plan of Merger dated as of October 14, 1993 by and
among the Company, New Horizon Auto Paint Holdings, Inc. ("New
Horizon") and New Horizon Auto Paint & Body Supplies, Inc. ("NHH
Sub") (Filed as Exhibit 2.1 to the Company's Registration Statement
on Form S-1 (Registration No. 33-83310) and incorporated herein by
reference.)
+2.2 Asset Purchase Agreement dated as of February 15, 1993 by and among
the Company, Dewitt's A to Z Paint Supply, Inc. ("Dewitt's"), John
W. DeWitt, Daniel L. DeWitt, and the controlling shareholders of
DeWitt's (Filed as Exhibit 2.2 to the Company's Registration
Statement on Form S-1 (Registration No. 33-83310) and incorporated
herein by reference.)
+2.3 Asset Purchase Agreement dated as of March 31, 1994 by and among
the Company, Al West Paint Co., Alfred H. West, Scott A. West,
Helen Virginia West, Debra West and Cindy Peltiner (Filed as
Exhibit 2.3 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
+2.4 Asset Purchase Agreement dated as of March 31, 1994 by and among
the Company, F.A. Heckendorf, Inc. and F.A. Heckendorf, Jr. (Filed
as Exhibit 2.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
2.5 Reincorporation Merger Agreement and Plan of Merger dated as of
August 18, 1994 between the Company and Thompson Capital
Corporation (Filed as Exhibit 2.5 to the Company's Registration
Statement on Form S-1 (Registration No. 33- 83310) and incorporated
herein by reference.)
+2.6 Stock Purchase Agreement dated as of January 6, 1995, among Herman
Lewis, the Company, and Arnold Paint Company, a Florida corporation
(Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K
dated January 11, 1995 and incorporated herein by reference.)
+2.7 Asset Purchase Agreement dated as of May 9, 1995, as amended, by
and among the Company and SEV Corporation (Filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K dated May 31, 1995 and
incorporated herein by reference.)
3.1 Amended and Restated Certificate of Incorporation of the Company
(Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1994 and incorporated herein by
reference.)
</TABLE>
29
<PAGE> 29
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
3.2 Bylaws of the Company (Filed as Exhibit 3.3 to the Company's
Registration Statement on Form S-1 (Registration No. 33-83310) and
incorporated herein by reference.)
3.3 First Amendment to Bylaws of the Company (Filed as Exhibit 3.3 to
the Company's Registration Statement on Form S-1 (Registration No.
33-96256) and incorporated herein by reference.)
4.1 Common Stock Purchase Warrant dated April 7, 1994 made by the
Company in favor of Chase Venture Capital Associates, L.P.
("Chase") (Filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (Registration No. 33-83310) and incorporated
herein by reference.)
4.3 Specimen of Common Stock Certificate of the Company (Filed as
Exhibit 4.3 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
4.4 Form of Warrant Agreement between the Company and SEV Corporation.
(Filed as Exhibit 2.2 to the Company's Current Report on Form 8-K
dated May 31, 1995 and incorporated herein by reference.)
10.1 Securities Purchase and Sale Agreement dated as of May 26, 1989 by
and among D. Hunt Ramsbottom, Jr. ("Ramsbottom"), Mortimer A.
Kline, III ("Kline") and Wedbush Capital Partners ("WCP"), as
amended by that certain First Amendment to Securities Purchase and
Sale Agreement dated as of June 5, 1992 and as terminated by that
certain Termination of Securities Purchase and Sale Agreement dated
as of June 30, 1994 (Filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-83310) and
incorporated herein by reference.)
10.2 1994 Stock Option Plan (the "1994 Plan") (Filed as Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.3 Amendment to the 1994 Plan (Filed as Exhibit 10.64 to the Company's
Quarterly Report on Form 10-Q for the three months ended March 31,
1995 and incorporated herein by reference.)
10.4 Form of Stock Option Agreement under 1994 Plan (Filed as Exhibit
10.3 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
10.5 Director's Fee Agreement dated as of March 6, 1990 by and between
the Company and Frank C. Alexander as amended by the Amendment to
Director's Fee Agreement dated as of June 30, 1994 (Filed as
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
10.6 1989 Stock Option Plan (the "1989 Plan") (Filed as Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.7 Form of Stock Option Certificate under the 1989 Plan between the
Company and Frank C. Alexander ("Alexander") (Filed as Exhibit 10.6
to the Company's Registration Statement on Form S-1 (Registration
No. 33-83310) and incorporated herein by reference.)
10.8 Memorandum of Understanding and Stock Option Agreement, dated June
29, 1994, by and among CVCA, WCP, Ramsbottom and Kline (Filed as
Exhibit 10.7 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
10.9 Registration Rights Agreement dated as of October 14, 1993, as
amended by Amendment No. 1 to Registration Rights Agreement dated
as of March 31, 1994, by and among the Company, Robert Thompson, as
trustee of The Family Trust, Ramsbottom as trustee of the Voting
Trust, Ramsbottom, Kline, WCP, CVC, Heller, Alexander, John F.
Kirtley, P. Jeffrey Leck and John B. Norrie (Filed as Exhibit 10.8
to the Company's Registration Statement on Form S-1 (Registration
No. 33-83310) and incorporated herein by reference.)
10.10 Credit Agreement dated as of January 6, 1995 between the Company
and Heller as Agent and Lender (Filed as Exhibit 10.56 to the
Company's Quarterly Report on Form 10-Q for the three months ended
December 31, 1994 and incorporated herein by reference.)
10.11 $15,000,000 Revolving Note dated January 6, 1995 in favor of Heller
(Filed as Exhibit 10.57 to the Company's Quarterly Report on Form
10-Q for the three months ended December 31, 1994 and incorporated
herein by reference.)
10.12 $10,000,000 Term Note A dated January 6, 1995 in favor of Heller
(Filed as Exhibit 10.58 to the Company's Quarterly Report on Form
10-Q for the three months ended December 31, 1994 and incorporated
herein by reference.)
10.13 $25,000,000 Acquisition Note dated January 6, 1995 in favor of
Heller (Filed as Exhibit 10.59 to the Company's Quarterly Report on
Form 10-Q for the three months ended December 31, 1994 and
incorporated herein by reference.)
</TABLE>
30
<PAGE> 30
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
10.14 Security Agreement dated as of January 6, 1995 between the Company
and Heller as Agent for the benefit of all Lenders (Filed as
Exhibit 10.60 to the Company's Quarterly Report on Form 10-Q for
the three months ended December 31, 1994 and incorporated herein by
reference.)
10.15 Pledge Agreement dated as of January 6, 1995 in favor of Heller as
Agent for the benefit of all Lenders (Filed as Exhibit 10.61 to the
Company's Quarterly Report on Form 10-Q for the three months ended
December 31, 1994 and incorporated herein by reference.)
10.16 Subordination Agreement dated as of October 14, 1993 by and between
BASF Corporation ("BASF") and Heller (Filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.17 Subordination Agreement dated as of October 14, 1993 by and between
PPG Industries, Inc. ("PPG") and Heller (Filed as Exhibit 10.19 to
the Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.18 Installment Note dated December 15, 1992 by D. Hunt Ramsbottom, Jr.
in favor of the Company, in the principal amount of $125,000 (Filed
as Exhibit 10.24 to the Company's Registration Statement on Form
S-1 (Registration No. 33-83310) and incorporated herein by
reference.)
10.19 Employment Agreement dated October 14, 1993 between D. Hunt
Ramsbottom, Jr. and the Company (Filed as Exhibit 10.25 to the
Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.20 Employment Agreement dated October 14, 1993 between Mortimer A.
Kline, III and the Company (Filed as Exhibit 10.26 to the Company's
Registration Statement on Form S-1 (Registration No. 33-83310) and
incorporated herein by reference.)
10.21 First Amendment to Employment Agreement, dated as of September 29,
1994, by and between the Company and Mortimer A. Kline, III (Filed
as Exhibit 10.45 to the Company's Registration Statement on Form
S-1 (Registration No. 33-83310) and incorporated herein by
reference.)
10.24 Senior Subordinated Notes and Warrant Purchase Agreement dated
April 7, 1994 by and between the Company and Chase (Filed as
Exhibit 10.30 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
10.25 $3,000,000 Senior Subordinated Promissory Note dated April 7, 1994
made by the Company in favor of Chase (Filed as Exhibit 10.31 to
the Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.26 Note Purchase Agreement dated as of August 31, 1990 between the
Company and Chase (Filed as Exhibit 10.32 to the Company's
Registration Statement on Form S-1 (Registration No. 33-83310) and
incorporated herein by reference.)
10.27 Form of Indemnification Agreement between the Company and its
directors and executive officers (Filed as Exhibit 10.34 to the
Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.28 Letter dated October 14, 1993 from the Company to certain former
shareholders of New Horizon regarding indemnification (Filed as
Exhibit 10.35 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
10.30 Security Agreement dated as of October 14, 1993 by and between the
Company and BASF (Filed as Exhibit 10.40 to the Company's
Registration Statement on Form S-1 (Registration No. 33-83310) and
incorporated herein by reference.)
10.31 Lease, dated as of August 31, 1990, by and between Central Paint &
Body Supplies, Inc. and NHH Sub, for premises at 1407 West Central,
Orlando, Florida (Filed as Exhibit 10.42 to the Company's
Registration Statement on Form S-1 (Registration No. 33-83310) and
incorporated herein by reference.)
10.32 7% Promissory Note dated December 1, 1993 by the Company in favor
of Sophers Auto Paints & Supply, Inc. (Filed as Exhibit 10.44 to
the Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.33 First Amendment to the 1989 Plan (Filed as Exhibit 10.46 to the
Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.34 Installment Note dated August 1, 1994 by D. Hunt Ramsbottom, Jr. in
favor of the Company in the amount of $21,016.06 (Filed as Exhibit
10.47 to the Company's Registration Statement on Form S-1
(Registration No. 33-83310) and incorporated herein by reference.)
</TABLE>
31
<PAGE> 31
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
10.35 Concurrent Use Agreement dated as of October 14, 1994 between PBE
Warehouse, Inc. and the Company (Filed as Exhibit 10.48 to the
Company's Registration Statement on Form S-1 (Registration No.
33-83310) and incorporated herein by reference.)
10.36 Resignation and Termination Agreement and Release of All Claims,
effective as of August 31, 1994, between John B. Norrie and the
Company (Filed as Exhibit 10.55 to the Company's Annual Report on
Form 10-K for the year ended September 30, 1994 and incorporated
herein by reference.)
10.37 Non-Negotiable Adjustable Promissory Note Subject to Right of
Setoff (Filed as Exhibit 2.2 to the Company's Current Report on
Form 8-K filed January 24, 1995 and incorporated herein by
reference).
10.38 Employment Agreement dated as of May 31, 1995, between the Company
and Courtland D. Gates (Filed as Exhibit 2.4 to the Company's
Current Report on Form 8-K dated May 31, 1995 and incorporated
herein by reference.)
10.39 Agreement Not to Compete, made and entered into as of May 9, 1995
between the Company, SEV Corporation and Courtland D. Gates (Filed
as Exhibit 2.3 to the Company's Current Report on Form 8-K dated
May 31, 1995 and incorporated herein by reference.)
10.40 Non-Negotiable Promissory Note Subject to Right of Setoff payable
to D & S Autocolor, Inc. by the Company (Filed as Exhibit 10.69 to
the Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1995 (File No. 0-25038) and incorporated herein by
reference.)
10.41 Non-Negotiable Promissory Note Subject to Right of Setoff payable
to Wiebe Enterprises, Inc. by the Company (Filed as Exhibit 10.70
to the Company's Quarterly Report on Form 10-Q for the three months
ended June 30, 1995 (File No. 0-25038) and incorporated herein by
reference.)
10.42 Non-Negotiable Promissory Note Subject to Right of Setoff payable
to State Auto Paint & Supply Co., by the Company (Filed as Exhibit
10.71 to the Company's Quarterly Report on Form 10-Q for the three
months ended June 30, 1995 (File No. 0-25038) and incorporated
herein by reference.)
10.43 Incentive Compensation Plan for Senior Executives (Filed as Exhibit
10.44 to the Company's Registration Statement on Form S-1
(Registration No. 33-96256) and incorporated herein by reference.)
10.45 Stock Option Plan for Outside Directors (the "Outside Director
Plan") (Filed as Exhibit 10.46 to the Company's Registration
Statement on Form S-1 (Registration No. 33-96256) and incorporated
herein by reference.)
10.46 Form of Stock Option Agreement under the Outside Director Plan
(Filed as Exhibit 10.47 to the Company's Registration Statement on
Form S-1 (Registration No. 33-96256) and incorporated herein by
reference.)
10.49 Non-Compete Agreement, dated as of August 31, 1990, between NHH Sub
and Robert B. Smithwick, Jr. (Filed as Exhibit 10.50 to the
Company's Registration Statement on Form S-1 (Registration No.
33-96256) and incorporated herein by reference.)
10.50 Amendment No. 1, dated as of September 19, 1995 to the Credit
Agreement dated as of January 6, 1995 between the Company, Heller
and the banks named therein. (Filed as Exhibit 10.50 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1995 and incorporated herein by reference.)
10.51 Underwriting Agreement, dated September 28, 1995 between the
Company, the Selling Stockholders named therein, and Smith Barney,
Inc., PaineWebber Incorporated and William Blair & Company, as
representatives of the several underwriters (Filed as Exhibit 10.51
to the Company's Registration statement on Form S-1 (Registration
No. 33-96256) and incorporated herein by reference.)
**10.52 Amendment No. 2, dated as of July 31, 1996 to the Credit Agreement
dated as of January 6, 1995 between the Company, Heller and the
banks named therein.
**10.53 Third Amendment to Credit Agreement, dated as of September 30,
1996 to the Credit Agreement dated as of January 6, 1995 between
the Company, Heller and the banks named therein.
**11.1 Computation of Per Share Earnings
**21.1 Subsidiaries of the Registrant.
**23.2 Consent of Deloitte & Touche LLP
**24.1 Power of Attorney (included on page 30)
</TABLE>
- -----------
** Filed herewith.
+ The schedules and similar attachments to these exhibits have been omitted
in accordance with Item 601(b)(2) of Regulation S-K. The registrant agrees
to furnish supplementally a copy of any omitted schedule to the Securities
and Exchange Commission upon request.
32
<PAGE> 32
(b) A report on Form 8-K 1996 dated September 20, 1996 was filed during the
fiscal quarter ended September 30, 1996. The Board of Directors approved a
change from a fiscal year that ends on September 30 of each year to a
52/53 week fiscal year that ends on the Saturday closest to September 30
of each year. The change will become effective for the 1997 fiscal year
which began on October 1, 1996 and will end on September 27, 1997.
(c) Included in "Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K,"subsection (a).
(d) None are required to be filed with this report.
33
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.
THOMPSON PBE, INC.
BY: /S/ Mortimer A. Kline, III
--------------------------------
Date: December 31, 1996 Mortimer A. Kline,III
Chairman of the Board,
Chief Executive Officer,
and Secretary
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mortimer A. Kline, III and Charles E.
Barrantes, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report on
Form 10-K has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------ ---------------------------- ------------------
<S> <C> <C>
/S/ Mortimer A. Kline, III Chairman of the Board, Chief December 31, 1996
- ------------------------------------ Executive Officer
Mortimer A. Kline, III and Director
(Principal Executive Officer)
/S/ Charles E. Barrantes Executive Vice President and December 31, 1996
- ------------------------------------ Chief Financial Officer
Charles E. Barrantes (Principal Financial Officer)
/S/ Michael O'Donovan Vice President, Corporate December 31, 1996
- ------------------------------------ Controller
Michael O'Donovan (Principal Accounting Officer)
/S/ Frank C. Alexander Director December 31, 1996
- ------------------------------------
Frank C. Alexander
/S/ David L. Ferguson Director December 31, 1996
- ------------------------------------
David L. Ferguson
/S/ D. Hunt Ramsbottom, Jr. Director December 31, 1996
- ------------------------------------
D. Hunt Ramsbottom, Jr.
/S/ John D. Roach Director December 31, 1996
- ------------------------------------
John D. Roach
/S/ Louis A. Simpson Director December 31, 1996
- ------------------------------------
Louis A. Simpson
</TABLE>
34
<PAGE> 34
THOMPSON PBE, INC.
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
<S> <C>
Consolidated Balance Sheets at September 30, 1995 and 1996 . . . . F-2
Consolidated Statements of Operations for each of the three years
in the period ended September 30, 1996 . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended September 30, 1996 . . . F-4
Consolidated Statements of Cash Flows for each of the three years
in the period ended September 30, 1996 . . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-6
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . F-20
</TABLE>
F-1
<PAGE> 35
THOMPSON PBE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 665 $ 482
Accounts receivable, net of allowance for doubtful
accounts of $592 (1995) and $1,018 (1996) . . . . . . . 14,195 19,741
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 21,877 31,440
Prepaid expenses and other current assets . . . . . . . . 2,080 4,505
Income tax refund receivable . . . . . . . . . . . . . . 1,435
Deferred income taxes . . . . . . . . . . . . . . . . . . 723 1,485
Deferred offering costs . . . . . . . . . . . . . . . . . 945
-------- ----------
Total current assets . . . . . . . . . . . . . . . . 40,485 59,088
Property and equipment, net . . . . . . . . . . . . . . . 4,811 7,430
Intangible assets . . . . . . . . . . . . . . . . . . . . 35,282 57,403
Other assets . . . . . . . . . . . . . . . . . . . . . . 228 263
Deferred income taxes . . . . . . . . . . . . . . . . . . 906 -
Due from officers . . . . . . . . . . . . . . . . . . . . 196 196
-------- ----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 81,908 $ 124,380
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term obligations . . . . . . . . $ 3,759 $ 7,013
Accounts payable . . . . . . . . . . . . . . . . . . . . 8,901 13,280
Accrued expenses and other current liabilities . . . . . 6,208 8,546
-------- --------
Total current liabilities . . . . . . . . . . . . . 18,868 28,839
Long-term obligations . . . . . . . . . . . . . . . . . . 46,084 44,307
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . 64,952 73,146
-------- --------
Commitments and contingencies . . . . . . . . . . . . . .
Stockholders' equity:
Preferred stock, par value $0.001 per share; 3,000,000
shares authorized; none issued and outstanding . . . . .
Common stock, par value $0.001 per share; 25,000,000
shares authorized; 6,391,946 (1995) and 8,692,438
(1996) shares issued and outstanding . . . . . . . . . 6 9
Additional paid in capital -- common stock . . . . . . . 28,277 61,479
Accumulated deficit . . . . . . . . . . . . . . . . . . . (11,327) (10,254)
-------- ---------
Total stockholders' equity . . . . . . . . . . . . 16,956 51,234
-------- ---------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 81,908 $ 124,380
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 36
THOMPSON PBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $ 97,271 $131,827 $178,139
Cost of sales . . . . . . . . . . . . . . . . . . . . . . 60,840 82,562 113,210
-------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . 36,431 49,265 64,929
-------- -------- --------
Selling, general and administrative expenses . . . . . . 28,463 36,996 55,831
Depreciation . . . . . . . . . . . . . . . . . . . . . . 1,143 1,387 1,848
Amortization of intangible assets . . . . . . . . . . . 1,504 1,679 2,267
Interest expense . . . . . . . . . . . . . . . . . . . . 2,546 2,918 2,600
Consulting expense . . . . . . . . . . . . . . . . . . . 102
Interest on Heller stock warrant purchase obligation . . 2,870
Special incentive stock compensation . . . . . . . . . . 1,472
Merger costs . . . . . . . . . . . . . . . . . . . . . . 1,146
-------- -------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . 39,246 42,980 62,546
-------- -------- ---------
Income (loss) before provision for income
taxes and extraordinary item . . . . . . . . . . . . . (2,815) 6,285 2,383
Provision for income taxes . . . . . . . . . . . . . . . (805) (1,310)
-------- -------- ---------
Income (loss) before extraordinary item . . . . . . . . . (2,815) 5,480 1,073
Extraordinary item - early extinguishment of debt . . . . (483) (445)
-------- -------- ---------
Net income (loss) . . . . . . . . . . . . . . . . . . . $ (3,298) $ 5,035 $ 1,073
========= ======== =========
PER SHARE DATA:
Income before extraordinary item . . . . . . . . . . . . $5,480
Redemption of redeemable stock and dividends accrued
on redeemable stock . . . . . . . . . . . . . . . . . . (1,078)
--------
Income available to common stockholders before
extraordinary item . . . . . . . . . . . . . . . . . . 4,402
Extraordinary item - early extinguishment of debt . . . . (445)
--------
Net income available to common stockholders . . . . . . . $ 3,957 $ 1,073
======== =========
Income per share before extraordinary item . . . . . . . $ 0.70 $0.12
Extraordinary item - early extinguishment of debt . . . . $ (0.07)
Net income per share . . . . . . . . . . . . . . . . . . $ 0.63 $0.12
Weighted average number of common and common
equivalent shares outstanding . . . . . . . . . . . . . 6,317 8,850
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 37
THOMPSON PBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SECOND JUNIOR THIRD JUNIOR
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------ ------------------------ ------------------------
ADDITIONAL ADDITIONAL ADDITIONAL
PAR PAID IN PAR PAID IN PAR PAID-IN
SHARES VALUE CAPITAL SHARES VALUE CAPITAL SHARES VALUE CAPITAL
----- ----- ------- ------ ----- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1993 . . . . 150,000 $2 $263 133,000 $1 $331 2,908,060 $29 $ 671
Net income of New Horizon
for the month
ended September 30, 1993 .
Stock purchase warrant . . . 282
Deferred option
compensation . . . . . . .
Accretion of dividends
to redeemable
preferred stock . . . . . .
Accretion to Class A
Common Stock . . . . . . .
Net loss . . . . . . . . . .
------- --- ---- ------- -- ---- --------- --- ------
Balance,
September 30, 1994 . . . . 150,000 $2 $263 133,000 $1 $331 2,908,060 $29 $ 953
Issuance of common stock
in initial public
offering . . . . . . . . . 2,450,000 2 22,713
Class A Common Stock
redemption premium . . . . (1,000)
Exercise of
Heller Warrant . . . . . . 365,609 3,740
Recapitalization and
conversion of preferred
stock into common
stock . . . . . . . . . . . (150,000) (2) (263)(133,000) (1) (331) 622,600 (25) 622
Reclassification of
deferred option
compensation and capital
charge arising
from combination . . . . . . 858
Exercise of stock options,
net of retirement of
outstanding stock . . . . . 45,677
Issuance of warrants
in connection
with an acquisition . . . . 100
Tax effect of
exercise of options . . . . 291
Net income . . . . . . . . .
------- --- ---- ------- -- ---- --------- --- ------
Balance,
September 30, 1995 . . . . - $ - $ - - $ - $ - 6,391,946 $6 $28,277
Issuance of common
stock in secondary
public offering . . . . . . 2,271,475 3 32,953
Exercise of stock options . . 29,017 200
Tax effect of exercise
of options . . . . . . . . 49
Net income . . . . . . . . .
------- --- ---- ------- -- ---- --------- --- ------
Balance,
September 30, 1996 . . . . - $ - $ - - $ - $ - 8,692,438 $ 9 61,479
======= === ==== ======= == ==== ========= === ======
</TABLE>
<TABLE>
<CAPTION>
CAPITAL
DEFERRED CHARGE
OPTION FROM ACCUMULATED
COMPENSATION COMBINATION DEFICIT TOTAL
------------ ----------- ------- --------
<S> <C> <C>
Balance,
September 30, 1993 . . . . $(614) $(12,170) $(11,487)
Net income of New Horizon
for the month
ended September 30, 1993 . 2 2
Stock purchase warrant . . . 282
Deferred option
compensation . . . . . . . $1,472 1,472
Accretion of dividends
to redeemable
preferred stock . . . . . . (614) (614)
Accretion to Class A
Common Stock . . . . . . . (282) (282)
Net loss . . . . . . . . . . (3,298) (3,298)
------ ----- -------- --------
Balance,
September 30, 1994 . . . . $1,472 $(614) $(16,362) $(13,925)
Issuance of common stock
in initial public
offering . . . . . . . . . 22,715
Class A Common Stock
redemption premium . . . . (1,000)
Exercise of
Heller Warrant . . . . . . 3,740
Recapitalization and
conversion of preferred
stock into common
stock . . . . . . . . . . .
Reclassification of
deferred option
compensation and capital
charge arising
from combination . . . . . (1,472) 614
Exercise of stock options,
net of retirement of
outstanding stock . . . . .
Issuance of warrants
in connection
with an acquisition . . . . 100
Tax effect of
exercise of options . . . . 291
Net income . . . . . . . . . 5,035 5,035
------ ----- -------- --------
Balance,
September 30, 1995 . . . . $ - $ - $(11,327) $16,956
Issuance of common
stock in secondary
public offering . . . . . . 32,956
Exercise of stock options . . 200
Tax effect of exercise
of options . . . . . . . . 49
Net income . . . . . . . . . 1,073 1,073
------ ----- -------- --------
Balance,
September 30, 1996 . . . . . $ - $ - $(10,254) $51,234
====== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 38
THOMPSON PBE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $(3,298) $ 5,035 $ 1,073
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 2,647 3,066 4,115
Interest on Heller Warrant purchase obligation . . . . . . . 2,870
Special incentive stock compensation . . . . . . . . . . . . 1,472
Amortization of discount on debt . . . . . . . . . . . . . . 116
Deferred income taxes . . . . . . . . . . . . . . . . . . . . (1,629) 144
Loss (gain) on sale of property and equipment . . . . . . . . (11)
Extraordinary item - early extinguishment of debt . . . . . . 445
Changes in operating assets and liabilities, net of
effect of business acquisitions (Note 14) . . . . . . . . . (501) (4,194) (6,749)
------- ------- -------
Net cash provided by (used by) operating activities . . . . . 3,295 2,723 (1,417)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in business acquisitions . . . . . . . . . . . . (6,966) (23,241) (22,086)
Proceeds from sale of property and equipment . . . . . . . . . 66
Purchases of property and equipment . . . . . . . . . . . . . (1,093) (1,681) (1,866)
Increases in other assets . . . . . . . . . . . . . . . . . . . (691) (22) (34)
------- ------- -------
Net cash used in investing activities . . . . . . . . . . . . (8,684) (24,944) (23,986)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving line
of credit . . . . . . . . . . . . . . . . . . . . . . . . . . 9,333 (4,782) 5,476
Net proceeds from sale of common stock . . . . . . . . . . . . 23,708 33,153
Repayment of senior debt from offering proceeds . . . . . . . . (33,385)
Issuance of long-term obligations . . . . . . . . . . . . . . 6,526 27,985 24,475
Repayment of long-term obligations . . . . . . . . . . . . . . (8,951) (13,131) (4,202)
Redemption of redeemable stock . . . . . . . . . . . . . . . . (10,704)
Financing fees . . . . . . . . . . . . . . . . . . . . . . . . (754) (297)
Increases in note receivable from shareholder . . . . . . . . (250)
Increases in deferred offering costs . . . . . . . . . . . . . (841)
------- ------- -------
Net cash provided by financing activities . . . . . . . . . 5,817 22,322 25,220
------- ------- -------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . 428 101 (183)
New Horizon cash flows for the month ended
September 30, 1993 . . . . . . . . . . . . . . . . . . . . . . (184)
Cash, beginning of year . . . . . . . . . . . . . . . . . . . . . 320 564 665
------- ------- -------
Cash, end of year . . . . . . . . . . . . . . . . . . . . . . . . $ 564 $ 665 $ 482
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 39
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND MERGER
The Company is an aftermarket distributor of automotive paint and related
supplies to the automotive collision repair industry. At September 30, 1996,
the Company operated a total of 101 distribution sites and four warehouses
located in eleven states. The Company is highly dependent on a small number
of key suppliers. For its most recent fiscal year, the Company regularly
served approximately 12,000 customers, none of which accounted for more than
1% of the Company's sales. The Company grants credit to substantially all of
its customers.
Contemporaneous with the closing of Thompson PBE, Inc.'s initial public
offering on November 16, 1994, Thompson Capital Corporation reincorporated in
the State of Delaware by merging with and into Thompson PBE, Inc. with Thompson
PBE, Inc. as the surviving company (the "Reincorporation Merger"). Prior to
the Reincorporation Merger, Thompson PBE, Inc. had no operations. References
to Thompson PBE, Inc. ("Thompson") include the operations of the predecessor,
Thompson Capital Corporation, unless the context indicates otherwise.
On October 14, 1993, Thompson and New Horizon Auto Paint Holdings, Inc.
("New Horizon") (together referred to herein as the "Company") consummated an
Agreement and Plan of Merger (the "Plan of Merger") pursuant to which Thompson
was the surviving corporation in a merger with New Horizon (the "New Horizon
Merger"). After giving effect to the New Horizon Merger, Thompson succeeded to
all of the business, assets and liabilities of New Horizon. The consolidated
financial statements give retroactive effect to the New Horizon Merger, which
was accounted for using the pooling-of-interests method and, as a result, the
financial position, results of operations and cash flows are presented as if
the combining companies had been consolidated for all periods presented. The
consolidated statements of stockholders' equity reflect the Thompson capital
stock issued to effect the New Horizon Merger as outstanding for the same
periods as the underlying capital stock of New Horizon.
Thompson raised approximately $25.1 million in gross proceeds (after
payment of underwriting discounts) in its initial public offering which closed
in November 1994. In that offering, Thompson issued and sold 2,450,000 shares
of common stock (including the full 330,000 shares covered by the underwriters'
overallotment option), and a selling stockholder sold 80,000 shares. The net
proceeds from the offering received by Thompson were used to repay debt and
retire its various classes of redeemable capital stock. The early
extinguishment of debt arising from use of the offering proceeds resulted in a
non-cash extraordinary charge in the amount of $445,000 related to the
write-off of certain deferred financing fees. Concurrent with its initial
public offering, Thompson's convertible preferred stock was converted into
shares of common stock, and the Heller Warrant (see Note 7) was exercised in
full. As a result of the reincorporation and recapitalization, only one class
of common stock is authorized and outstanding.
In October 1995, Thompson raised approximately $34.3 million in gross
proceeds (after payment of underwriting discounts) in a secondary public
offering. In that offering, Thompson issued and sold 2,271,475 shares of
common stock (including the full 271,475 shares covered by the underwriters'
overallotment option), and selling stockholders sold 1,178,525 shares. The net
proceeds from the offering received by Thompson were used to repay senior debt.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The accompanying consolidated financial
statements include the accounts of Thompson PBE, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Inventory -- Inventory is stated at the lower of average cost or market.
Inventory consists of the direct costs of goods purchased for resale.
Intangible Assets -- Intangible assets are recorded at cost and are
amortized using the straight-line method over their estimated useful lives of
2.5 years for covenants not to compete and prepaid consulting fees and 15-30
years for goodwill. The recoverability of goodwill attributable to the
Company's acquisitions is analyzed annually based on actual and projected
levels of profitability of the locations acquired on an undiscounted basis.
Debt issuance costs are amortized using the straight-line method over the term
of the related debt.
F-6
<PAGE> 40
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment -- Property and equipment are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the related assets. Useful lives range from three to seven years for vehicles,
furniture, fixtures and equipment. Leasehold improvements are amortized over
the lesser of the useful life of the asset or the remaining lease term.
Revenue Recognition -- The Company recognizes revenues from product sales
at the time of delivery.
Income Taxes -- Prior to October 1, 1993, deferred income taxes were
provided for differences between income for financial statement purposes and
income for federal and state income tax purposes. Effective October 1, 1993,
the Company changed its method of accounting for income taxes to conform with
the requirements of Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." SFAS No. 109 requires the recognition of
deferred tax assets and liabilities based on temporary differences between the
tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements that will result in taxable or deductible
amounts in future years. The adoption of SFAS No. 109 had no effect on the
Company's results of operations for the year ended September 30, 1994, nor was
there any cumulative effect at October 1, 1993.
Recent Accounting Pronouncements -- In October 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123, Accounting for Stock
Based Compensation. This statement requires the determination of compensation
expense equal to the fair value of the option grant to be estimated, using
accepted option pricing formulas, when the option is granted. The computed
fair value of option grants to non-employees must be amortized over the vesting
period of the option. The effects of amortizing the computed fair value of
option grants to employees may either be charged to the statement of operations
or set forth as pro forma information in the footnotes to the financial
statements, depending on the method elected by the Company upon adoption of the
standard. The Company will adopt the disclosure requirements of Statement No.
123 in its fiscal year ending September 27, 1997, but, as permitted, does not
intend to charge to the statement of operations the effects of amortizing the
fair value of options granted to employees.
In March 1995, the Financial Accounting Standard Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets To
Be Disposed Of" which requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicatate that the carrying amount
of an asset may not be recoverable. If the sum of the expecterd undiscounted
future cash flows from the use of the asset is less than the carrying amount of
the asset, an impairment loss is recognized. The impairment loss is measured
based on the fair value of the assets. The Company will adopt SFAS NO. 121 in
the first quarter of its fiscal year ending September 27, 1997 and, based on
current circumstances, does not believe the effect of adoption will have a
material effect on the consolidated financial statements.
Earnings Per Share - Net income per share information is computed using
the weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options and warrants using the treasury
stock method. Under this method, primary net income per share is computed as
if options and warrants were exercised at the beginning of the period (or at
time of issuance, if later) and as if the funds obtained thereby were used to
purchase common stock at the average fair value per common share during the
period. As a result of the Company's November 1994 reincorporation and
recapitalization, earnings per share for periods prior to 1995 are not
meaningful, and are therefore not presented.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. The ultimate resolution
of such estimates and assumptions may vary from the estimates and assumptions
used in the preparation of financial statements.
F-7
<PAGE> 41
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS
The Company's acquisition strategy is to continue to make add-on
acquisitions to augment its Southeast Division (comprised of its operations in
Alabama, Florida, and Georgia), Southern California Division, Northern
California Division, Rocky Mountain Division (comprised of its Arizona and
Colorado operations), Mid-Atlantic Division (comprised of its North Carolina,
South Carolina and Virginia operations) and Northeast Division (comprised of
its operations in Massachusetts and Connecticut) and to capitalize on
opportunities to enter new geographic markets. Since its inception in May
1989, the Company has made a total of 50 acquisitions, including 14
acquisitions during the fiscal year ended September 30, 1996. These
acquisitions were accounted for in accordance with the purchase method, and
accordingly, the purchase consideration has been allocated first to the fair
value of identifiable assets acquired and liabilities assumed, and the
remaining amounts allocated to goodwill. The following table summarizes the
acquisition transactions of the Company in each of the periods presented (in
thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net assets acquired . . . . . . . . . . . . . . . . . . . $ 5,167 $11,313 $10,512
Goodwill and covenants not to compete . . . . . . . . . . 5,788 22,529 24,080
---------- ---------- ---------
10,955 33,842 34,592
Less liabilities assumed . . . . . . . . . . . . . . . . 1,434 4,322 4,735
---------- ---------- ---------
Purchase price . . . . . . . . . . . . . . . . . . . . . 9,521 29,520 29,857
Seller acquisition debt . . . . . . . . . . . . . . . . . 2,555 6,279 7,771
Issuance of preferred stock . . . . . . . . . . . . . . . - - -
---------- ---------- ---------
Purchase price net of acquisition debt . . . . . . . . . $ 6,966 $23,241 $22,086
========== ========== =========
Number of acquisitions . . . . . . . . . . . . . . . . . 4 16 14
</TABLE>
In connection with certain of the Company's fiscal year 1995 acquisitions,
the Company agreed to pay a total of approximately $1,600,000 of contingent
consideration to the former owners of the businesses acquired. The amount of
consideration will be dependent upon the acquired companies retention of sales,
as defined, for specified periods subsequent to the closing of the acquisitions
and achievement of other specified objectives. In addition, warrants to
purchase up to 170,000 shares of Thompson's Common Stock at an exercise price
of $21.25 per share are expected to become issuable to the seller of an
acquired business in December 1996.
In connection with certain of the Company's fiscal year 1996 acquisitions,
the Company agreed to pay a total of approximately $3,700,000 of contingent
consideration to the former owners of the businesses acquired. The amount of
consideration will be dependent upon the acquired companies retention of sales,
as defined, for specified periods subsequent to the closing of the acquisitions
and achievement of other specified objectives. In addition, in connection with
the acquisition of a business during the fiscal year ended September 30, 1996,
the Company issued to the seller a five year, adjustable convertible promissory
note subject to right of set-off in the initial principal amount of $2,125,000.
This note is convertible under certain circumstances into shares of the
Company's Common Stock at an initial conversion price of $15.47 per share,
subject to adjustment. In addition to customary anti-dilution adjustments,
the conversion price will be increased at the rate of 7% per year commencing
in April 1998.
F-8
<PAGE> 42
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS (CONTINUED)
The following table sets forth the unaudited pro forma results of operations
for each period in which acquisitions occurred as if the acquisitions were
consummated at the beginning of the preceding period. The unaudited pro forma
results of operations data gives effect to the Company's acquisitions during the
fiscal year ended September 30, 1996, and also gives effect to certain
acquisitions during the fiscal year ended September 30, 1995, including the
acquisition of the stock of Arnold Paint Company and its subsidiary, the
acquisition of substantially all of the assets of SEV Corporation, and to other
asset acquisitions, consisting of D & S Auto Color, Inc., Border Paint & Supply,
Inc., Auto Paint Specialties, Inc., Refinishers Supply and Equipment, Inc. and
F.A. Heckendorf. Additional acquisitions made by the Company since October 1,
1993 are either already reflected in the historical statement of operations of
the Company or were not significant. The unaudited pro forma results of
operations data consists of the historical results of the Company as adjusted to
give effect to (i) a decrease in selling, general and administrative expenses
for amounts of compensation paid to former owners or employees of acquired
businesses who are no longer employed by the Company; (ii) amortization of the
excess of purchase price over net assets acquired; and (iii) the interest
expense attributable to debt incurred to finance the acquisitions net of the
reduction of interest expense attributable to debt and other liabilities that
were not assumed by the Company. As a result of the Company's November 1994
reincorporation and recapitalization, the unaudited pro forma weighted average
number of common and common equivalent shares outstanding for periods prior to
1995 are not meaningful, and are therefore, not presented. The unaudited pro
forma results of operations do not purport to represent what the Company's
actual results of operations would have been had such transactions in fact
occurred on such dates.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
PRO FORMA RESULTS OF
OPERATIONS DATA (UNAUDITED):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . $138,975 $193,738 $202,888
Income (loss) before extraordinary item . . . . . . . . . (2,865) 6,390 2,795
Net income (loss) . . . . . . . . . . . . . . . . . . . (3,348) 5,945 1,314
Income per share before extraordinary item . . . . . . . $1.01 $0.15
Net income per share . . . . . . . . . . . . . . . . . . $0.94 $0.15
Pro forma weighted average number of common and
common equivalent shares . . . . . . . . . . . . . . . 6,317 8,850
</TABLE>
Supplementary pro forma results of operations data (unaudited) presented
below assumes that the acquisitions described above were consummated at the
beginning of the preceding period and gives effect to the pro forma adjustments
discussed above, and also gives effect to i) the Company's November 1994 initial
public offering and recapitalization and the use of the proceeds to the Company
therefrom, and, ii) the Company's October 1995 secondary offering of Common
Stock and the use of the proceeds to the Company therefrom, in each case as if
such transactions had occurred on October 1, 1993. Supplementary pro forma per
share data also reflects an assumed reduction of interest expense, net of
applicable income tax effects, arising from the assumed use of proceeds of the
offerings in November 1994 and October 1995.
F-9
<PAGE> 43
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. BUSINESS ACQUISITIONS (CONTINUED)
Supplementary pro forma weighted average number of common and common
equivalent shares (unaudited) used in the calculation of such per share data
assumes the issuance of Common Stock from the Company's October 1995 secondary
offering occurred in prior periods to the extent that the use of proceeds from
that offering would have resulted in a reduction of debt assumed to be
outstanding under the Company's primary credit facility.
<TABLE>
<CAPTION>
Year Ended
September 30,
1995
----
<S> <C>
SUPPLEMENTARY PRO FORMA RESULTS OF
OPERATIONS DATA (UNAUDITED):
Supplementary pro forma income
before extraordinary item . . . . . . . . . . . . . . $7,936
Supplementary pro forma extraordinary items - early
extinguishment of debt . . . . . . . . . . . . . . . . (445)
------
Supplementary pro forma net income . . . . . . . . . . . $7,491
======
Supplementary pro forma income per share
before extraordinary item . . . . . . . . . . . . . . . $ 0.89
Supplementary pro forma extraordinary item - early
extinguishment of debt . . . . . . . . . . . . . . . . $(0.05)
Supplementary pro forma net income per share . . . . . . $ 0.84
Supplementary pro forma weighted average number of
common and common equivalent shares . . . . . . . . . . 8,874
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------
1995 1996
-------- ---------
<S> <C> <C>
Covenants not to compete . . . . . . . . . . . . . . . . $ 1,134 $ 201
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . 37,096 61,176
Debt issuance costs and other . . . . . . . . . . . . . . 861 1,160
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . 39,091 62,537
Less accumulated amortization . . . . . . . . . . . . . . 3,809 5,134
-------- ---------
Intangible assets -- net . . . . . . . . . . . . . . . . $35,282 $57,403
======== =========
</TABLE>
Intangible assets and the related accumulated amortization are removed from the
accounts when fully amortized.
F-10
<PAGE> 44
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------
1995 1996
--------- ----------
<S> <C> <C>
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . $2,867 $ 3,667
Furniture, fixtures and equipment . . . . . . . . . . . . 2,518 3,216
Leasehold improvements . . . . . . . . . . . . . . . . . 1,662 2,044
Computer equipment . . . . . . . . . . . . . . . . . . . 2,729 4,952
--------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . 9,776 13,879
Less accumulated depreciation and amortization . . . . . 4,965 6,449
--------- ----------
Property and equipment -- net . . . . . . . . . . . . . . $4,811 $7,430
========= ==========
</TABLE>
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
---------------------
1995 1996
----- ------
<S> <C> <C>
Salaries and wages . . . . . . . . . . . . . . . . . . . $ 853 $1,984
Other . . . . . . . . . . . . . . . . . . . . . . . . 5,355 6,562
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . $6,208 $8,546
====== ======
</TABLE>
7. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
1995 Credit Agreement with Heller Financial, Inc. as
agent and lender, bearing interest at an effective annual rate
of 7.87% and 7.08% at September 30, 1995 and
1996, respectively . . . . . . . . . . . . . . . . . . $40,288 $36,855
Obligations under various covenant not to compete
agreements, payable through September 1999, net of
unamortized discounts based on imputed interest rates
ranging from 8.5% to 12% . . . . . . . . . . . . . . . 423 340
Notes payable to sellers and capital lease obligations, bearing
interest ranging from 5% to 12%, payable through 2005 . 9,132 14,125
-------- --------
Total long-term obligations . . . . . . . . . . . . . . . 49,843 51,320
Less current portion of long-term obligations . . . . . . 3,759 7,013
-------- --------
Total long-term obligations, less current portion . . . . $46,084 $44,307
======== ========
</TABLE>
On January 6, 1995, the Company entered into a new credit agreement with
Heller Financial, Inc. as agent and lender (the "1995 Credit Agreement"), which
expires January 2002. The 1995 Credit Agreement, as amended, provides for
borrowings in an aggregate amount not to exceed $75 million, consisting of (i)
a revolving credit facility of $18.0 million,
F-11
<PAGE> 45
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
limited to a borrowing base, (ii) a term loan of $30.0 million, and (iii) an
acquisition loan facility of $27.0 million. Advances under the 1995 Credit
Agreement bear interest based upon either a "base rate" or LIBOR at the
election of the Company, plus a spread which is determined based on the
Company's ratio of senior debt to operating cash flow for the prior twelve
months.
7. LONG-TERM OBLIGATIONS (CONTINUED)
As of September 30, 1996, borrowings under the 1995 Credit Agreement bore
interest at an effective interest rate of 7.08% per annum. Borrowings under
the 1995 Credit Agreement are secured by substantially all of the Company's
assets, and such agreement contains significant restrictive covenants which,
among other things, require the Company to maintain certain financial ratios
and which limit capital expenditures, the incurrence of indebtedness and the
payment of cash dividends. Certain of the financial covenant ratios and
certain other provisions of the 1995 Credit Agreement were amended effective
September 30, 1996. At September 30, 1996, the Company was near the amended
limit of several covenant ratios. At September 30, 1996, the Company had $11.7
million available to it under its revolving credit facility.
The 1995 Credit Agreement requires annual prepayments in an amount equal
to 50% of the Company's excess cash flow (as defined) commencing in 1997 and
annual repayments, payable quarterly, of the $30.0 million term loan of: $2.3
million in fiscal 1997, $3.5 million in fiscal 1998, $5.3 million in fiscal
1999, $6.2 million in fiscal 2000, $7.0 million in fiscal 2001 and $5.2 million
in fiscal 2002. Annual repayments of the acquisition loan, payable quarterly,
commence in fiscal 1998 based on the following percentages of the aggregate
amount of acquisition loans extended to the Company as of July 1998: 3.75% in
fiscal 1998, 16.25% in fiscal 1999, 22.50% in fiscal 2000, 31.25% in fiscal 2001
and 26.25% in fiscal 2002. At September 30, 1996, the Company had approximately
$852,000 in deferred fees and other origination costs, net of related
accumulated amortization, related to the 1995 Credit Agreement.
In connection with the execution of a loan agreement with Heller in May
1989, the Company's predecessor issued a warrant to purchase 382,609 shares of
its Class B common stock at $0.45 per share (the "Heller Warrant"). The
warrant contained a put feature that required the Company to repurchase the
warrant at the option of the holder. The warrant was initially valued at
$337,000, and the Company accreted interest so as to provide a liability equal
to the warrant's estimated repurchase value. Interest accreted related to the
stock warrant purchase obligation was $2,870,000 in the year ended September
30, 1994. The Heller Warrant was exercised and the put feature was terminated
in November 1994 concurrent with the Company's initial public offering.
In connection with the issuance of a senior subordinated note to Chase
Venture Capital Associates, L.P. ("Chase"), the Company issued a detachable
stock purchase warrant to Chase. The warrant gives Chase the right to purchase
a specified amount of the Company's Class C common stock for $0.005 per share.
The number of shares purchasable was based on the amount of the note drawn by
the Company as a percentage of the total $5 million available, the number of
Class C common shares outstanding, including the shares assumed to be
outstanding after giving effect to the exercise of the warrants, and the length
of time borrowings remained outstanding. Based on the $3,000,000 borrowed by
the Company, Chase received a warrant to purchase 47,806 shares of the
Company's Class C common stock. The warrant was valued at $282,000,
representing the difference between the aggregate exercise price and the
estimated fair market value of the Company's Class C common stock purchasable
under the warrant. The amount allocated to these warrants is included in
additional paid-in capital in the accompanying consolidated financial
statements and the resulting discount on the note was being amortized over the
life of the senior subordinated note, resulting in an effective interest rate
of 12.7%. In connection with the Company's initial public offering in November
1994, the senior subordinated note payable was repaid, the unamortized portion
of the discount on the note was charged to income as a component of the
extraordinary item -- early extinguishment of debt and the warrant became
exercisable for a like number of shares of the Company's Common Stock.
Prior to the New Horizon Merger, New Horizon had a revolving line of credit
agreement and several term notes with Sanwa Business Credit ("Sanwa"). New
Horizon was obligated to pay a fee to Sanwa of 5% of adjusted earnings before
tax, as defined, for each year through 1995 subject to a total minimum fee of
$500,000. The amount was recorded at the discounted present value of the
minimum fee obligation. The term notes and revolving line of credit agreement
were repaid in October 1993 in connection with New Horizon Merger.
Accordingly, the Company paid a fee of $563,000 and wrote off the unamortized
deferred financing costs related to the Sanwa loans, resulting in an
extraordinary charge upon early extinguishment of debt of $483,000 for the
fiscal year ended September 30, 1994.
F-12
<PAGE> 46
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG TERM OBLIGATIONS (CONTINUED)
Scheduled payments of long-term obligations at September 30, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . $ 7,013
1998 . . . . . . . . . . . . . . . . . . . 14,142
1999 . . . . . . . . . . . . . . . . . . . 8,220
2000 . . . . . . . . . . . . . . . . . . . 8,097
2001 . . . . . . . . . . . . . . . . . . . 8,146
Thereafter . . . . . . . . . . . . . . . . 5,702
-------
Total . . . . . . . . . . . . . . . . . . $51,320
=======
</TABLE>
8. INCOME TAXES
The components of the Company's provision for income taxes consist of the
following (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------
1994 1995 1996
------- ------ --------
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . $1,901 $ 914
State . . . . . . . . . . . . . . . . . . . . . . . . . . 533 252
------ --------
Total current . . . . . . . . . . . . . . . . . . . . 2,434 1,166
Deferred . . . . . . . . . . . . . . . . . . . . . . (518) 835 144
Change in valuation allowance . . . . . . . . . . . . . . . 518 (2,464) -
------- ------ --------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 805 $1,310
======= ====== ========
</TABLE>
At October 1, 1993 the Company recognized deferred tax assets of $1,946,000
with a corresponding valuation allowance upon the adoption of SFAS 109 (see
Note 2.)
The Company's effective income tax rate differs from the federal statutory
income tax rate applied to income before provision for income taxes due to the
following:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate . . . . . . . . . . . . . (35.0)% 35.0% 35.0%
Increases (reductions) in taxes resulting from:
State taxes, net of federal benefit . . . . . . . . . . 6.0 7.2
Amortization of non-deductible intangible assets . . . . 4.2 2.7 11.7
Non-deductible interest on Heller Warrant . . . . . . . 23.9
Nondeductible merger costs . . . . . . . . . . . . . . . 11.3
Nondeductible stock option costs . . . . . . . . . . . 12.6
Changes in valuation allowance . . . . . . . . . . . . . (18.4) (39.2)
Other . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 8.3 1.1
------ ------- -----
Effective tax rate . . . . . . . . . . . . . . . . . . . . 0.0% 12.8% 55.0%
====== ======= =====
</TABLE>
F-13
<PAGE> 47
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES (CONTINUED)
The tax effects of temporary differences giving rise to deferred tax assets are
as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------
1995 1996
---- ----
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable . . . . . . . . . . . . . . . . . . . $261 $ 902
Intangible assets . . . . . . . . . . . . . . . . . . . . 689 87
Accrued expenses . . . . . . . . . . . . . . . . . . . . 174 190
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 288 349
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 217 (43)
------- --------
Net deferred tax assets . . . . . . . . . . . . . . . . . . $1,629 $1,485
====== ======
</TABLE>
In the year ended September 30, 1995 the Company reduced the valuation
allowance to the extent that deferred tax assets were anticipated to be
realizable.
Tax benefits arising from the exercise of stock options provide the Company
a tax deduction equal to the difference between the exercise price and the fair
market value of the stock on the date of exercise. The tax effect of the
deduction is excluded from the provision (benefit) for income taxes and
credited directly to additional paid in capital. For the year ended September
30, 1995 and 1996, tax benefits credited directly to stockholders' equity
totaled $291,000 and $49,000, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases substantially all of its operating and office facilities
under various operating and capital leases expiring through 2002. Most of
these leases provide for increases in rents based on the Consumer Price Index
and include renewal options ranging from two to ten years. Future minimum lease
payments under such leases as of September 30, 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- --------
<S> <C> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 619 $4,420
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 3,995
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 3,315
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 1,933
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 454
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . 38
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . 1,434 $ 14,155
========
Less amount representing interest . . . . . . . . . . . . . 113
--------
Present value of minimum lease payments . . . . . . . . . . 1,321
Less current portion of obligations under
capital lease obligations . . . . . . . . . . . . . . . . 652
--------
Long-term portion . . . . . . . . . . . . . . . . . . . . . $ 669
========
</TABLE>
Total rental expense included in the accompanying statements of operations
was $1,593,000, $2,544,000 and $4,026,000 for the years ended September 30,
1994, 1995 and 1996, respectively.
F-14
<PAGE> 48
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the ordinary course of business, the Company is subject to examination of
its sales tax returns. At September 30, 1996 a liability to the Florida
Department of Revenue for sales and use taxes was recorded to reflect the
results of an audit of the sales and operations of a predecessor company for the
period September 1989 through August 1994. The Florida Department of Revenue is
currently claiming amounts due of approximately $1.8 million. The Company is
contesting the manner in which the audit was conducted and the alleged
deficiency calculated and assessed. The Company recorded a charge to earnings
during the year ended September 30, 1996 to establish a reserve sufficient for
the assessed amount, although the ultimate amount to be paid can not yet be
predicted pending the outcome of the Company's efforts to appeal this matter.
Management presently believes that all other existing claims will ultimately be
resolved without a material effect on the Company's financial position.
The Company has three agreements with warehouse suppliers for the purchase
of certain of its paint and non-paint supplies in specified geographic
locations. The agreements provide for aggregate specified minimum purchases of
$8,100,000 in each of the fiscal years 1997 and 1998, $7,800,000 in each of the
fiscal years 1999 and 2000, and $2,800,000 in each of the fiscal years 2001
through 2003. The agreements expire in 1999, 2000 and 2003.
10. REDEEMABLE STOCK
A portion of the net proceeds from the Company's November 1994 initial
public offering was used to redeem all outstanding shares of Company's
redeemable stock. As a result of the reincorporation and recapitalization
concurrent with the Company's initial public offering, only one class of common
stock is authorized and outstanding. At September 30, 1995, there were no
redeemable or preferred stock shares outstanding.
The following sets forth activity for each class of redeemable stock for
each of the two years ended September 30, 1995 (in thousands, except share
data):
<TABLE>
<CAPTION>
First Junior
Senior Preferred Stock Senior B Preferred Stock Preferred Stock
-------------------------- -------------------------- --------------------------
Additional Additional Additional
Par Paid-In Par Paid-In Par Paid-In
Shares Value Capital Shares Value Capital Shares Value Capital
------ ----- ------- ------ ----- ------- ------ ----- -------
<S> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1993 . . . . . . 633,750 $6 $1,306 48,318 $48 $4,739 704,348 $7 $1,070
Accretion of dividends to
redeemable preferred stock . . 132 376 106
Accretion to Class A
common stock . . . . . . . . .
Note receivable
from shareholder . . . . . . .
- - -
BALANCE,
SEPTEMBER 30, 1994 . . . . . . 633,750 6 1,438 48,318 48 5,115 704,348 7 1,176
Accretion to redemption
amount of preferred stock
and Class A common . . . . . . 72 78 27
Redemption of preferred
and common stock . . . . . . . (633,750) (6) (1,510) (48,318) (48) (5,193) (704,348) (7) (1,203)
-------- --- ------ ------- --- ------ -------- --- ------
BALANCE,
SEPTEMBER 30, 1995 . . . . . . - $- $ - - $ - $ - - $ - $ -
======== === ====== ====== === ====== ======== ==== ======
</TABLE>
<TABLE>
<CAPTION>
Class A
Common Stock
-------------------------- Note
Additional Receivable
Par Paid-In from
Shares Value Capital Shareholder Total
------ ----- ------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1993 . . . . . . 4,917,645 $49 $2,583 ($750) $9,058
Accretion of dividends to
redeemable preferred stock . . 614
Accretion to Class A
common stock . . . . . . . . . 282 282
Note receivable
from shareholder . . . . . . . (250) (250)
- --- ---- ----
BALANCE,
SEPTEMBER 30, 1994 . . . . . . 4,917,645 49 2,865 (1,000) 9,704
Accretion to redemption
amount of preferred stock
and Class A common . . . . . . (177)
Redemption of preferred
and common stock . . . . . . . (4,917,645) (49) (2,688) 1,000 (9,704)
---------- --- ------ ----- ------
BALANCE,
SEPTEMBER 30, 1995 . . . . . . - $ - $ - $ - $ -
========== === ====== ===== ======
</TABLE>
F-15
<PAGE> 49
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS
The Company had two stock option plans in effect at September 30, 1996: the
1994 Stock Option Plan, as amended (the "1994 Plan"), and the Outside Director
Stock Option Plan (the "1995 Director Plan"). The 1989 Stock Option Plan (the
"1989 Plan") was terminated in August 1995.
1994 Plan
The Company has reserved 965,000 shares of Common Stock for issuance under
the 1994 Plan. Options may be granted under the 1994 Plan at an exercise price
not less than the fair market value of the shares on the date of grant.
Options granted under the 1994 Plan generally have terms of five to ten years,
and become exercisable in three equal annual installments from the date of
grant.
The following summarizes activity in the 1994 plan through September 30,
1996:
<TABLE>
<CAPTION>
Aggregate
Number of Range of Exercise
Options Option Price Price
--------- ------------ ---------
(in thousands)
<S> <C> <C> <C> <C>
Granted and outstanding,
September 30, 1994 . . . . . . . 300,300 $ 5.91 - $ 6.50 $1,829
Granted . . . . . . . . . . . . 419,966 $11.00 - $17.25 5,772
Exercised . . . . . . . . . . . (35,964) $5.91 - (213)
Canceled . . . . . . . . . . . (5,301) $5.91 - $11.00 (47)
--------- --------
Outstanding,
September 30, 1995 . . . . . . 679,001 $ 5.91 - $17.25 $7,341
Granted . . . . . . . . . . . . 94,000 $9.50 - $14.00 1,193
Exercised . . . . . . . . . . . (29,017) $5.91 - $11.00 (200)
Canceled . . . . . . . . . . . (78,868) $5.91 - $16.75 (948)
--------- --------
Outstanding,
September 30, 1996 . . . . . . 665,116 $ 5.91 - $17.25 $ 7,386
========= ========
</TABLE>
At September 30, 1995 and 1996, options to purchase 63,802 and 319,938
shares, respectively, were exercisable under the 1994 Plan.
Outside Director Stock Option Plan
In August 1995, the Board of Directors authorized the establishment of a
stock option plan for outside directors (the "1995 Director Plan") pursuant to
which options to acquire up to 100,000 shares may be granted, which plan was
approved by stockholders in February 1996. The 1995 Director Plan provides for
specified grants of stock options to outside directors upon their initial
election to the board of Directors, and provides for annual grants on a formula
basis upon their reelection. The exercise price of all such options will be
the last reported sales price of the Common Stock on the Nasdaq Stock Market on
the date immediately prior to the date of grant. Options granted under the 1995
Director Plan will be for terms of ten years, and will vest one third at the
end of the first, second and third anniversaries of the
F-16
<PAGE> 50
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
date of grant. As of September 30, 1996, the Company had granted options to
acquire 40,000 shares of Common Stock under the 1995 Directors Plan at exercise
prices ranging from $13.00 to $17.00.
F-17
<PAGE> 51
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK OPTION PLANS (CONTINUED)
Other Stock Options
In 1989, in connection with the original acquisition of Thompson Lacquer
Company by the Company, Wedbush Capital Partners ("Wedbush"), a shareholder of
the Company, and certain of the Company's officer/shareholders entered into a
Securities Purchase and Sale Agreement (the "SPSA"). Under the terms of the
SPSA, among other things, Wedbush had the option to purchase a total of 38,260
shares of Class C common stock from the officer/shareholders at $0.005 per
share for each of the years ended March 31, 1992, 1993 and 1994 in which the
Company failed to achieve defined levels of earnings before interest and taxes
(the "EBIT Target"). The Company did not attain the EBIT Target in either 1992
or 1993. The 38,260 shares subject to the 1992 EBIT Target were transferred to
Wedbush in August 1992. In June 1994, the SPSA was terminated. In accordance
with the termination agreement, Wedbush transferred the 38,260 Class C shares
subject to the 1992 EBIT Target back to the officer/shareholders and all rights
and obligations of any of the parties to the SPSA were terminated and
rescinded. As a result of the termination of the SPSA, the Company recognized
compensation expense of approximately $848,000, which is included in special
incentive stock compensation in the accompanying statement of operations for
the year ended September 30, 1994.
Prior to June 1994, an Incentive Stock Agreement (the "ISA") among Wedbush,
Chemical and its officer/shareholders was in effect. Under the terms of the
ISA, as amended, Wedbush and Chemical agreed to grant options to purchase up to
96,320 shares of Second Junior preferred stock at $0.91 per share to the
officer/shareholders upon the occurrence of a liquidity event, as defined. In
June 1994, the ISA was terminated and Wedbush and Chemical granted to the
officer/shareholders options to purchase a total of 96,280 shares of common
stock owned by the shareholders at $0.91 per share, subject to antidilution
provisions. The options are presently exercisable and expire on January 31,
1999. In connection with the issuance of these options, the Company recognized
compensation expense of approximately $624,000, which is included in special
incentive stock compensation in the accompanying statement of operations for
the year ended September 30, 1994.
13. DUE FROM OFFICERS
The Company has notes receivable from certain of its officers which
amounted to $196,000 at September 30, 1995 and 1996. Such notes bear interest
at rates ranging from 6.0% to 7.5%.
14. STATEMENT OF CASH FLOWS
Increases (decreases) in operating cash flows arising from changes in
operating assets and liabilities, net of the effects of business acquisitions,
consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Accounts receivable . . . . . . . . . . . . . . . . . . . . $(1,479) $(1,561) (2,126)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . 1,072 (219) (4,551)
Prepaid expenses and other current assets . . . . . . . . . (300) (2,663) (925)
Accounts payable . . . . . . . . . . . . . . . . . . . . . (174) (1,071) 1,812
Income taxes payable . . . . . . . . . . . . . . . . . . . (2,063)
Accrued expenses and other current liabilities . . . . . . 380 1,320 1,104
------- ------- -------
$ (501) $(4,194) $(6,749)
======= ======= =======
</TABLE>
F-18
<PAGE> 52
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash paid for interest and income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended September 30,
-------------------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Interest . . . . . . . . . . . . . . . . . . . . . . . . . $2,340 $2,851 $2,465
Income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 80 $1,782 $2,591
</TABLE>
Financing and investing activities of the Company in the fiscal year ended
September 30, 1995 and 1996 which affect recognized assets or liabilities but
that do not result in cash receipts or cash payments are as follows (in
thousands):
Capital leases acquired in connection with the
acquisition of certain businesses and property . . . . . $710 $1,230
Non-cash financing and investing activities during the fiscal year ended
September 30, 1994 were not significant.
15. SUBSEQUENT EVENT (UNAUDITED)
Subsequent to September 30, 1996 the Company announced the acquisition of
two businesses with historical annual revenues of over $8 million. The
acquired businesses operated two distribution sites.
F-19
<PAGE> 53
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. RESULTS OF OPERATIONS - UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following table sets forth unaudited consolidated statement of
operations data for each of the eight quarters ended September 30, 1996. The
unaudited quarterly information has been prepared on the same basis as the
annual financial information and, in management's opinion, includes all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the information for the quarters presented. The operating
results for any quarter are not necessarily indicative of results for any future
period. (Amounts in thousands, except per share data.)
<TABLE>
<CAPTION>
1995 Quarters Ended
----------------------------------------------------
Dec. 31 March 31 June 30 Sept. 30
-------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $24,952 $31,019 $37,235 $38,621
Cost of sales . . . . . . . . . . . . . . . . . . . . 15,531 19,330 23,336 24,365
-------- --------- --------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . 9,421 11,689 13,899 14,256
Selling, general and administrative expenses . . . . 7,476 8,813 10,158 10,549
Depreciation expense . . . . . . . . . . . . . . . . 294 350 379 364
Amortization of goodwill and other intangible assets 377 351 430 521
Interest expense, net . . . . . . . . . . . . . . . . 584 597 837 900
-------- --------- --------- --------
Income before provision for income
taxes and extraordinary item . . . . . . . . . . . 690 1,578 2,095 1,922
Provision for income taxes . . . . . . . . . . . . . (805)
-------- --------- --------- --------
Income before extraordinary item . . . . . . . . . . 690 1,578 2,095 1,117
Extraordinary item - early extinguishment of debt . . (445)
-------- --------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . . . $ 245 $ 1,578 $ 2,095 $ 1,117
======== ========= ========= ========
Earnings (loss) per common and common
equivalent share available to common
stockholders . . . . . . . . . . . . . . . . . . .. $(0.16) $0.24 $0.31 $0.17
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . 5,281 6,610 6,667 6,683
</TABLE>
<TABLE>
<CAPTION>
1996 Quarters Ended
----------------------------------------------------
Dec. 31 March 31 June 30 Sept. 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $37,145 $41,981 $48,958 $50,055
Cost of sales . . . . . . . . . . . . . . . . . . . . 23,199 26,479 30,627 32,905
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . 13,946 15,502 18,331 17,150
Selling, general and administrative expenses . . . . 11,218 12,231 13,684 18,698
Depreciation expense . . . . . . . . . . . . . . . . 419 436 490 503
Amortization of goodwill and other intangible assets 483 525 590 669
Interest expense, net . . . . . . . . . . . . . . . . 344 542 756 958
-------- -------- -------- --------
Income (loss) before provision for income
taxes . . . . . . . . . . . . . . . . . . . . . . . 1,482 1,768 2,811 (3,678)
Provision (benefit) for income taxes . . . . . . . . 615 734 1,166 (1,205)
-------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 867 $ 1,034 $ 1,645 $( 2,473)
======== ======== ======= ========
Earnings (loss) per common and common
equivalent share . . . . . . . . . . . . . . . . . $0.10 $0.12 $0.19 $(0.28)
</TABLE>
F-20
<PAGE> 54
THOMPSON PBE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C>
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . 8,814 8,903 8,834 8,692
</TABLE>
During the fourth quarter of fiscal year 1996, the Company recorded charges
to its statement of operations totaling approximately $3.5 million relating to
reserves for a sales and use tax audit of a certain predecessor company,
disputed reimbursements from vendors and writedowns of inventory carrying
value.
F-21
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Thompson PBE, Inc.:
We have audited the accompanying consolidated balance sheets of Thompson PBE,
Inc. and its subsidiaries (the "Company") as of September 30, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended September 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
September 30, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 10, 1997
F-22
<PAGE> 56
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
Board of Directors and Stockholders
Thompson PBE, Inc.:
We have audited the consolidated financial statements of Thompson PBE, Inc.
and its subsidiaries (the "Company") as of September 30, 1996 and 1995, and for
each of the three years in the period ended September 30, 1996, and have issued
our report thereon dated December 19, 1996; such consolidated financial
statements and report is included elsewhere in this Annual Report on Form 10-K.
Our audits also included the financial statement schedule of the Company listed
in Item 14(a). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 10, 1997
S-1
<PAGE> 57
THOMPSON PBE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Provision Balance at
Beginning for Doubtful Net End of
of Period Accounts Write-Offs Period
---------- -------- ---------- ------
<S> <C> <C> <C> <C>
Year ended September 30, 1994
Allowance for doubtful accounts . . . . . . . . . $ 571 $ 471 $ 626 $ 416
Year ended September 30, 1995
Allowance for doubtful accounts . . . . . . . . . $ 416 $ 502 $ 326 $ 592
Year ended September 30, 1996
Allowance for doubtful accounts . . . . . . . . . $ 592 $1,179 $ 753 $1,018
</TABLE>
S-2
<PAGE> 1
Exhibit 10.52
SECOND AMENDMENT CREDIT AGREEMENT
This Second Amendment to Credit Agreement (this "Second Amendment"),
made as of this 31st day of July, 1996, by and among HELLER FINANCIAL, INC.
("Heller"), a Delaware corporation with a place of business at 500 West Monroe
Street, Chicago, Illinois 60661, for itself, as Lender and as agent ("Agent")
for the Lenders signatory hereto and THOMPSON PBE, INC., a Delaware corporation
("Thompson"), with its principal place of business at 4553 Glencoe Avenue,
Suite 200, Marina del Rey, California 90292, and ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower, Agent and Lenders have entered into that certain
Credit Agreement dated as of January 6, 1995 (as heretofore amended, the
"Credit Agreement"); and
WHEREAS, Borrower has requested that Lenders restructure the lending
arrangements under the Credit Agreement to increase the aggregate amount of
Lenders' Commitments under the Credit Agreement; and
WHEREAS, the increased amount of credit would be used to provide
additional working capital under the Revolving Loan and additional funds to
assist Borrower in Making Permitted Acquisitions under the Acquisition Loan;
and
WHEREAS, Lenders are willing to restructure the terms of the Credit
Agreement and provide additional credit to the Borrower pursuant to the terms
of this Second Amendment;
NOW, THEREFORE, in consideration of the promises set forth herein,
Borrower and Lenders agree as follows:
ARTICLE I
1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Modifications and Additions to Certain Definitions
All capitalized terms used in this Second Amendment but not defined in
this Second Amendment shall have the meanings given to them in the Credit
Agreement. In the event of a conflict between the definitions contained in
this Second Amendment and the definitions contained in the Credit Agreement,
the definitions contained in this Second Amendment shall prevail. As of the
date hereof, the following terms are added to the Credit Agreement in their
proper alphabetical order, having the following meanings and/or modified as
follows:
"Second Amendment" means that certain Second Amendment to Credit
Agreement dated as of the 31st day of July 1996.
2
<PAGE> 2
"Second Amendment Effective Date" means the first date to the
effectiveness of which the conditions precedent set forth in the Second
Amendment have been satisfied to the satisfaction of Agent and Lenders.
Clause (a) of the first sentence of the defined terms of (i)
"Acquisition Loan Commitment," (ii) "Revolving Loan Commitment," and
(iii) "Term Loan A Commitment," shall respectively be modified to
reflect the new commitments of each Lender as set forth on the signature
page of the Second Amendment opposite such Lender's signature.
1.2 Subsection 2.1(A) of the Credit Agreement is hereby amended by
deleting subsection 2.1(A) in its entirety and inserting the following in its
place and stead:
(A) Term Loan A. Subject to the terms and conditions of the
Credit Agreement and in reliance upon the representation and warranties
of Borrower contained in the Second Amendment and the Credit Agreement,
each lender agrees, severally and not jointly, to lend to Borrower on
the Second Amendment Effective Date its Pro Rata Share of Term Loan A.
The aggregate amount of Term Loan A shall be Thirty Million Dollars
($30,000,000) and shall be comprised of the sum of (i) the aggregate
amount of advances heretofore advanced by each Lender under the
Acquisition Loan, the principal amount of which remains unpaid as of the
Second Amendment Effective Date plus (ii) the aggregate amount advanced
by each Lender under Term Loan A on the Closing Date of the Credit
Agreement, the principal amount of which remains unpaid as of the Second
Amendment Effective Date plus (iii) to the extent necessary for Term
Loan A to equal $30,000,000, the Pro Rata Share of any amounts
heretofore advanced by each Lender under the Revolving Loan, the
principal amount of which remains unpaid as of the Second Amendment
Effective Date. The original amount of Term Loan A was funded on the
Closing Date and the balance shall be funded in one drawing on the
Second Amendment Effective Date. Amounts borrowed under this
subsection 2.1(A) and repaid may not be reborrowed. Borrower shall make
principal payments in the amounts of the applicable Scheduled
Installments (or such lesser principal amount of Term Loan A as shall be
outstanding) on the dates and in the amounts set forth below.
"Scheduled Installment: means, for each date set forth below,
the amount set forth opposite such date.
Date Amount
---- ------
The last day of each calendar quarter $500,000
commencing September of 1996 and ending
June of 1997
The last day of each calendar quarter $750,000
commencing September of 1997 and
ending June of 1998
3
<PAGE> 3
The last day of each calendar quarter $1,250,000
commencing September of 1998 and ending
June of 1999
The last day of each calendar quarter $1,500,000
commencing September of 1999 and
ending June of 2000
The last day of each calendar quarter $1,750,000
commencing September of 2000 and ending
March of 2002
The last day of July 2002 $1,750,000
1.3 Subsection 2.1(B) of the Credit Agreement is hereby amended by
deleting subsection 2.1(B) in its entirety up to 2.1(B)(1) and inserting the
following in its place and stead:
(B) Acquisition Loan. Subject to the terms and conditions
of the Credit Agreement and in reliance upon the representations and
warranties of Borrower contained in the Second Amendment and the Credit
Agreement, each Lender agrees, severally and not jointly, to lend to
Borrower on each Acquisition Date occurring on or before the second
anniversary of the Second Amendment Effective Date its Pro Rata Share of
the portion of the Acquisition Loan requested by Borrower on such
Acquisition Date. The Proceeds of the Acquisition Loan shall be used
solely to fund Permitted Acquisitions and Permitted Small Acquisitions
and related fees and expenses. The aggregate amount of advances made
under the Acquisition Loan shall be Twenty-Seven Million Dollars
($27,000,000). No advances will be made under the Acquisition Loan
after the second anniversary of the Second Amendment Effective Date.
Amounts borrowed under this subsection 2.1(B) and repaid may not be
reborrowed. On each date set forth below, Borrower shall repay a portion
of the principal amount of the Acquisition Loan which is outstanding on
the second anniversary of the Second Amendment Effective Date, which
portion will be equal to the percentage thereof which is set forth for
such date (each such payment being referred to herein as a "Scheduled
Installment")."
Date Percentage
---- ----------
The last day of each calendar quarter 3.75%
commencing September of 1998 and ending
June of 1999
The last day of each calendar quarter 5.00%
commencing September of 1999 and
ending June of 2000
4
<PAGE> 4
The last day of each calendar quarter 7.5%
commencing September of 2000 and
ending June of 2001
The last day of each calendar quarter 8.75%
commencing September of 2001 and
ending March of 2002
The last day of July 2002 8.75%
1.4 Subsection 2.1(C) of the Credit Agreement is hereby amended by
deleting subsection 2.1(C) in its entirety up to 2.1(C)(1) and inserting the
following in its place and stead:
(C) Revolving Loan. Subject to the terms and conditions of
the Second Amendment and the Credit Agreement and in reliance upon the
representations and warranties of Borrower contained in the Second
Amendment and the Credit Agreement, each Lender agrees, severally and
not jointly, to lend to Borrower from time to time during the period
from the Second Amendment Effective Date to and excluding the Expiry
Date, its Pro Rata Share of the Revolving Loan. The aggregate amount of
all Revolving Loan Commitments shall be Eighteen Million Dollars
($18,000,000), as reduced from time to time pursuant to subsection 2.4.
Amounts borrowed under this subsection 2.1(C) may be repaid and
reborrowed at any time prior to the Expiry Date. No Lender shall have
any obligation to make advances under this subsection 2.1(C) to the
extent any requested advance would cause the principal balance of the
Revolving Loan then outstanding to exceed the Maximum Revolving Loan
Amount.
1.5 Subsection 2.1(D)(1) of the Credit Agreement is hereby amended
by deleting subsection 2.1(D)(1) in its entirety and inserting the following in
its place and stead:
"(l) Maximum Amount. The aggregate amount of Lender Guaranty
Liability with respect to all Lender Letters of Credit and Lender Guaranties
outstanding at any time shall not exceed Five Million Dollars ($5,000,000)."
1.6 Subsection 2.5 of the Credit Agreement is hereby amended by
deleting clause (b) of the first sentence thereof and substituting the
following in its place
"(b) July 31, 2002 (the "Termination Date"), and the Commitments
shall (unless earlier terminated) terminate concurrently on the
Termination Date."
5
<PAGE> 5
1.7 Subsection 6.1 of the Credit Agreement is hereby amended by
deleting subsection 6.1 in its entirety and inserting the following in its
place and stead:
6.1 Capital Expenditure Limits. The aggregate amount of all
Capital Expenditures of Borrower and its Subsidiaries for the Fiscal
Years set forth below will not exceed the amount set forth below for
such Fiscal Year. The amounts set forth below are exclusive of the
capital costs related to the purchase and installation of the Borrower's
new information system, which costs shall not exceed $2,000,000.
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------
<S> <C>
1996 $2,200,000
1997 $3,000,000
1998 and each Fiscal Year thereafter $4,000,000
</TABLE>
Notwithstanding the foregoing, in the event Borrower does not in any
Fiscal Year use the permitted amount of Capital Expenditures for such Fiscal
Year, Borrower may carry forward to the immediately succeeding Fiscal Year
fifty percent (50%) of the unused portion of such permitted amount. All Capital
Expenditures shall first be applied to reduce the carry forward from the
previous year, if any, and then to reduce the applicable limit for the then
current Fiscal Year.
1.8 Subsection 6.3 of the Credit Agreement is hereby amended by
deleting subsection 6.3 in its entirety and inserting the following in its
place and stead:
6.3 Fixed Charge Coverage. Borrower shall not permit Fixed
Charge Coverage for the twelve (12) month period ending on the last day
of each month during the periods set forth below to be less than the
amount set forth below for such period.
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Each month after the Second Amendment 1.2 to 1
Effective Date
</TABLE>
6
<PAGE> 6
ARTICLE II
GENERAL PROVISIONS
2.1 Conditions Precedent. The effectiveness of this Second
Amendment is subject to the satisfaction of the following conditions precedent
(unless specifically waived in writing by Agent and Lenders): (a) there shall
have occurred no material adverse change in the business, operations, financial
condition, profits or prospects, or in the Collateral of Borrower; (b) Borrower
shall have executed and delivered such other documents and instruments as Agent
may require; (c) all corporate proceedings taken in connection with the
transactions contemplated by the Second Amendment and all documents, instruments
and other legal matters incident thereto shall be satisfactory to Agent and its
legal counsel; (d) execution and delivery of all Notes to each of Lenders
representing their Pro Rata Share of new Commitments; (e) after giving effect to
the payment of, or the creation of a reserve for, all costs, fees and expenses
related to the closing of the Second Amendment, Borrower shall have a minimum of
Ten Million Dollars ($10,000,000) available to draw under the Revolving Loan on
the Second Amendment Effective Date; (f) the conditions of Section 2.11 of the
Second Amendment shall have been satisfied to Agent's satisfaction; and (g)
Borrower shall have paid or shall pay when due to Heller, individually and as
Agent, in addition to Interest and other charges, the following fees:
(i) Closing Fee: The amount of $96,563.00 will be due and
payable on the Second Amendment Effective Date;
(ii) Commitment Affirmation Fee: A commitment affirmation
fee in the amount of $61,563.00 will be due and payable on the Second
Amendment Effective Date;
(iii) Certain Fees: Borrower shall pay to Heller,
individually and as Agent, such fees in the amounts and at the times
specified in that certain letter agreement of even date herewith between
Borrower and Heller
2.2 Ratification. The terms and provisions set forth in the Second
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and, except as expressly modified and superseded
by the Second Amendment, the terms and provisions set forth in the Credit
Agreement are ratified and confirmed and shall continue in full force and
effect. All representations, warranties, covenants and agreements of Borrowers
set forth in the Credit Agreement, as modified hereby, are hereby restated as
of the date hereof.
2.3 Reference to Credit Agreement. The Credit Agreement and all
other agreements, documents or instruments now or hereafter executed and
delivered pursuant to the terms hereof or pursuant to the terms of the Credit
Agreement as amended hereby, are hereby amended so that any reference therein
to the Credit Agreement shall mean a reference to the Credit Agreement as
amended hereby.
7
<PAGE> 7
2.4 Amendment; Assignment. This Second Amendment may not be
modified, altered or amended except by an instrument in writing signed by
Borrowers and Lender. Borrowers may not sell, assign or transfer this Second
Amendment or any portion thereof, including, without limitation, any of
Borrower's rights, titles, interests, remedies, powers and/or duties hereunder
or thereunder.
2.5 Severability. If any provision of this Second Amendment or the
application thereof to any Person or circumstance is held invalid or
unenforceable, the remainder of this Second Amendment and the application of
such provision to other Persons or circumstances will not be affected thereby
and the provisions of this Second Amendment shall be severable in any such
instance.
2.6 Counterparts. This Second Amendment may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement. An executed facsimile
of this Second Amendment shall be deemed to be a valid and binding agreement
between the parties hereto.
2.7 Headings. All headings used in this Second Amendment are for
convenience of reference only and shall not be used in interpreting this Second
Amendment.
2.8 Entire Agreement. This Second Amendment, including all
Exhibits and other documents attached hereto or incorporated by reference
herein, constitutes the entire agreement of the parties with respect to the
subject matter hereof and supersedes all other understandings, oral or written,
with respect to same.
2.9 THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
2.10 CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
EACH BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED WITHIN THE COUNTY OF COOK, STATE OF ILLINOIS AND IRREVOCABLY AGREES
THAT, SUBJECT TO AGENT'S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN
SUCH COURTS. EACH BORROWER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY
AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS
AGREEMENT, SUCH NOTE, SUCH OTHER
8
<PAGE> 8
LOAN DOCUMENT OR SUCH OBLIGATION. BORROWER DESIGNATES AND APPOINTS CT
CORPORATION SYSTEM AND SUCH OTHER PERSONS AS MAY HEREAFTER BE SELECTED BY
BORROWER WHICH IRREVOCABLY AGREE IN WRITING TO SO SERVE AS ITS AGENT TO RECEIVE
ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT,
SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY BORROWER TO BE EFFECTIVE AND BINDING
SERVICE IN EVERY RESPECT. A COPY OF ANY SUCH PROCESS SO SERVED SHALL BE MAILED
BY REGISTERED MAIL TO BORROWER AT ITS ADDRESS PROVIDED IN SUBSECTION 10.5
EXCEPT THAT UNLESS OTHERWISE PROVIDED BY APPLICABLE LAW, ANY FAILURE TO MAIL
SUCH COPY SHALL NOT AFFECT THE VALIDITY OF SERVICE OF PROCESS. IF ANY AGENT
APPOINTED BY BORROWER REFUSES TO ACCEPT SERVICE, BORROWER HEREBY AGREES THAT
SERVICE UPON IT BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE. NOTHING HEREIN
SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT OF AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST
BORROWER IN THE COURTS OF ANY OTHER JURISDICTION.
2.11 Required Lender Approval. As required by Section 10.3 of the
Credit Agreement, this Second Amendment shall become effective as of the date
first set forth above upon execution by the Borrower and each of the Lenders,
satisfaction of the conditions precedent set forth herein and acknowledgment
hereof by Grand Distributing Corp., Arnold Paint Company, McNeil & Sons Auto
Paint, Inc. and Santa Clara Color Service, Inc. The Lenders identified on the
signature pages hereof constitute all of the Lenders as of the date first set
forth above.
IN WITNESS WHEREOF, this Second Amendment has been duly executed as of
the day and year first above written.
THOMPSON PBE, INC.
By: /s/ CHARLES E. BARRANTES
-----------------------------------
Name: CHARLES E. BARRANTES
---------------------------------
Title: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
--------------------------------
[SIGNATURES CONTINUE ON THE NEXT PAGE]
9
<PAGE> 9
Revolving Loan Commitment: HELLER FINANCIAL, INC., as Agent
$4,560,000.00
By: /s/ ELIZABETH PRICE
Term Loan A Commitment: ------------------------------
Name: Elizabeth Price
$7,600,000.00 ------------------------------
Title: VP
Acquisition Loan Commitment: ------------------------------
$6,840,000.00
Revolving Loan Commitment: GIROCREDIT BANK
AKTIENGESELLSCHAFT DER SPARKASSEN
$2,160,000.00
By: /s/ ANCA TRIFAN
Term Loan A Commitment: ------------------------------
Name: Anca Trifan
$3,600,000.00 -------------------------------
Title: Vice President
Acquisition Loan Commitment: ------------------------------
$3,240,000.00
Revolving Loan Commitment: SANWA BUSINESS CREDIT CORPORATION
$4,560,000.00
By: /s/ LAWRENCE J. PLACEK
Term Loan A Commitment: ------------------------------
Name: Lawrence J. Placek
$7,600,000.00 ------------------------------
Title: Vice President
Acquisition Loan Commitment: ------------------------------
$6,840,000.00
[SIGNATURES CONTINUE ON THE NEXT PAGE]
10
<PAGE> 10
Revolving Loan Commitment: FLEET BANK OF MASSACHUSETTS, N.A.
$4,560,000.00
By: /s/ LINDA COPOULIS
Term Loan A Commitment: ------------------------------
Name: Linda Copoulis
$7,600,000.00 ------------------------------
Title: Vice President
Acquisition Loan Commitment: ------------------------------
$6,840,000.00
Revolving Loan Commitment: UNION BANK
$2,160,000.00
By: /s/ STEVEN BIERMAN
Term Loan A Commitment: ------------------------------
Name: Steven Bierman
$3,600,00.00 ------------------------------
Title: VP
Acquisition Loan Commitment: ------------------------------
$3,240,000.00
11
<PAGE> 11
ACKNOWLEDGMENT
GRAND DISTRIBUTING CORP. acknowledges and consents to the terms of this
Second Amendment and hereby affirms, ratifies and confirms all of the terms of
its Continuing Guaranty dated January 5, 1995.
GRAND DISTRIBUTING CORP.
By: /s/ MORT KLINE
-----------------------------
Title: CEO
--------------------------
12
<PAGE> 12
ACKNOWLEDGMENT
ARNOLD PAINT COMPANY acknowledges and consents to the terms of this
Second Amendment and hereby affirms, ratifies and confirms all of the terms of
its Continuing Guaranty dated February 16, 1995.
ARNOLD PAINT COMPANY
By: /s/ MORT KLINE
-----------------------------
Title: President
--------------------------
13
<PAGE> 13
ACKNOWLEDGMENT
MCNEIL & SONS AUTO PAINT, INC. acknowledges and consents to the terms of
this Second Amendment and hereby affirms, ratifies and confirms all of the terms
of its Continuing Guaranty dated February 15, 1996.
MCNEIL & SONS AUTO PAINT, INC.
By: /s/ MORT KLINE
-----------------------------
Title: President
--------------------------
14
<PAGE> 14
ACKNOWLEDGMENT
SANTA CLARA COLOR SERVICE, INC. acknowledges and consents to the terms
of this Second Amendment and hereby affirms, ratifies and confirms all of the
terms of its Continuing Guaranty dated February 15, 1996.
SANTA CLARA COLOR SERVICE, INC.
By: /s/ MORT KLINE
-----------------------------
Title: President
--------------------------
15
<PAGE> 1
EXHIBIT 10.53
THIRD AMENDMENT CREDIT AGREEMENT
This Third Amendment to Credit Agreement (this "Third Amendment"),
made as of this 30th day of September, 1996, by and among HELLER FINANCIAL,
INC. ("Heller"), a Delaware corporation with a place of business at 500 West
Monroe Street, Chicago, Illinois 60661, for itself, as Lender and as agent
("Agent") for all Lenders and THOMPSON PBE, INC., a Delaware corporation
("Thompson"), with its principal place of business at 4553 Glencoe Avenue,
Suite 200, Marina del Rey, California 90292, and ("Borrower").
W I T N E S S E T H:
WHEREAS, the Borrower and Agent and Lenders have entered into that
certain Credit Agreement dated as of January 6, 1995 (as heretofore amended
from time to time the "Credit Agreement"); and
WHEREAS, the Borrower has requested the Lenders to amend certain
financial covenants contained in the Credit Agreement;
WHEREAS, Lenders are willing to amend the Credit Agreement pursuant
to the terms of this Third Amendment;
NOW, THEREFORE, in consideration of the promises set forth herein,
Borrower and Lenders agree as follows:
ARTICLE I
CAPITALIZED TERMS
1.1 All capitalized terms used in this Third Amendment but not
defined in this Third Amendment shall have the meanings given to them in the
Credit Agreement. In the event of a conflict between the definitions contained
in this Third Amendment and the definitions contained in the Credit Agreement,
the definitions contained in this Third Amendment shall prevail.
2
<PAGE> 2
ARTICLE II
AMENDMENTS TO THE CREDIT AGREEMENT
2.1 The definition of "EBITDA" in subsection 1.1 of the Credit
Agreement is hereby amended to (i) delete the period at the end of said
definition and substitute a semi-colon in its place and stead; and (ii) add the
following:
PLUS (i) sales tax reserves equal to $1,800,000 recorded in
September, 1996 and deducted in the determination of Net Income; PLUS
(j) reserves related to amounts due from vendors equal to $500,000,
recorded in September, 1996 and deducted in the determination of Net
Income.
2.2 Subsection 6.4 of the Credit Agreement is hereby amended to
delete said subsection and substitute the following in its place and stead:
6.4 SENIOR LEVERAGE. Borrower shall not permit the ratio of
Senior Debt as of the last day of each month during the periods set
forth below to Pro Forma Operating Cash Flow for the twelve (12) month
period ending on the last day of each month during the periods set
forth below to be greater than the ratio set forth for such period.
Period Ratio
------ -----
Closing through 9/30/96 3.50 to 1.00
10/1/96 through 2/28/97 4.00 to 1.00
3/1/97 through 5/31/97 3.75 to 1.00
6/1/97 through 8/31/97 3.75 to 1.00
9/1/97 through 9/30/98 3.50 to 1.00
10/1/98 through 9/30/99 3.25 to 1.00
10/1/99 through 9/30/00 2.75 to 1.00
10/1/00 and each month thereafter 2.25 to 1.00
2.3 Subsection 6.5 of the Credit Agreement is hereby amended to
delete said subsection and substitute the following in its place and stead:
6.5 TOTAL INDEBTEDNESS LEVERAGE. Borrower shall not permit the
ratio of total Indebtedness of Borrower and its Subsidiaries on a
consolidated basis as of the last day of each month during the periods
set forth below to Pro Forma Operating Cash Flow for the twelve (12)
month period ending on the last day of each month during the periods
set forth below to be greater than the ratio set forth for such
period.
Period Ratio
------ -----
Closing through 9/30/96 4.50 to 1.00
10/1/96 through 2/28/97 5.25 to 1.00
3/1/97 through 5/31/97 5.25 to 1.00
6/1/97 through 8/31/97 4.75 to 1.00
9/1/97 through 9/30/98 4.00 to 1.00
10/1/98 through 9/30/99 3.75 to 1.00
10/1/99 through 9/30/00 3.25 to 1.00
10/1/00 and each month thereafter 2.75 to 1.00
3
<PAGE> 3
2.4 Subsection 7.1(f) of the Credit Agreement is hereby amended to
substitute the number Fifteen Million Dollars ($15,000,000) for the number Ten
Million Dollars ($10,000,000) and substitute the number Eighteen Million
Dollars ($18,000,000) for the number Twelve Million Dollars ($12,000,000).
ARTICLE III
GENERAL PROVISIONS
3.1 CONDITIONS PRECEDENT. The effectiveness of this Third Amendment
is subject to: (1) Borrower's payment to Lenders of a fee equal to $50,000;
(ii) Borrower hereby agrees not to utilize the Acquisition Loan to repurchase
its own common stock in accordance with that certain letter dated December 10,
1996, until October 1, 1997; and (iii) Borrower hereby agrees that all
acquisitions (including Permitted Small Acquisitions) will require Requisite
Lenders' approval until such time as Borrower is in compliance with the Senior
Debt and total Indebtedness ratios set forth in subsection 2.1(B)(2)(C) of the
Credit Agreement.
3.2 RATIFICATION. The terms and provisions set forth in this Third
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and, except as expressly modified and superseded
by this Third Amendment, the terms and provisions set forth in the Credit
Agreement are ratified and confirmed and shall continue in full force and
effect. All representations, warranties, covenants and agreements of Borrowers
set forth in the Credit Agreement, as modified hereby, are hereby restated as
of the date hereof.
3.3 REFERENCE TO CREDIT AGREEMENT. The Credit Agreement and all
other agreements, documents or instruments now or hereafter executed and
delivered pursuant to the terms hereof or pursuant to the terms of the Credit
Agreement as amended hereby, are hereby amended so that any reference therein
to the Credit Agreement shall mean a reference to the Credit Agreement as
amended hereby.
3.4 AMENDMENT; ASSIGNMENT. This Third Amendment may not be modified,
altered or amended except by an instrument in writing signed in accordance with
Section 10.3 of the Credit Agreement. Borrower may not sell, assign or
transfer this Third Amendment or any portion thereof, including, without
limitation, any of Borrower's rights, titles, interests, remedies, powers and/or
duties hereunder or thereunder.
3.5 SEVERABILITY. If any provision of this Third Amendment or the
application thereof to any Person or circumstance is held invalid or
unenforceable, the remainder of this Third Amendment and the application of
such provision to other Persons or circumstances will not be affected thereby
and the provisions of this Third Amendment shall be severable in any such
instance.
4
<PAGE> 4
3.6 COUNTERPARTS. This Third Amendment may be executed in two or
more counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
3.7 HEADINGS. All headings used in this Third Amendment are for
convenience of reference only and shall not be used in interpreting this Third
Amendment.
3.8 ENTIRE AGREEMENT. This Third Amendment, including all Exhibits
and other documents attached hereto or incorporated by reference herein,
constitutes the entire agreement of the parties with respect to the subject
matter hereof and supersedes all other understandings, oral or written, with
respect to same.
3.9 THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
3.10 REQUIRED LENDER APPROVAL. As required by Section 10.3 of the
Credit Agreement, this Third Amendment shall become effective as of the date
first set forth above upon execution by the Borrower and Requisite Lenders
and acknowledgement hereof by Grand Distributing Corp., Arnold Paint Company,
McNeil & Sons Auto Paint, Inc., Auto Body Supply Corporation, Automotive Paint
and Supply Company, Incorporated and Santa Clara Color Service, Inc. The
Lenders identified on the signature pages hereof constitute all of the Lenders
as of the date first set forth above.
IN WITNESS WHEREOF, this Third Amendment has been duly executed as
of the day and year first above written.
THOMPSON PBE, INC.
By: /s/ MORT KLINE
-----------------------------------
Name: Mortimer A. Kline, III
---------------------------------
Title: President
--------------------------------
[SIGNATURES CONTINUE ON NEXT PAGE]
5
<PAGE> 5
HELLER FINANCIAL, INC., as Agent
By: /s/ ROBERT M. HORACK
-----------------------------------
Name: Robert M. Horak
---------------------------------
Title: Associate Vice President
--------------------------------
GIROCREDIT BANK
AKTIENGESELLSCHAFT DER
SPARKASSEN
By: /s/ ANCA TRIFAN
-----------------------------------
Name: Anca Trifan
---------------------------------
Title: Vice President
--------------------------------
SANWA BUSINESS CREDIT CORPORATION
By: /s/ MICHAEL J. COX
-----------------------------------
Name: Michael J. Cox
---------------------------------
Title: Vice President
--------------------------------
FLEET BANK OF MASSACHUSETTS, N.A.
By: /s/ ERIC C. VANDERMEN
-----------------------------------
Name: Eric C. Vandermen
---------------------------------
Title: Vice President
--------------------------------
UNION BANK
By: /s/ STEVEN C. BIERMAN
-----------------------------------
Name: Steven C. Bierman
---------------------------------
Title: Vice President
--------------------------------
6
<PAGE> 6
ACKNOWLEDGMENT
GRAND DISTRIBUTING CORP. acknowledges and consents to the terms of
this Third Amendment and hereby affirms, ratifies and confirms all of the terms
of its Continuing Guaranty dated January 5, 1995.
GRAND DISTRIBUTING CORP.
By: /s/ MORT KLINE
-----------------------------------
Title: CEO
--------------------------------
7
<PAGE> 7
ACKNOWLEDGMENT
ARNOLD PAINT COMPANY acknowledges and consents to the terms of this
Third Amendment and hereby affirms, ratifies and confirms all of the terms of
its Continuing Guaranty dated February 16, 1995.
ARNOLD PAINT COMPANY
By: /s/ MORT KLINE
-----------------------------------
Title: President
--------------------------------
8
<PAGE> 8
ACKNOWLEDGMENT
McNEIL & SONS AUTO PAINT, INC. acknowledges and consents to the terms
of this Third Amendment and thereby affirms, ratifies and confirms all of the
terms of its Continuing Guaranty dated February 15, 1996.
McNEIL & SONS AUTO PAINT, INC.
By: /s/ MORT KLINE
-----------------------------------
Title: President
--------------------------------
9
<PAGE> 9
ACKNOWLEDGMENT
AUTO BODY SUPPLY CORPORATION acknowledges and consents to the terms
of this Third Amendment and hereby affirms, ratifies and confirms all of the
terms of its Continuing Guaranty dated October 4, 1996.
AUTO BODY SUPPLY CORPORATION
By: /s/ MORT KLINE
-----------------------------------
Title: President
--------------------------------
10
<PAGE> 10
ACKNOWLEDGMENT
AUTOMOTIVE PAINT AND SUPPLY COMPANY, INCORPORATED acknowledges and
consents to the terms of this Third Amendment and hereby affirms, ratifies and
confirms all of the terms of its Continuing Guaranty dated April 19, 1996.
AUTOMOTIVE PAINT AND SUPPLY COMPANY,
INCORPORATED
By: /s/ MORT KLINE
-----------------------------------
Title: President
--------------------------------
11
<PAGE> 11
ACKNOWLEDGMENT
SANTA CLARA COLOR SERVICE, INC. acknowledges and consents to the
terms of this Third Amendment and hereby affirms, ratifies and confirms all of
the terms of its Continuing Guaranty dated February 15, 1996.
SANTA CLARA COLOR SERVICE, INC.
By: /s/ MORT KLINE
-----------------------------------
Title: President
--------------------------------
12
<PAGE> 1
Exhibit 11.1
THOMPSON PBE, INC.
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
FISCAL YEARS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Common stock outstanding, beginning of period . . . . . . . . . 2,908,060 6,391,946
Issuance of common stock in connection with
public offering . . . . . . . . . . . . . . . . . . . . . . . 2,450,000 2,271,475
Conversion of convertible preferred stock . . . . . . . . . . . 622,600
Exercise of Heller stock warrant . . . . . . . . . . . . . . . 365,609
Exercise of options . . . . . . . . . . . . . . . . . . . . . . 58,756 29,017
Retirement of stock used to pay for exercise of options . . . . (13,079)
--------- ---------
Common stock outstanding, end of period . . . . . . . . . . . . 6,391,946 8,692,438
========= =========
PER SHARE DATA:
Weighted average shares outstanding during the period,
assuming exercise of options and warrants . . . . . . . . . . 6,586,188 9,157,826
Shares assumed to be repurchased under the treasury stock
method at an average fair market value per share of $14.59 and
$13.08 at September 30, 1995 and 1996, respectively . . . . . (268,777) (307,643)
--------- ----------
Total shares used in computing Historical Per Share data . . . 6,317,411 8,850,183
========= =========
Income before income taxes and extraordinary item . . . . . . $ 5,480,000
Less: assumed redemption of redeemable capital stock . . . . . (1,000,000)
Less: dividends accrued on preferred stock and
redeemable preferred stock . . . . . . . . . . . . . . . . . (78,000)
---------
Income available to common stockholders before income
taxes and extraordinary item . . . . . . . . . . . . . . . . 4,402,000
Extraordinary item - early extinguishment of debt . . . . . . . (445,000)
-----------
Net income used in computing Historical Per Share data . . . . $ 3,957,000 $1,073,000
=========== ==========
Income per share before income taxes and extraordinary item . . $ 0.70
Extraordinary item - early extinguishment of debt . . . . . . . $(0.07)
Net income per share . . . . . . . . . . . . . . . . . . . . . $ 0.63 $0.12
</TABLE>
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
1. Grand Distributing Corp., a California corporation
2. Thompson Lacquer Co., a California corporation
3. Arnold Paint Company, a Florida corporation
4. Lewis Paint Company, a Florida corporation
5. Santa Clara Color, Inc., a California corporation
6. McNeil & Sons Auto Paint, Inc., a Massachusetts corporation
7. Auto Colorco, Inc., an Alabama corporation
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Forms S-8, in
Registration Statement Nos. 33-90712, 333-2916 and 333-2918 of Thompson PBE,
Inc., of our report dated December 19, 1996 appearing in this Annual Report on
Form 10-K of Thompson PBE, Inc. for the year ended September 30, 1996.
DELOITTE & TOUCHE LLP
Los Angeles, California
January 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 482
<SECURITIES> 0
<RECEIVABLES> 20,759
<ALLOWANCES> 1,018
<INVENTORY> 31,440
<CURRENT-ASSETS> 59,088
<PP&E> 13,879
<DEPRECIATION> 6,449
<TOTAL-ASSETS> 124,380
<CURRENT-LIABILITIES> 28,839
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 51,225
<TOTAL-LIABILITY-AND-EQUITY> 124,380
<SALES> 178,139
<TOTAL-REVENUES> 178,139
<CGS> 113,210
<TOTAL-COSTS> 113,210
<OTHER-EXPENSES> 58,767
<LOSS-PROVISION> 1,179
<INTEREST-EXPENSE> 2,600
<INCOME-PRETAX> 2,383
<INCOME-TAX> 1,310
<INCOME-CONTINUING> 1,073
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,073
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
