<PAGE>
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FORM 10-K/A-2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] -- AMENDMENT
FOR THE FISCAL YEAR ENDED JANUARY 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4505
STANDARD BRANDS PAINT COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-6029682
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or No.)
organization)
4300 WEST 190TH STREET
TORRANCE, CALIFORNIA 90509-2956
(Address of principal (Zip Code)
executive offices)
</TABLE>
Registrant's telephone number, including area code: (310) 214-2411
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
Title of each class Name of each exchange
on which registered
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
------------------------
AMENDMENT NO. 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report for the year ended
January 30, 1994 on Form 10-K as set forth on the pages attached hereto:
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (page 12)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
STANDARD BRANDS PAINT COMPANY
<TABLE>
<S> <C>
Date: March 29, 1995 By /s/ HOWARD S. SCHWARTZ
-------------------------------------
Howard S. Schwartz
Senior Vice President/Finance
and Chief Financial Officer
(Principal Financial Officer)
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(FINANCIAL INFORMATION IN THOUSANDS)
INTRODUCTION
The Company emerged from its reorganization proceedings in June, 1993.
Management believes it will be able to concentrate on operational activities and
pursue the Company's long-term growth and strategic objectives. The Company
believes that its ability to meet growth and strategic objectives is contingent
upon several factors. The Company has reduced the size of its retail paint store
chain to a core group of stores concentrating on selling paint and related
merchandise, and must increase operating profits from these remaining core
stores. The Company will also focus on its competitive and asset strengths in
paint market share, retail locations, and paint manufacturing capabilities. In a
multifaceted approach, the Company hopes to add potential incremental business
and profits by (i) remerchandising its retail paint stores, (ii) launching new
paint products, (iii) increasing sales to outside retailers (i.e., private
labeling), and (iv) reducing general corporate overhead costs associated with
such areas as distribution, warehousing, and management information systems.
On March 16, 1994, the Company entered into an agreement with the Insurance
Company Lenders and Fidelity and Kodak for $10 million of new financing and a
plan to restructure the Company's existing $103 million Insurance Company Loan
and existing $6 million indebtedness with Fidelity and Kodak.
Under the terms of the planned restructure, the Company has agreed to
establish a grantor trust ("Real Estate Trust") to which it will transfer all
but approximately 19 of its operating and non-operating real properties in
exchange for the assumption by the Real Estate Trust of approximately $80
million of existing indebtedness owed to the Insurance Company Lenders under the
Amended Insurance Company Loan. The Company estimates that the book value of the
properties to be sold by the Real Estate Trust will exceed the sale proceeds,
less applicable fees, expenses and other costs, by approximately $16,478.
Accordingly, the Company has provided for this loss in the Consolidated
Financial Statements for the fiscal year ended January 30, 1994. The
establishment of the Real Estate Trust and transfer of substantially all of the
Company's real estate properties is subject to stockholder approval at the
Company's Annual Meeting to be held in June 1994. (See also Liquidity and
Capitalization Measures.)
CHAPTER 11 FILINGS
On February 11, 1992 ("Petition Date"), the Company and four (4) of its
wholly-owned direct and indirect subsidiaries ("Debtors") filed separate
voluntary petitions for reorganization under Chapter 11 of Title 11 of the
United States Code ("Bankruptcy Code") in the United States Bankruptcy Court for
the Central District of California.
On May 13, 1993 ("Confirmation Date"), based upon the receipt of the
required creditor and equity holder acceptances under the Bankruptcy Code, the
Bankruptcy Court confirmed the Debtors' Plan. On June 14, 1993 ("Effective
Date"), all conditions to effectiveness were met and the Reorganization Plan
became effective.
In general, the Reorganization Plan provided for the resolution of all
prepetition claims that existed at the Petition Date and cancellation of
preferred stock, as well as the resolution of certain environmental and legal
matters in exchange for cash, real property, other assets, and common stock.
Pursuant to the Reorganization Plan, holders of the Company's common stock on
the Effective Date retained their shares and 16,758,000 shares of additional
common stock were issued and distributed in partial satisfaction of the allowed
claims of the Company's creditors and preferred shareholders.
RESULTS OF OPERATIONS FISCAL YEARS 1993 AND 1992
Upon emergence from its Chapter 11 proceedings, the Company adopted the
provisions of Statement of Position No. 90-7, "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code" ("Fresh-Start Reporting") as
promulgated by the American Institute of Certified Public Accountants in
November 1990. Accordingly, all assets and liabilities have been restated to
reflect their
1
<PAGE>
reorganization value, which approximates their fair value at the Effective Date.
In addition, the accumulated deficit of the Company was eliminated and capital
structure was recast in conformity with the Reorganization Plan, and as such,
the Company has recorded the effects of the Reorganization Plan and Fresh-Start
Reporting as of August 1, 1993. In connection with the adoption of Fresh-Start
Reporting, the Company recorded one time adjustments of $41,463 (see,
Reorganization Items) which increased the Company's net income for the six
months ended August 1, 1993. The results of operations and cash flows for the
six months ended August 1, 1993 include operations prior to the Company's
emergence from Chapter 11 proceedings and the effect of adopting Fresh-Start
Reporting, and include operations subsequent to the Company's emergence from
Chapter 11 proceedings. Furthermore, the results of operations and cash flows
for the six months ended January 30, 1994 include operations subsequent to the
Company's emergence from Chapter 11 proceedings. As a result, net income (loss)
for the six month period ended August 1, 1993 and six month period ended January
30, 1994 are not comparable with prior periods.
Fiscal 1992 was impacted by the effects of the reorganization process and
the restructuring of operations under Chapter 11. The Company began fiscal 1992
with extremely limited financial resources, poor in-stock inventory positions,
intense pressure from competitors and weakened market conditions, particularly
in the Company's core California markets. Shortly after filing for Chapter 11
protection, the Company arranged a $17,000 debtor-in-possession working capital
facility with a financial institution which provided adequate liquidity during
the Chapter 11 process. During the remainder of fiscal 1992, the Company
restructured virtually all operational departments, closed selected marginal
stores and sold certain real properties to better its financial position.
Accordingly, the Company's financial statements for fiscal 1992 reflect sizeable
Reorganization items including the costs of professional fees, store closings,
estimated liabilities for rejected executory contracts and a write-off of the
note receivable from the Leveraged Employee Stock Ownership Plan ("LESOP"). Such
Reorganization items contributed to a loss of $21,675 for fiscal 1992.
PROFITABILITY MEASUREMENTS
The Company's methods of measuring profitability stated below include
various ratios and statistics which define key performance parameters from
continuing operations:
<TABLE>
<CAPTION>
FISCAL YEAR 1993
--------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED FISCAL YEAR
JANUARY 30, AUGUST 1, -------------------------
1994 1993 1992 1991
----------- ------------ ------------ ----------
(SUCCESSOR (PREDECESSOR
COMPANY) COMPANY) (PREDECESSOR COMPANY)
<S> <C> <C> <C> <C>
Decrease in retail sales (1)(2)........ $ (21,140) $ (2,341) $ (27,999) $(45,750)
Percentage decrease in retail sales
(1)(2)................................ (21.2)% (2.3)% (12.1)% (16.5)%
Percentage (decrease) increase in same
store sales (1)(2).................... (4.0)% 4.5% (11.0)% (12.6)%
Gross profit percentage................ 37.7% 38.1% 38.8% 40.1%
(Loss) earnings before interest and
taxes (3)............................. $ (27,192) $ 35,007 $ (24,359) $(10,110)
<FN>
------------------------
(1) Retail store sales for the six month period ended January 30, 1994 and the
six month period ended August 1, 1993 reflect sales for 52 weeks compared
to 53 weeks for fiscal 1992. The additional week of sales included in
fiscal 1992 for the sixty-two (62) stores open as of January 30, 1994 was
approximately $2.1 million.
(2) "Same" stores are defined as stores open for more than one year. For the
six months ended January 30, 1994 and August 1, 1993, same store sales
reflect sales for the sixty-two (62) stores which the Company operated as
of January 30, 1994.
(3) In connection with the adoption of Fresh-Start Reporting, the Company
recorded one-time adjustments of $41,463 (see Reorganization Items) which
increased the Company's earnings before interest and taxes for the six
months ended August 1, 1993.
</TABLE>
2
<PAGE>
SALES AND GROSS PROFIT
The following table summarizes the decrease in sales for fiscal 1993:
<TABLE>
<CAPTION>
FISCAL YEAR 1993
-------------------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED FISCAL YEAR
JANUARY 30, 1994 AUGUST 1, 1993 1992 VARIANCE
------------------ ----------------- ------------ ---------
(SUCCESSOR (PREDECESSOR (PREDECESSOR
COMPANY) COMPANY) COMPANY)
<S> <C> <C> <C> <C>
Continuing Paint Stores...................... $56,592 $ 62,586 $ 118,844 $ 344
Closed Paint Stores*......................... 21,761 32,566 71,886 (17,559)
-------- ----------------- ------------ ---------
78,353 95,152 190,730 (17,225)
Art Stores (1)............................... 0 5,571 11,827 (6,256)
Zynolyte Products Company (1)................ 0 11,821 21,862 (10,041)
Major Paint Company and Export Sales......... 5,647 2,984 2,330 6,301
-------- ----------------- ------------ ---------
$84,000 $115,528 $ 226,749 $ (27,221)
-------- ----------------- ------------ ---------
-------- ----------------- ------------ ---------
<FN>
------------------------
* Updated to reflect additional store closures through January 30, 1994.
(1) These business units were transferred to newly formed corporations owned by
a grantor trust pursuant to the Reorganization Plan, to secure the
indebtedness owed to Fidelity and Kodak under the Fidelity/Kodak Secured
Notes. Zynolyte Products Company was sold on August 2, 1993.
</TABLE>
Consolidated sales for the six months ending January 30, 1994 and the six
months ending August 1, 1993 were $84,000 and $115,528 a decrease of $27,221
compared to $226,749 for the fiscal year ending January 31, 1993. The decreased
sales were principally caused by the closure of unprofitable stores and the
transfer of two of the Company's business units pursuant to its Reorganization
Plan. The sales decrease for fiscal 1992 reflects the impact of the
reorganization process and the restructuring of operations under Chapter 11. The
Company began fiscal 1992 with extremely limited financial resources, poor
in-stock inventory positions, heavy pressure from competitors and poor market
conditions, particularly in the Company's core California markets. Sales for
fiscal 1991 decreased due to poor in-stock positions and heavy competition from
large discount warehouse stores.
In connection with the adoption of Fresh-Start Reporting, the Company
(referred to as "Successor Company" in the financial tables contained herein)
adopted the First-in, First-out ("FIFO") method for determining the cost of its
inventories. The Company's consolidated FIFO gross profit was 37.7%, 37.4% and
38.8% for the six months ended January 30, 1994, six months ended August 1, 1993
and twelve months ended January 31, 1993, respectively. The decreased margin
resulted, in part, from strategic marketing decisions and competitive factors
pursuant to which the Company reduced prices in certain product categories and
utilized promotional markdowns to improve customer traffic and reduce
discontinued merchandise.
The Company's gross profit percentage for fiscal 1992 decreased to 38.8%.
This change reflects the results of strategic marketing decisions and
competitive factors whereby the Company reduced prices in certain product
segments to attract and hold customers and utilized promotional markdowns to
attempt to improve customer traffic. During fiscal 1991, the Company determined
that a change in accounting principle to include as inventory costs all expenses
directly related to the distribution of merchandise to stores was appropriate.
Previously the Company charged specific merchandise cost and freight into the
Company's warehouse as inventory costs.
The Company's gross profit percentage decreased to 40.1% in fiscal 1991.
This decrease results from the change in accounting principle discussed above
($5,550) as well as a focused change toward promotional pricing and special
order merchandise sales dictated by the Company's search for liquidity.
3
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal 1993, selling, general and administrative expenses decreased 5.9%
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1993
---------------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED FISCAL YEAR
JANUARY 30, 1994 AUGUST 1, 1993 1992 VARIANCE
---------------- --------------- ------------ --------
(SUCCESSOR (PREDECESSOR (PREDECESSOR
COMPANY) COMPANY) COMPANY)
<S> <C> <C> <C> <C>
Paint Stores............................ $ 29,314 $ 35,722 $ 68,272 $ (3,236)
Art Stores (1).......................... 0 2,047 3,819 (1,772)
Zynolyte Products Company (1)........... 0 2,722 4,501 (1,779)
Major Paint Company and Export Sales.... 1,174 114 244 1,044
Corporate costs......................... 4,154 5,103 8,543 714
-------- --------------- ------------ --------
$ 34,642 $ 45,708 $ 85,379 $ (5,029)
-------- --------------- ------------ --------
-------- --------------- ------------ --------
<FN>
------------------------
(1) These business units were transferred to newly formed corporations owned by
a grantor trust pursuant to the Reorganization Plan, to secure the
indebtedness owed to Fidelity and Kodak under the Fidelity/Kodak Secured
Notes. Zynolyte Products Company was sold on August 2, 1993.
</TABLE>
The decrease results primarily from the closing of 57 stores and the
transfer of two of the Company's business units pursuant to its Plan. Selling,
general and administrative expenses were 41.2% and 39.6% of sales, for the six
months ended January 30, 1994 and August 1, 1993, respectively, versus 37.7% for
the fiscal year ended January 31, 1993. The increase in the percentage of sales
for the six months ended January 30, 1994 and August 1, 1993 versus fiscal 1992
is due to the reduction in sales as previously discussed and the fixed nature of
certain expenses.
The decrease for fiscal 1992 resulted from the closing of 15 stores and
stringent cost controls. For fiscal 1991, the decrease resulted from the change
in accounting for warehouse costs and the Company's program to close selected
unprofitable stores.
RESTRUCTURING CHARGES
The results of operations for the fiscal year ended January 30, 1994 reflect
a provision of $6,000 for the anticipated costs to effect the expanded
restructuring of the Company's operations and closure of approximately
thirty-four (34) retail outlets which the Company owns. This provision includes
$3,200 for inventory clearance markdowns, employee severance and other store
closing costs. The provision also includes $1,200 for property taxes, utilities,
maintenance and other ongoing holding costs which the Company expects to incur
until these thirty-four (34) retail stores are sold and $1,600 for similar
ongoing costs relating to 31 previously closed stores which, due to various
market conditions, have not yet been sold.
The Company has reduced the number of paint stores in operation to 62 from
120 since emerging from bankruptcy on June 14, 1993 and plans to be operating
approximately 59 retail outlets by the end of May, 1994. This is revised from
the Company's initial plan to maintain approximately 80 of its stores in
operation.
At the end of fiscal 1991, the Company identified certain paint stores which
were unprofitable. The Company determined that these stores should be closed and
recorded a $2,000 restructuring charge against the fiscal 1991 earnings to
recognize markdown and other costs related to the closing of those stores.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $1,744 and $2,558 for the six months ended
January 30, 1994 and August 1, 1993, respectively, versus $5,910 for the fiscal
year ended January 31, 1993. This decrease was principally due to the sale of
surplus real estate properties and the Company's adoption
4
<PAGE>
of Fresh-Start reporting whereby it restated and reallocated real estate values
between non-depreciable land and depreciable buildings and fixtures. In
addition, the Company does not depreciate non-operating properties held for sale
as such properties are carried at their net realizable value. Depreciation and
amortization was $5,956 in fiscal 1991.
INTEREST INCOME AND INTEREST EXPENSE
Interest income reflects amounts earned on cash deposits. Interest expense
includes accrued amounts on the Senior Notes, short-term borrowings, as well as
the other debt. Interest expense for the six months ended January 30, 1994 and
six months ended August 1, 1993 was $5,358 and $6,556, respectively, versus
$13,846 for the year ended January 31, 1993. The decrease results from the
reduction of outstanding long-term debt from the sale of real property
encumbered under the Company's Senior Notes and settlement of prepetition
obligations pursuant to the Plan.
Interest income for fiscal 1992 of $156 is classified as a component of
Reorganization Items in the Company's consolidated financial statements.
Interest income of $1,397 for fiscal 1991 reflects the availability and
investment of excess funds prior to the time such funds were required for
working capital.
During its Chapter 11 case, the Company accrued interest on the Insurance
Company Loan at 9%. Under the terms of an "Adequate Protection Stipulation"
approved by the Bankruptcy Court the Company was required to make payments to
the Insurance Company Lenders amounting to $900 per month. Such interest expense
was approximately $3,331 less than the contractual stated rate (initially
11.75%). Similarly, the Company accrued interest on the Revolving Loan and LESOP
loan at prime plus 2%.
Interest expense during fiscal 1991 decreased in direct relationship to the
repayment of debt. The Company repaid (net of issuance) $9,124 in 1991.
OTHER INCOME
Other income primarily represents the Company's gains on the sales of real
property.
LOSS ON TRANSFER OF REAL PROPERTIES TO A GRANTOR TRUST
On March 16, 1994, the Company entered into an agreement with the Insurance
Company Lenders and Fidelity and Kodak for $10 million of new financing and a
plan to restructure the Company's existing $103 million Insurance Company Loan
and existing $6 million indebtedness with Fidelity and Kodak.
Under the terms of the planned restructure, the Company has agreed to
establish a grantor trust ("Real Estate Trust") to which it will transfer all
but approximately 19 of its operating and non-operating real properties in
exchange for the assumption by the Real Estate Trust of approximately $80
million of existing indebtedness owed to the Insurance Company Lenders under the
Amended Insurance Company Loan. The Company estimates that the book value of the
properties to be sold by the Real Estate Trust will exceed the sale proceeds,
less applicable fees, expenses and other costs, by approximately $16,478.
Accordingly, the Company has provided for this loss in the Consolidated
Financial Statements for the fiscal year ended January 30, 1994. (See also
Liquidity and Capitalization Measures).
REORGANIZATION ITEMS
Reorganization items consist of expenses directly related to the
reorganization of the Company from the Petition Date through the Effective Date,
including professional fees and other costs related to the administration of
bankruptcy matters. In addition, reorganization items include adjustments to
record assets and liabilities at fair value in connection with the Company's
adoption of Fresh-Start Reporting, and a loss on the sale of business units and
real properties transferred to a grantor trust in accordance with the Plan.
Additional information is included in Item 1 and in Note 2 to the Consolidated
Financial Statements.
5
<PAGE>
INCOME TAXES
The tax provision for fiscal 1993 represents the minimum due for franchise
taxes and the net change in deferred tax.
The 1992 tax provisions represents the expense associated with settlement of
an Internal Revenue Service examination covering the Company's four fiscal years
preceding the Chapter 11 filing, additional refunds received from carryback of
the federal and state operating losses for fiscal 1991, state tax liabilities
for fiscal 1992, and the net change in deferred tax for fiscal 1992.
The 1991 tax provision represents the Company's current benefit equivalent
to the anticipated tax refund available when the current year's taxable loss is
carried back to offset previous year's tax liabilities plus the liquidation of
deferred taxes related to balance sheet changes reflected in selected assets and
liabilities at the end of fiscal 1991.
LIQUIDITY AND CAPITALIZATION MEASURES
The Company considers the following as comparative measures of liquidity and
capital resources:
<TABLE>
<CAPTION>
FISCAL YEAR 1993
---------------------------------
SIX MONTHS
ENDED SIX MONTHS FISCAL YEAR
JANUARY 30, ENDED ---------------------------
1994 AUGUST 1, 1993 1992 1991
--------------- --------------- ------------ -------------
(SUCCESSOR (PREDECESSOR
COMPANY) COMPANY) (PREDECESSOR COMPANY)
<S> <C> <C> <C> <C>
Working capital (deficiency)
(1)(2)....................... $ (2,206) $ 5,909 $ 30,155 $ (126,976)
Current ratio (1)(2).......... .94 to 1 1.14 to 1 2.15 to 1 .32 to 1
Cash (used for) provided by
operating activities......... $ (11,413) $ (9,089) $ 648 $ 7,880
Debt and mandatory redeemable
preferred stock to
stockholders' equity ratio
(1)(2)....................... 10.7 to 1 7.05 to 1 (7.44) to 1 (78.27) to 1
<FN>
------------------------
(1) As of January 31, 1993, all contractual debt has been classified as
non-current or as a liability subject to compromise.
(2) As of January 26, 1992, all contractual debt for legal entities in Chapter
11 had been classified as current because of various loan covenant
violations.
</TABLE>
The Company's capital structure remains highly leveraged despite its
recapitalization and restructuring.
On the Effective Date, the Company repaid $2.2 million previously borrowed
under its Debtor-in-Possession ("DIP") line of credit, and through January 30,
1994 borrowed approximately $6.6 million (net) available under a new Loan and
Security Agreement dated June 14, 1993 with Foothill Capital Corporation
("Foothill").
At January 30, 1994, the Company had no additional availability under its
working capital facility with Foothill. The credit agreement provided for a one
year renewal on June 14, 1994. On April 14, 1994, the credit agreement was
amended to extend the line of credit for three additional years through April
14, 1997. As of January 30, 1994, the Company was not in compliance with certain
financial covenants contained in the Amended Insurance Company Loan. On March
16, 1994, the Amended Insurance Company Loan was amended to provide, among other
things, a waiver of compliance with all financial covenants until April 30,
1995.
During the third and fourth quarters of fiscal 1993, the Company borrowed an
additional $6 million for working capital from the grantor trust established
under the Reorganization Plan. The grantor trust financed the loan on issuer
notes to Fidelity and Kodak in an aggregate amount of $6 million upon terms
substantially identical to the Fidelity/Kodak Secured Notes. During the fourth
6
<PAGE>
quarter of fiscal 1993, the Insurance Company Lenders agreed to defer a
mandatory $1.0 million prepayment due under the Amended Insurance Company Loan
for a period of six months upon terms substantially identical to the Amended
Insurance Company Loan.
Notwithstanding the additional borrowings discussed above, the Company
continued to experience cash flow difficulties due to continued operating losses
and the lack of sufficient borrowing availability under its credit agreement
with Foothill.
On March 16, 1994, the Company entered into an agreement with the Insurance
Company Lenders and Fidelity and Kodak for $10 million of new financing and a
plan to restructure the Company's existing $103 million Insurance Company Loan
and existing $6 million indebtedness with Fidelity and Kodak. Under the terms of
this agreement, the Company borrowed an aggregate of $10 million from the
Insurance Company Lenders, Fidelity and Kodak (the "New Loan"). The New Loan
provides for monthly interest at a rate of 10% per annum. Principal on the loan
is due in full in March 1999. The indebtedness is secured by a second lien on
substantially all of the Company's real property. The loan proceeds will be used
to pay existing trade debt, provide working capital and pay for transaction
expenses.
The $10 million of new financing coupled with projected cash flow from
operations is expected to provide adequate liquidity coverage through the 1994
fiscal year end.
Fidelity and Kodak have agreed to restructure $6 million of existing
indebtedness to a term of six years with interest payable quarterly at a rate of
10% per annum. This indebtedness will be secured by a third lien on certain of
the Company's real properties.
Under the terms of the planned restructure, the Company has agreed to
establish a grantor trust ("Real Estate Trust") to which it will transfer all
but approximately 19 of its operating and non-operating real properties in
exchange for the assumptions by the Real Estate Trust of approximately $80
million of existing indebtedness owed to the Insurance Company Lenders under the
Amended Insurance Company Loan ("Assumed Indebtedness"). The Company estimates
that the book value of the properties to be sold by the Real Estate Trust will
exceed the sale proceeds, less applicable fees, expense and other costs, by
approximately $16,478. Accordingly, the Company has provided for this loss in
the Consolidated Financial Statements for the fiscal year ended January 30,
1994. Interest and principal on the Assumed Indebtedness will only be payable to
the extent of proceeds from sales of Real Estate Trust assets. The interest rate
on the Assumed Indebtedness will be increased to 10% per annum. The Company will
provide a limited guaranty in an amount equal to 10% of the Assumed
Indebtedness.
The servicer of the Real Estate Trust will be Transamerica Realty Services,
Inc. (the "Servicer"). The Servicer will sell the Real Estate Trust assets in
the ordinary course. Until sold, the operating properties will be leased back to
the Company for no rent until October 31, 1997. Proceeds from such sales will be
used to repay the Assumed Indebtedness. The Company will retain an 80% residuary
interest in the Real Estate Trust after all of the Assumed Indebtedness has been
repaid. The Insurance Company Lenders will retain a 20% residuary interest in
the Real Estate Trust. As operating properties are sold, the Company intends
generally to either remain in the location on a leased basis, or relocate to new
leased premises.
The establishment of the Real Estate Trust and transfer of substantially all
of the Company's real estate properties is subject to stockholder approval at
the Company's Annual Meeting to be held in June 1994. Upon the establishment of
the Real Estate Trust, the Company has agreed to issue to the Insurance Company
Lenders, Fidelity and Kodak warrants to purchase an aggregate of 750,000 shares
of the Company's common stock at an exercise price equal to the market price for
the shares on the day of grant. Thirty months from the establishment of the Real
Estate Trust, warrants to purchase an additional aggregate of 750,000 shares
will be issued to the Insurance Company Lenders, Fidelity and Kodak. In each
case the warrants will be redeemable by the Company for a price equal to $1.00
per share.
7
<PAGE>
Under the terms of the restructure, if the Real Estate Trust is not
established and the properties transferred by September 16, 1994, then the
principal on the New Loan and the existing indebtedness to Fidelity and Kodak
will become due and payable.
The existing Insurance Company Lenders' indebtedness not assumed by the Real
Estate Trust (approximately $23 million) ("Retained Indebtedness") will be
restructured to provide for principal to be due and owing in March 1999.
Interest will continue to be due monthly at an annual rate of 9% per annum. The
Retained Indebtedness will continue to be secured by real properties of the
Company not transferred to the Real Estate Trust.
At June 13, 1994, the Company operated 58 paint stores (62 at January 30,
1994), 31 of which are among the 91 parcels of real property to be transferred
to the Real Estate Trust. From the date upon which those parcels are transferred
to the Real Estate Trust until the date upon which those parcels are sold, the
Company shall not be responsible for any lease payments to the Real Estate
Trust, provided the sales occur prior to October 31, 1997. Upon the sale of
those parcels, the Company intends generally to either remain in the same
location on a leased basis or relocate to new leased locations. The Company will
be given a minimum of four months notice prior to the sale of any currently
operating retail paint store. The Company has already engaged a real estate
consultant who is actively involved in identifying potential sites for new
stores.
The Company's liquidity coverage is highly dependent on cash flow from
operating paint stores. During fiscal 1993, the cash flow from the then 58
operating paint stores was approximately $13.1 million of which approximately
$5.8 million was the cash flow from the 31 stores which are to be transferred to
the Real Estate Trust. While it is the Company's intention generally to either
remain in the same location on a leased basis or relocate to new leased
locations, the Company can give no assurances that it will be able to negotiate
favorable leases for the same locations or find and relocate to suitable new
leased locations with favorable terms as these stores are sold.
Beginning with fiscal 1995, the Company's cash flow could be seriously
impacted depending on the number of operating stores which could be sold and the
timing of such sales. Should this occur, the Company's ability to meet its
obligations would be impaired and additional sources of working capital would be
required. The Company would then pursue other potential financing activities
which may include the sale of certain other assets such as the Major Paint
Company.
As previously discussed, a proposed restructuring of the Company's debt with
the Insurance Company Lenders, which will substantially reduce the Company's
debt service requirements, is subject to stockholder approval. Since this
restructuring has not yet been approved by the Company's stockholders, the
report of the Company's independent auditors dated April 22, 1994 indicates that
there is substantial doubt as to the Company's ability to continue as a going
concern. The potential consequences of the Company's inability to continue as a
going concern would be the filing of a petition(s) under chapter 7 of the United
States Bankruptcy Code.
However, the Company expects that the proposed restructuring of debt will be
approved by the stockholders at the Annual Meeting. Fidelity and Kodak have
advised the Corporation that they currently intend to vote their shares,
approximately 41.56% of the issued and outstanding common stock of the Company,
for this proposal. The Insurance Company Lenders have agreed to vote their
shares, approximately 21.8% of the issued and outstanding common stock of the
Company, in the same proportion that all other shares are voted for or against
the proposal.
INVENTORY VALUATION
During the first quarter of fiscal 1991, the Company determined that a
change in accounting principles to include as inventory costs all expenses
directly related to the distribution of merchandise to the stores was
appropriate. Previously, the Company charged specific merchandise cost and
freight into the Company's warehouse as inventory costs. The Company believes
that the new costing
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technique is preferable because (1) it more appropriately matches costs and
revenue in the periods in which the revenues are earned and (2) the method more
closely corresponds with the methods used by others within the Company's
industry.
The additional freight and rehandling costs associated with the Company's
restructuring and closing of stores during fiscal 1993 were not included as
inventory costs. The inventory in those stores designated to close was
substantially liquidated through in-store clearance sales with remaining minimal
amounts transferred to other nearby stores. The costs of transferring the
remaining inventory was charged to operations. The nature of the additional
freight and handling costs consisted of freight charges to move store fixtures
and remaining inventory from a closed store to a nearby store and labor costs
associated with packing, loading, and unloading of the store fixtures and
inventory.
COMMITMENTS AND CONTINGENCIES
As of January 30, 1994, the Company has been notified that it is a
potentially responsible party (PRP) with respect to hazardous waste at five (5)
of its sites. The Company has estimated and accrued for the costs of its
participation in remediation activities based upon a reasonable estimate of the
costs, or if available information indicates that the estimated amount of the
costs is within a range, the lower end of the range was accrued. The
determination was based on an analysis of each of the five sites. The Company
believes that there will not be a future material change to earnings due to its
PRP status at these sites based on the amounts accrued.
EXPLANATION OF SALES DECREASE FOR 1992
The sales decrease for fiscal 1992 reflects the impact of the reorganization
process and restructuring of operations under Chapter 11. The Company began
fiscal 1992 with extremely limited financial resources, poor-in-stock inventory
positions, heavy pressure from competitors and poor market conditions,
particularly in the Company's core California markets. The impact of the
reorganization process and the restructuring of operations under Chapter 11 is
not expected to negatively impact sales in the future. However, the Company's
sales are still impacted by poor market conditions in the California markets and
sales in the future may be impacted by heavy pressure from competitors.
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