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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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<S> <C> <C>
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JANUARY 29, 1995
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
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STANDARD BRANDS PAINT COMPANY
(Exact name of registrant as specified in its charter)
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DELAWARE 95-6029682
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4300 WEST 190TH STREET 90509-2956
TORRANCE, CALIFORNIA (Zip Code)
(Address of principal
executive offices)
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Registrant's telephone number, including area code: (310) 214-2411
Securities registered pursuant to Section 12(b) of the Act:
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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<S> <C>
Title of each class Name of each exchange on
which registered
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Securities registered pursuant to Section 12 (g) of the Act: NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 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. /X/
THE EXHIBIT INDEX IS LOCATED AT PAGES 28 THROUGH 32.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes __X__ No ____
As of April 7, 1995 the registrant had 22,429,275 shares of its Common
Stock, $.01 par value, issued and outstanding, and the aggregate market value of
the voting stock held by non-affiliates of the registrant was $9,868,881
(approximately based upon the closing price of the Common Stock on the New York
Stock Exchange on such date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed within 120 days
from the Company's fiscal year end are incorporated into Part III by reference.
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PART I
ITEM 1. BUSINESS
GENERAL
Standard Brands Paint Company, a Delaware corporation founded in 1939
(hereinafter referred to, together with its consolidated subsidiaries, as the
"Company") is an integrated supplier of paint and related products. The Company
endeavors to provide the do-it-yourself customer with exceptional value through
a complete selection of high quality merchandise at competitive prices,
supported by attentive, friendly and expert service and project advice. As of
January 29, 1995, the end of the 1994 fiscal year (the term "fiscal year" refers
to the Company's yearly period ending in January of the year following the year
described, so, "1994 fiscal year" means the yearly period ending in January,
1995), the Company operated 58 retail units. Retail locations identified for
eventual sale are not necessarily reflective of any intention to abandon an area
or market. The Company is also looking at opportunities to improve certain owned
locations with leased store sites.
As discussed below, the Company has entered into agreements with Corimon,
S.A.C.A., a Venezuelan corporation, the Company's Insurance Company Lenders,
Fidelity Capital & Income Fund ("FCI") and Kodak Retirement Income Plan Trust
Fund ("KRI") to provide a material financial restructuring of the Company. See
"1995 Restructuring".
STANDARD BRANDS SPECIALTY RETAIL STORES
The Company's specialty retail stores (the "Paint Stores") cater to the
do-it-yourself customer. The Company pioneered this retailing concept in 1939
and continues to be one of the major specialty retailers of paint and home
decorating products in the western United States. The Company's marketing goal
for the retail stores is to provide the best source for paint and related
products in the Company's marketing area aimed at the needs of the
"do-it-yourself" customer interested in decorating and maintaining his or her
home. The retail stores' marketing strategy is to characterize the retail stores
as "neighborhood" Paint Stores, offering the best selection of paint and related
products aimed at the needs of the do-it-yourself customer, coupled with first
class service and everyday low prices.
The retail stores generally offer the do-it-yourself customer the most
complete selection of paint, paint applicator products and accessories,
wallcoverings, window treatments and floorcoverings combined under one roof, as
well as excellent selections of art supplies. Over 8,000 stock keeping units
offer large selections of paint colors in addition to wallcoverings, window
treatments, flooring and carpeting, and art material. Stock-keeping units are
offered in quantities and assortments large enough to handle virtually any home
decorating project. Large selections of paint colors, wallcoverings, window
treatments, flooring and carpeting are also conveniently offered through special
order to meet customer demands. In addition, a multitude of products are
conveniently offered through special order to meet customer demands of even the
most discriminating decorator.
The retail stores stock the Company's own high quality products in addition
to national name brand merchandise. The Company continually reviews its product
mix, discontinuing some products and adding others, to anticipate and meet the
changing needs of its customers. A wide selection of the most popular products
are offered at prices comparable to those of the Company's primary competitors.
The Company's marketing strategy emphasizes the retailing of quality paint
at competitive prices with friendly, knowledgeable service. The Company strives
to distinguish itself from large warehouse operations by emphasizing customer
service. The Company's sales staff offers one-on-one personal service including
step-by-step project advice in all product categories.
As of January 29, 1995, the Company operated 58 retail stores. When
selecting a retail location, the Company searches for sites on well trafficked
streets in popular shopping areas, generally on or near major intersections. The
Paint Stores range in size from sites of approximately 3,800 square feet to
stores of approximately 21,900 square feet. In the more prevalent format, the
retail stores range
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from approximately 10,000 to 16,000 square feet, resulting in an average of
approximately 13,300 square feet. Net retail selling space ranges from
approximately 3,300 square feet to 18,500 square feet, resulting in an average
of approximately 11,800 square feet.
ADVERTISING
The Company's retail advertising utilizes an aggressive multimedia approach
to attract new customers and to reemphasize values to existing customers. Print
advertising represented 68% of the overall budget, and 3.3% of retail sales in
the 1994 fiscal year. Television and radio advertising represented 21% of the
overall budget, while yellow page advertising fees, publicity, etc. represented
the balance. For the 1994 fiscal year, the Company spent 4.8% of sales on
advertising costs.
MERCHANDISING
The Company's retail merchandise strategy is to offer to its customers the
most comprehensive selection of quality paint and paint-related items,
wallcoverings, window treatment, floor coverings, and art and hobby supplies at
competitive prices.
PAINT. The largest single specialty product group in the Company's retail
sales mix is paint which contributed 45.6% to total retail sales for the 1994
fiscal year. Of those sales, 75.9% were from paint and paint-related products
manufactured by the Company's Major Paint Company subsidiary. The Company's most
notable manufactured paint lines, DECADE and HIDE-ALL, are heavily advertised
and promoted. The Company's retail stores carry a vast selection of types and
qualities of paint and paint specialty products. The Company can computer match
and mix any color of paint that a customer might need, and offers this service
free of charge. Paint applicators, accessories and sundries added another 13.3%
to retail sales for the 1994 fiscal year.
FLOORCOVERING. The Company's retail stores offer a wide selection of hard
surface floorcoverings including sheet vinyl, floor tile, ceramic, marble and
wood tile, as well as a full compliment of carpeting, ranging from fine quality
broadloom to indoor/outdoor. Floorcovering contributed 21.3% to total retail
sales for the 1994 fiscal year.
WALLCOVERING. The Company's retail stores stock an average of 150 wallpaper
patterns, and offer approximately 30,000 wallpaper patterns through in-store
selection of special order books and offer virtually every pattern of every
national brand of wallcovering through a customized direct order program. Among
other wall decor options available at the stores are wall murals, cork panels
and mirrors. Wallcovering contributed 3.2% to total retail sales for the 1994
fiscal year.
WINDOW TREATMENT. A full selection of vertical blinds, mini blinds, pleated
shades, valances, drapery hardware and exterior blinds is available at the
Company's retail stores. The Company's special order program offers customized
selections to meet its customer's individual demands and specifications. Window
treatment made up 4.3% of total retail sales for the 1994 fiscal year.
ART MATERIALS. The Company's retail stores carry a wide range of artists
materials including artists colors, brushes, canvas, frames and papers. They
also stock drafting materials, easels, marking pens, printing inks, adhesives,
and other complementary materials aimed at accommodating the part-time artist.
Sales of art materials contributed 6.4% to total retail sales for the 1994
fiscal year.
CONVENIENCE AND REPLACEMENT ITEMS. The Company's retail stores carry an
assortment of products often needed by customers as replacement items to
complete their painting project, including lighting, plumbing, electrical,
cabinet hardware, security hardware, cleaners and waxes, and shelf paper. Sales
of convenience and replacement items contributed 5.9% to total retail sales for
the 1994 fiscal year ended.
IN HOME SALES AND SERVICES. During the fourth quarter of fiscal 1993, the
Company implemented a new "In-Home Sales and Services" program. This program is
designed to meet its customers needs for expert, at-home consultation for home
fashion products, especially the measuring and selection of floorcovering and
window treatment.
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COMPETITION
The Company competes in the paint and decorating industry. This is a
specialty segment of the retail industry and the key product categories are
paint, wall coverings, floor coverings and window treatments. The Company is a
significant participant in all four groups, and in fact these four groups are
the primary focus of the Company.
Nationally over 50% of paint sales, 30% of window treatments and 75% of
floor covering sales are accounted for by this specialty retail segment. In 1993
over 18,000 specialty retail outlets offered these products. Sales growth in the
industry has been in the 6-7% annual average increase range in recent years.
The Paint Stores compete with numerous general merchandisers and warehouse
stores that emphasize everyday low pricing, home improvement centers, paint and
wallpaper stores, hardware and specialty stores located in the same geographical
areas. The market for Paint Store products is highly fragmented and competition
is based upon service, product, quality and price.
The Company has identified its target customer as the do-it-yourself or
buy-it-yourself homeowner with an additional target of the handyman as opposed
to the contractor.
The primary competitors for the targeted consumer profile are home
improvement warehouses, home improvement centers, discount stores, department
stores and warehouse clubs.
MANAGEMENT INFORMATION SYSTEMS
All of the Company's retail units are computer linked to its main frame
computer. Sales transactions are computer processed and UPC bar code scanning is
operational in all stores. The Company plans, within the next 12 to 24 months,
to replace its present mainframe computer with a mini-computer system. The
conversion to a mini-computer system will result in sizeable reductions in
operating and support services costs.
TRAINING AND DEVELOPMENT
Vendors and industry professionals are called upon to provide product and
job training in live sessions or on video tape to improve the Company's ability
to better serve customers and increase customer count. Retail store employees
receive customer service training on a regular basis to reinforce the priority
of satisfying customers and ensuring their return for future needs. This
training emphasizes that a transaction can only be good for the Company if it is
good for the customer.
TRADEMARKS
The Company owns, or is in the process of applying for, federal and state
registrations of numerous trademarks and servicemarks associated with its
products, including STANDARD BRANDS, DECADE, NEXT DECADE, ADVANTAGE, GALLERIE,
HIDE-ALL, KIDDO, NEAT AND CLEAN, PREMIUM, PROFESSIONAL, RUST DEFENDER, RUST
GUARD, SATIN WALL FINISH, STANDARD BRANDS WINDSOR 21, SUPER-TONE, WALL OF
ANOTHER COLOR, MAJOR, WITH MY OWN TWO HANDS and its Brush Design Logo.
SEASONALITY OF RETAIL BUSINESS
Due to warm-weather paint purchase and use trends by consumers and the
significant proportion of retail sales to the Company's total revenue, sales
tend to be highest during the summer months.
MAJOR PAINT COMPANY
The Company's wholly-owned subsidiary, Major Paint Company, manufactures and
distributes high quality paint and related products. Major Paint Company's
production capacity enables it to control availability, minimize inventories and
price its products competitively. Major Paint Company's production facilities
manufacture predominantly water-based, interior/exterior paints and are
automated to maximize productivity and are environmentally safe.
Major Paint Company produces approximately 76% of the paints sold by the
Company in its retail stores, consisting of 27 lines of paint and paint
products.
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For the 1994 fiscal year, Major Paint Company packaged 5.1 million gallons
of paint and paint products at its Torrance, California facility.
Major Paint Company actively pursues outside sales through the manufacture
and sale of both the Company's labeled paint products, paints packaged under
private labels and paint concentrate. Major Paint Company's sales to
unaffiliated companies were $9.2 million for the 1994 fiscal year.
The paints manufactured by Major Paint Company require over 100 raw
materials including resins such as latex emulsions and alkyd solutions, pigments
such as titanium dioxide and other chemicals such as glycols and solvents, all
of which are generally available from several suppliers in sufficient
quantities.
RESEARCH AND DEVELOPMENT. Major Paint Company is responsible for the
research and development activities associated with the Company's paint and
paint-related products. A fully equipped laboratory is maintained, staffed by
chemists and laboratory technicians, to research and develop new product
formulations.
New and alternative raw materials are also tested in this research and
development laboratory to determine their value in further improving the
coverage, flow and leveling qualities of the Company's paints. The Company
expended $172,000 in connection with research and development activities for the
1994 fiscal year, compared to $364,600 for the 1993 fiscal year and $414,100 for
the 1992 fiscal year.
QUALITY CONTROL. Assuring the quality of its paint products is a top
priority of the Company. Once a formulation has been developed by Major Paint
Company's research laboratory, every production batch is tested in the quality
control lab for both its practical properties and its technical specifications.
A staff of chemists and technicians is employed to guarantee the consistency and
quality of all the products manufactured by Major Paint Company.
COMPETITION. Major Paint Company competes with both large national paint
producers and smaller regional producers throughout the western United States
outside of Company stores. Major Paint Company is considered competitive in both
price and quality. Important national competitors are Sherwin Williams, Glidden,
Dutch Boy, and PPG. Smaller regional companies such as Sinclair, Behr, Ameritone
and United Paint among others provide regional competition. Major Paint Company
has certain advantages in its low cost structure and in being a full line
producer. Lack of costs associated with national advertising is also an
advantage in Major Paint Company keeping its competitive edge.
TRADEMARKS. Major Paint Company owns, or is in the process of applying for,
federal and state registrations of numerous trademarks and service marks
associated with its products, including BASIX, CONTEMPO, CYCLE II, CONTRACTOR'S
CHOICE, CONTRACTORS GRADE A, KIDS PRUF-MOM'S SECRET WEAPON, and SUDDENLY 21.
ENVIRONMENTAL MATTERS
As of January 29, 1995, the Company has been notified that it is a
potentially responsible party (PRP) with respect to hazardous waste at seven (7)
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 seven sites. The Company
believes that there will not be a future material charge to earnings due to its
PRP status at these sites based on the amounts accrued.
The Company undertakes to comply with various governmental regulations
pertaining to the environment, the use, storage and discharge of waste materials
and worker safety. The Company maintains health and safety programs to minimize
potential exposures and to protect the health and welfare of employees and
community residents. Major Paint Company's Torrance paint manufacturing
operation has been exempted from federal and state permit requirements due to
its program in waste reduction at the source and through recycling then reusing
manufacturing process waste water.
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Due to the nature of paint products manufactured and/or sold in the past, the
Company received various notifications from governmental agencies and landowners
prior to and during the Chapter 11 Proceeding that it may have been a
potentially responsible party at several sites. These matters were compromised
and settled as part of the Reorganization Plan.
As part of its environmental disposal program, Major Paint Company currently
manufacturers and sells recycled paint to municipalities, state governments, the
United States General Services Administration and to retail customers through
the Paint Stores. The recycled paint consists of old paint, manufacturing waste
and virgin materials.
Capital expenditures to comply with governmental regulations have not been
significant and have had no material effect upon the Company's competitive
position or earnings.
EMPLOYEES
As of January 29, 1995, the Company employed 853 people, 592 of whom worked
in retailing and 261 of whom worked in office, warehousing and manufacturing
positions. Approximately 60% of the Company's employees are represented by the
United Food and Commercial Workers Union ("UFCW"). The majority of these
employees are covered by four-year contracts with the UFCW which were ratified
in November 1991.
FINANCIAL CONDITION PRIOR TO CHAPTER 11 FILING
In 1987, the Company implemented a recapitalization pursuant to which the
Company repurchased 55% of the then outstanding shares of the Company's Common
Stock ("1987 Recapitalization"). The 1987 Recapitalization was financed by
approximately $190 million of new debt and the issuance of $16.3 million of
Series B Preferred Stock. The indebtedness incurred consisted of (i) a $132.5
million loan secured by substantially all of the Company's real estate
("Insurance Company Loan Agreement") from the Insurance Company Lenders, (ii)
bank ("Bank") financing for a $45 million revolving line of credit and (iii) a
$15 million loan to the Company's Leveraged Employee Stock Ownership Plan
("LESOP").
The Company implemented a business plan concurrent with the 1987
Recapitalization emphasizing various strategic changes to the Company's
operations. During the 1988 and 1989 fiscal years, however, extrinsic factors
dramatically reduced the Company's profitability. Declines in housing starts, a
consumer spending slowdown in several of the Company's markets, defense budget
reductions and increased competition from warehouse-type distributors and large
home centers in already saturated markets resulted in reduced sales and caused
the Company to reduce prices leading to an erosion of the Company's retail gross
profit margins.
As the Company continued to experience reduced sales and a deteriorating
financial condition, its gross profit margin continued to erode due to poor
economic conditions along with promotional pricing and the need for special
order merchandise (dictated by tightening liquidity). The Company made a
strategic decision to refocus the marketing and the merchandising strategy for
its retail stores and return to its historical role as a retail center for
paint. In spite of its efforts, high levels of debt service caused operating
losses of $10 million for the fiscal year ended January 27, 1991.
In the first quarter of fiscal 1991, the Company's bank credit facilities
were cancelled, resulting in a $5 million decrease in available working capital.
The Company's trade creditors, in response, modified their terms, restricted
credit, or limited or withheld merchandise shipments. As a result, inventory
levels became insufficient to sustain normal operations. In addition, the
Company lacked liquid resources for debt service due to operational problems and
the depressed economic conditions. In May 1991, unable to refinance the
obligations owed under the bank facility, the Company defaulted under certain
financial covenants with the Insurance Company Lenders. The Company restructured
its debt in the latter part of May 1991 by amending the Insurance Company Loan
Agreement to include a pledge of $1.2 million in value of previously
unencumbered and undeveloped real estate, and a preferred stock exchange of $7.9
million of Series D Preferred Stock and $8.3 million of Series E Preferred
Stock. The Bank received additional collateral in the form of the Company's
LESOP note
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receivable for the LESOP loan. Following this restructure, the Company sought
but was unable to obtain additional capital. For the fiscal year ended January
26, 1992, the Company reported a net loss of $18 million and an operating loss
of $26.7 million.
CHAPTER 11 FILING AND PLAN OF REORGANIZATION
Unable to resolve its financial problems, the Company, and four of its
direct and indirect wholly-owned subsidiaries, Standard Brands Paint Co., a
California corporation, Major Paint Company, a California corporation, Standard
Brands Realty Co., Inc., a California corporation, and Zynolyte Products
Company, a California corporation, filed separate voluntary petitions under
chapter 11 of the United States Bankruptcy Code, 11 U.S.C. Section101 et seq.,
on February 11, 1992, for the purpose of implementing the operational and
financial restructuring of their businesses. On March 3, 1993, the Company along
with the other filed subsidiaries, filed their Fourth Amended Joint Plan of
Reorganization (the "Reorganization Plan") with the bankruptcy court. The
Reorganization Plan was confirmed by the Bankruptcy Court on May 13, 1993 and
became effective on June 14, 1993.
The Reorganization Plan resulted in a recapitalization of the Company and a
change in management as follows: (i) approximately $29.6 million of the
outstanding debt owed to FCI and KRI as successors in interest to the Bank, was
converted into 11,283,720 shares of Common Stock, or approximately 50.5% of the
Company's issued and outstanding Common Stock as of the effective date of the
Reorganization Plan, (ii) the maturity date of the Insurance Company Loan (with
a principal amount outstanding of approximately $117 million) was extended at a
reduced interest rate (the "Amended Insurance Company Loan"), (iii) unsecured
priority claims were paid cash in full, (iv) $22 million of unsecured claims
were paid through the distribution of $8.8 million cash plus proceeds of up to
$4.2 million from sales of eight of the Company's Colorado real estate
properties, (v) the Company's existing outstanding Series D Preferred Stock and
Series E Preferred Stock, including accrued but unpaid dividends (which was held
by the Insurance Company Lenders) was exchanged for 5,474,280 shares of the
Company's Common Stock or approximately 24.5% of the issued and outstanding
Common Stock as of the effective date of the Reorganization Plan, (vi) all of
the common stock held by the LESOP and Payroll Stock Ownership Plan ("PAYSOP")
was distributed to plan participants, and (vii) a new board of directors and
senior management team was elected. Existing common stockholders retained their
equity interests, with the exception of all interests arising under the
Company's Rights Agreement dated November 10, 1987, which was extinguished.
Consequently, prior holders of the Company's Common Stock including the LESOP
and PAYSOP distributees, collectively retained approximately 25.0% of the
Company's total issued and outstanding shares as of the effective date of the
Reorganization Plan.
The Reorganization Plan was financed, in part, by FCI and KRI through a
newly formed grantor trust ("Grantor Trust") by purchasing a $20 million
principal amount secured note ("FCI/KRI Secured Notes") for $8 million in cash
and a $12 million note ("FCI/KRI Exchange Note"). The FCI/ KRI Secured Notes are
secured by the stock of three holding companies which own: (i) the Common Stock
of The Art Store, (ii) the Common Stock of Zynolyte Products Company, and (iii)
two real estate properties, the stock of such three corporations having been
transferred to the Grantor Trust (all such assets are collectively referred to
as the "Grantor Trust Assets") with the contemplation that (i) the capital stock
of Zynolyte and the Art Store would be sold to unrelated third parties, and (ii)
the real estate would be sold and the proceeds from such sales used to reduce
the indebtedness under the FCI/ KRI Secured Notes. The Company had a residuary
interest in the Grantor Trust Assets, and on repayment of the FCI/KRI Secured
Notes would have been entitled to such assets. As contemplated by the
Reorganization Plan, on August 2, 1993 the capital stock of Zynolyte was sold
for approximately $14.8 million. In October 1993, one of the parcels of real
estate was sold for approximately $1.4 million. The net proceeds of both
transactions were used to reduce the principal outstanding under the FCI/KRI
Secured Notes to approximately $4.5 million. In addition, the Company had
guaranteed $2.5 million of the principal outstanding on the FCI/KRI Secured
Notes. In February 1995, the remaining Grantor Trust Assets were transferred to
FCI and KRI as part of the 1995 Restructuring described below.
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EVENTS AFTER EMERGENCE FROM CHAPTER 11
The Company's capital structure remained highly leveraged despite its
recapitalization and restructuring. On June 14, 1993, the effective date of the
reorganization, the Company repaid $2.2 million previously borrowed under its
Debtor-in-Possession ("DIP") line of credit with Foothill Capital Corporation
("Foothill"), and through January 30, 1994 borrowed approximately $6.6 million
(net) available under a revised Loan and Security Agreement dated June 14, 1993
with 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. 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 the fiscal year ended January 30,
1994, the Company borrowed an additional $6.0 million for working capital from
the Grantor Trust. The Grantor Trust financed the loan by issuing notes to FCI
and KRI (the "Grantor Trust Notes") in an aggregate amount of $6.0 million on
terms substantially identical to the FCI/KRI Secured Notes. During the fourth
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.
Notwithstanding the additional borrowings, 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.
Lower sales resulted from general economic conditions and increased competition.
In addition, the Company's business plan was adjusted during the third and
fourth quarters of fiscal 1993 to close an additional 34 retail stores. The
ability to fund the expected costs resulting from those changes, including a
reduction in sales relating to these stores, had been premised on expected
increased sales to third parties by the Company's manufacturing subsidiary,
Major Paint Company. The expected sales did not materialize. With working
capital levels deteriorating, the Company's major vendors became concerned about
receiving payment on past due accounts. Some vendors ceased shipping or placed
additional credit limits on the Company's orders, with the result that store
inventories of items other than paint were becoming increasingly depleted at the
Company's retail stores.
On March 16, 1994, the Company entered into an agreement ("New Loan
Agreement") with the Insurance Company Lenders and the Grantor Trust for $10
million of new financing and a plan to restructure the Company's $103 million
indebtedness under the Amended Insurance Company Loan and its $6 million
indebtedness to the Grantor Trust.
Under the terms of the New Loan Agreement, the Company borrowed an aggregate
of $10 million from the Insurance Company Lenders and the Grantor Trust. 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 were used
to pay existing trade debt, provide working capital and pay for transaction
expenses. FCI and KRI through the Grantor Trust agreed to restructure the
Grantor Trust Notes to a term of six years (due in full in March 2000) with
interest payable quarterly at a rate of 10% per annum. As part of this
financing, Foothill agreed to extend its facility through April, 1997.
In accordance with the terms of the New Loan Agreement, on August 1, 1994,
the Company and certain of its subsidiaries established the Liquidating Property
Trust and transferred (subject to the existing liens of the Insurance Company
Lenders) 78 of its 103 operating and non-operating real properties with a net
book value of approximately $82.7 million to the Liquidating Property Trust in
exchange for the assumption by the Liquidating Property Trust of approximately
$68.7 million of indebtedness owed to the Insurance Company Lenders under the
Amended Insurance Company Loan ("Original Trust Debt"). The Company estimated
that the book value of the properties to be sold by the Liquidating Property
Trust would exceed the sales proceeds, less applicable fees, expenses and other
costs by approximately $14.6 million. Accordingly, the Company provided for this
loss as of
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January 30, 1994. The interest rate on the Original Trust Debt was increased to
10%. Interest and principal on the Original Trust Debt was made payable only to
the extent of proceeds from sales of the Liquidating Property Trust assets. The
Company provided a limited guarantee on the Original Trust Debt in an amount
equal to 10% of the Original Trust Debt (the "Liquidating Property Trust
Guarantee").
The Company retained a 100% residual interest in the Liquidating Property
Trust, and the Insurance Company Lenders were to be paid contingent interest on
the Original Trust Debt in an amount equal to 20% of the proceeds of the
liquidation of the properties in excess of the liabilities of the Liquidating
Property Trust. Under the terms of the Liquidating Property Trust documents, to
the extent the Company received distributions for its residuary interest those
proceeds were to be used first to retire the approximately $30.5 million of
indebtedness remaining from the Amended Insurance Company Loan retained by the
Company ("Retained Indebtedness") and then to retire the $10 million outstanding
under the New Loan Agreement.
The terms of the Retained Indebtedness were amended to provide for principal
to be due and owing in July 1999. Interest continued to be due monthly at an
annual rate of 9% per annum. The Retained Indebtedness continued to be secured
by first liens on real properties of the Company not transferred to the
Liquidating Property Trust.
In connection with the Liquidating Property Trust transaction, the Company
issued to the Insurance Company Lenders, FCI and KRI warrants to purchase an
aggregate of 375,000 shares of the Company's Common Stock at an exercise price
of $1.50 per share. Warrants to purchase up to an additional 375,000 shares will
become effective after September 16, 1996 reduced to the extent principal on the
New Loan Agreement has been repaid. The warrants have certain registration
rights with respect to their underlying shares. The warrants are redeemable by
the Company, at any time, for a price equal to $1 per share in excess of the
Market Price (as defined in the warrants).
As of February 15, 1995, the Company operated 58 paint stores, 25 of which
are among the 78 parcels of real property transferred to the Liquidating
Property Trust. Under the terms of the Liquidating Property Trust, the Company
was to be given a minimum of four months notice prior to the sale of any
currently operating retail paint store. Until sold, 13 of the 25 operating
retail stores properties were being leased back to the Company through July 31,
1995 at an aggregate monthly rent of approximately $178,500 (on a triple net
basis). After July 31, 1995, such properties which remained unsold were to be
leased to the Company on a month to month basis at a fair market rent as agreed
to between the Disposition Agent and the Company. Upon the sale of the 25
currently operating retail paint stores, the Company intended to either remain
in the same location on a leased basis or relocate to new leased locations. The
terms of the Liquidating Property Trust will be modified in the Restructuring as
described below.
1995 RESTRUCTURING
In February 1995, the Company entered into various agreements with Corimon
Corporation, a United States subsidiary of Corimon, S.A.C.A., a Venezuelan
corporation (collectively, "CRM"), the Insurance Company Lenders, FCI and KRI to
provide for a financial restructuring of the Company (the "Restructuring"). A
special meeting of stockholders of the Company will be held on May 16, 1995 to
vote upon approval of the Restructuring. It is contemplated that the closing
date ("Closing Date") of the Restructuring will take place promptly after the
special meeting of stockholders, subject to satisfaction of any other conditions
precedent to the Closing Date.
The principal elements of the Restructuring are as described below.
INTERIM FINANCING
As of February 15, 1995, CRM provided interim financing to the Company in
contemplation of the completion of the Restructuring ("Interim Financing"). CRM
entered into an Interim Loan Agreement pursuant to which it purchased $14
million of notes ("Interim Notes") from the Company on substantially the same
terms as the $10 million originally borrowed by the Company under the New
8
<PAGE>
Loan Agreement. Pursuant to an intercreditor agreement, the Interim Notes share
pro rata in the collateral securing the obligations under the New Loan Agreement
and the Grantor Trust Notes, and the Company has granted fourth mortgages to CRM
on its real properties to secure the indebtedness.
FCI, KRI and the Insurance Company Lenders terminated their warrants to
purchase Common Stock with respect to 750,000 shares, all of which are at an
exercise price substantially above the current market price.
The Company believes that it is extremely unlikely that the Company would
have been able to avoid bankruptcy if it had not received the Interim Financing.
Subsequent to the Interim Financing, pursuant to the Investment Agreement
and an unsecured loan agreement, dated as of April 7, 1995, CRM loaned an
additional $2 million to the Company. On the Closing Date, this loan will be
exchanged as consideration for CRM's purchase from the Company of a 49% residual
interest in the Liquidating Property Trust.
REVERSE STOCK SPLIT
On the Closing Date of the Restructuring, each 10 shares of Common Stock
will be combined into one share of Common Stock (the "Reverse Stock Split"). The
par value will not be changed from $.01 per share. The Company shall have the
option of paying cash in lieu of fractional shares resulting from the reverse
stock split or rounding up fractional shares to the nearest whole number of
shares.
EXCHANGE OF INTERIM NOTES FOR COMMON STOCK
On the Closing Date, after giving effect to the Reverse Stock Split, CRM
will exchange the Interim Notes for 15,700,496 shares of newly issued Common
Stock which will constitute approximately 76.1% of the Company's issued and
outstanding stock, at a price of $0.89 per share. All of the mortgages granted
in connection with the Interim Notes will be released.
EXCHANGE OF OUTSTANDING INDEBTEDNESS FOR COMMON STOCK AND PREFERRED STOCK
On the Closing Date, after giving effect to the Reverse Stock Split, the
Grantor Trust Notes (in the principal amount of $6 million) and the indebtedness
under the New Loan Agreement (in the principal amount of $10 million) will be
exchanged for Common Stock and Preferred Stock. Two million dollar principal
amount of such indebtedness will be exchanged for 2,242,928 newly issued shares
of Common Stock, at a price of $0.89 per share, and the balance of $14 million
principal amount of such indebtedness will be exchanged for 1,570,049 shares of
Preferred Stock at a price of $8.92 per share. All of the mortgages and
guarantees granted in connection with the Grantor Trust Notes and the New Loan
Agreement will be released. CRM will receive 271,836 shares of Common Stock and
190,288 shares of Preferred Stock as a result of their purchase and exchange of
the Purchased Indebtedness.
AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
The Board of Directors of the Company has adopted a resolution setting forth
the following amendment to the Company's Restated Certificate of Incorporation,
declaring its advisability and calling the special meeting of stockholders.
Approval by the stockholders of the Company of the Restructuring will constitute
the approval by the stockholders of this amendment to the Company's Restated
Certificate of Incorporation.
The Company's Restated Certificate of Incorporation will be amended in order
to increase the total number of shares which the Company is authorized to issue,
effectuate the Reverse Stock Split, and remove the Company's current limitation
on the issuance of non-voting stock. Specifically, the first paragraph of
Article IV of the Company's Restated Certificate of Incorporation will be
amended such that said paragraph shall read as follows:
"The Corporation is authorized to issue two classes of shares of
stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of
9
<PAGE>
shares which the Corporation shall have authority to issue is one
hundred five million (105,000,000) shares, consisting of one
hundred million (100,000,000) shares of common stock having $.01
par value per share ("Common Stock") and five million (5,000,000)
shares of preferred stock having $.01 par value per share
("Preferred Stock")". Upon the amendment of this Article IV
effected by this Amendment, each 10 outstanding shares of Common
Stock will be converted into one share of Common Stock, provided
that no fractional shares may be issued pursuant to such change.
The Corporation may, at its option, pay cash for any fractional
shares or round such fractional shares up to the nearest whole
number of shares."
AMENDMENT TO THE COMPANY'S BYLAWS
At the consummation of the Interim Financing, the Company's Bylaws were
amended and restated to, among other things, (i) provide for a Board of
Directors of not less than eight (8) nor more than twelve (12) and to initially
fix the number at eight (8) thereby eliminating one of the vacancies that
previously existed on the Board of Directors, and (ii) eliminate "staggered"
terms whereby directors were elected in different years.
BOARD COMPOSITION
At the consummation of the Interim Financing, the Company's Bylaws were
amended and restated to initially provide for a Board of Directors consisting of
eight (8) members until further resolution by the board of directors. During
1994, Gary Depolo resigned from the Board thereby creating a vacancy. The Board
was reconstituted, at the consummation of the Interim Financing, with the
resignation of Fletcher L. Byrom, the former Chairman and Chief Executive
Officer of the Company and Blandina Cardenas-Ramirez, and with the addition of
CRM's designees, Roland F. Breault, Juan Gramage and Thomas A. White to fill the
vacancies. Furthermore, Deborah Hicks Midanek was elected Chairman of the Board
and Ronald I. Scharman was elected interim Chief Executive Officer of the
Company.
On the Closing Date, the Board will fix the number of directors at ten (10).
It is expected that Arthur W. Broslat and Charles Codrea will be added to the
Board on the Closing Date. In accordance with a stockholders agreement, CRM will
have the right to name seven (7) directors, the Insurance Company Lenders will
have the right to name one (1) director and the nominating committee of the
Company's Board of Directors will have the right to name two (2) directors. At
least two of the directors will be "independent" as defined by the rules of the
New York Stock Exchange. The Insurance Company Lenders have not exercised their
right to name a director as part of the Restructuring, but may choose to do so
in the future.
MODIFICATIONS TO THE LIQUIDATING PROPERTY TRUST
The Board of Directors of the Company has approved the real property
transfers ("Property Transfers") to be effected as part of the Restructuring on
the terms described in this and the following subsections, and determined that
the Property Transfers were in the best interests of the Company. The approval
by the stockholders of the Company of the Restructuring, will constitute a
resolution adopted by the stockholders authorizing the Property Transfers.
Under the terms of the Restructuring, the terms of the Liquidating Property
Trust will be modified. In 1994, 78 of the Company's properties were transferred
to the Liquidating Property Trust with a net book value of $82.7 million and an
estimated appraised value of $92 million in exchange for the assumption by the
Liquidating Property Trust of approximately $68.7 million of Original Trust
Debt. Twenty-two of these properties have been sold and 22 properties are in
escrow or the subject of sales negotiation. Sixteen of the Company's operating
stores and one of its warehouse properties which are currently part of the
assets of the Liquidating Property Trust will be leased to the Company ("Leased
Properties"). Eight of the Leased Properties and the warehouse property will
have 10 year leases with two renewal options of five years each. The other eight
Leased Properties will have 18 month leases with no renewal options. The rental
on each property will be 12% of the properties' 1992 appraised value. Renewal
rent will be 95% of market but not less than the prior rent. The
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<PAGE>
Liquidating Property Trust Guarantee of approximately $6.8 million of the
indebtedness transferred to the Liquidating Property Trust will be released in
exchange for the retention by the Company of approximately $2.5 million of debt
on the transferred properties (included in the Retained Company Debt, as defined
below) and a cash payment of $500,000 to the Insurance Company Lenders. Upon the
sale of any of the Leased Properties, the buyer will be required to take the
property subject to the Company's leasehold interest.
TRANSFER OF PROPERTIES TO THE LIQUIDATING PROPERTY TRUST
At the time the Liquidating Property Trust was formed, the Company retained
approximately $30.5 million of Retained Indebtedness. The terms of the
Restructuring contemplate the transfer of 15 of the Company's remaining 26
properties (not previously transferred to the Liquidating Property Trust) with a
book value of $20.9 million and a 1992 appraised value of approximately $21.5
million to the Liquidating Property Trust. The Company will also transfer
approximately $14.3 million of the Retained Indebtedness to the Liquidating
Property Trust ("New Trust Debt"). The Company will continue to retain 11
properties (2 warehouse properties for its paint manufacturing operations, 6
operating stores, 1 store currently leased to a third party and 2 vacant
properties) and approximately $16 million of the Retained Indebtedness
("Retained Company Debt"). The new properties transferred to the Liquidating
Property Trust will be leased back to the Company for an aggregate rent of
approximately $2.8 million per year (on a triple net basis), adjusted every 30
months. The aggregate rent represents a 12% capitalization rate on value of the
properties. The properties will be leased for 10 years subject to 2 renewal
options of 5 years each. Renewal rent will be at 95% of market, but not less
than the prior rent.
The Retained Company Debt will be modified with a maturity of 10 years from
the Closing Date and interest payable at 10% per annum, compounded monthly.
Interest only will be due in years one and two with principal and interest due
in years three through 10 based on a 15 year amortization schedule. At the end
of 10 years the unpaid principal of approximately $8.1 million will be due in
full. The indebtedness will be secured by the existing first trust deeds on the
8 retained properties and a security interest on all of the Company's personal
property and equipment (excluding cash, inventory, trademarks, accounts
receivable and rolling stock).
The New Trust Debt will be due and payable 3 years from the Closing Date.
Interest is payable monthly at 10% per annum compounded monthly. Interest and
principal on the New Trust Debt are payable only to the extent of proceeds from
sales of the Liquidating Property Trust assets.
The disposition agent to the Liquidating Property Trust is Transamerica
Realty Services, Inc. (the "Disposition Agent") which is responsible for
maintaining and selling the trust assets. The Disposition Agent is an affiliate
of Transamerica Life Insurance and Annuity Company and Transamerica Occidental
Life Insurance Company, both parties to the Restructuring. The Disposition
Agent, in its sole discretion, will also perform the following services: develop
and implement policies for the disposition of the Liquidating Property Trust
assets; obtain insurance coverage and maintain the properties; collect all
proceeds from leases affecting the properties; collect any and all insurance and
condemnation award proceeds relating to the properties; recommend and implement
capital improvements (not to exceed $20,000 without consultation with the
Company); meet each month with representatives of the Company and provide a
written report covering activities for the previous period; monitor the results
of all co-op real estate brokers, if any; hire and supervise inspectors to
repair properties in need of repairs; review the status of all escrows; review
and approve all title documents; coordinate all applicable legal work; execute
all documents needed to close the sale of Liquidating Property Trust assets and
release liens on the assets; and handle the listing, marketing and hiring of
professionals to sell the Liquidating Property Trust assets. The Disposition
Agent will be paid an administration fee of $41,000 per month, reduced to
$38,000 once one half of the 78 initial properties are sold, plus a 1%
disposition fee for each escrow closing based on the sum of (i) the gross
selling price and (ii) any proceeds of insurance or condemnation awards received
for such property.
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<PAGE>
In exchange for a payment of $500,000 to the Insurance Company Lenders and
the retention by the Company of approximately $2.5 million of debt on the
transferred properties (included in the Retained Company Debt), the Liquidating
Property Trust Guarantee will be released and the Company will not be required
to guarantee any of the Original Trust Debt or the New Trust Debt.
TRANSFER AND SALE OF COMPANY'S RESIDUAL INTEREST IN THE LIQUIDATING PROPERTY
TRUST
On the Closing Date, the Company will transfer 20% and 31% of its residual
interest in the Liquidating Property Trust to the Insurance Company Lenders or
their affiliates, and FCI and KRI, respectively, in consideration of their
participation in the Restructuring and in further consideration of the Insurance
Company Lenders release of their right to contingent interest. In addition, CRM
will purchase the Company's remaining 49% residual interest in the Liquidating
Property Trust for $2 million through the exchange of the unsecured debt
incurred in April 1995. As a result of the Property Transfers and sale of its
residual interests in the Liquidating Property Trust pursuant to the
Restructuring, the Company will no longer consolidate assets having a net book
value of $84.4 million and liabilities of $67.1 million. Accordingly, the
Company recognized a loss of $15.3 million for the year ending January 29, 1995,
representing the excess of the net book value as of the Closing Date of real
properties transferred in 1994 and on the Closing Date to the Liquidating
Property Trust over the indebtedness assumed and outstanding on the Closing Date
and the proceeds from the sale of the Company's residual interest in the
Liquidating Property Trust.
TAX TREATMENT OF TRANSFER OF PROPERTIES TO THE LIQUIDATING PROPERTY TRUST
Since its inception, the Liquidating Property Trust has been treated as a
grantor trust, such that the initial transfer of the real estate properties to
the Liquidating Property Trust had no immediate federal income tax consequences
to the Company. Rather, the assets and related liabilities of the Liquidating
Property Trust, as well as its operations (including interest and operating
expense, and the gain or loss from the sale of properties), have been included
in the Company's consolidated operating results for both financial statement and
tax purposes.
The book values for the properties held by the Liquidating Property Trust
are significantly higher than the adjusted tax basis for the properties, as the
book values reflect a write-up to appraised values as of the date of the
Company's emergence from Chapter 11 proceedings, while the adjusted tax basis
for the properties reflects their lower historical cost basis less accumulated
tax depreciation. Thus, the gains from sales of properties by the Liquidating
Property Trust have been, and will continue to be, significantly higher for tax
purposes than for financial statement purposes. This treatment is expected to
continue through the Closing Date of the Restructuring.
Upon the disposition of the Company's residual interest in the Liquidating
Property Trust, the Company will be considered to have sold the remaining
properties held by the Liquidating Property Trust, as well as the 15 additional
properties to be transferred to the Liquidating Property Trust, for
consideration consisting of (1) the Original Trust Debt, (2) the New Trust Debt,
and (3) the payments received, or deemed to have been received, for the
Company's residual interest in the Liquidating Property Trust. The gains to be
recognized for federal income tax purposes as a result of these transactions are
expected to be significant. However, subject to certain limitations as a result
of changes in the ownership of the Company, the Company expects to have
approximately $66.4 million in net operating losses ("NOLs") available for
carryforward from its 1991, 1992, 1993 and 1994 fiscal years to offset such
gains. The Company intends to utilize these NOLs in order to offset the gains to
be recognized for federal income tax purposes from the disposition of its
interest in the Liquidating Property Trust and the additional real estate
properties.
Subject to certain limitations, the federal alternative minimum tax ("AMT")
system NOLs available for utilization by the Company in connection with the
Restructuring will generally be lower than the NOLs identified above for regular
tax purposes. The AMT NOLs available for utilization in connection with the
Restructuring from fiscal years 1991, 1992, 1993 and 1994 are expected to be
approximately $62.2 million.
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<PAGE>
The gain to be recognized from the Restructuring for AMT purposes generally
will be lower than the gain recognized for other tax purposes.
Since AMT NOLs can be utilized to offset only 90% of preliminary alternative
minimum taxable income for a given period, it is possible that the Company will
incur an AMT liability for the taxable period which includes the Effective Date
of the Restructuring. However, such tax liability is not expected to be material
to the Company's financial statements, and the deferred tax liability previously
provided for and carried on the Company's balance sheet since the end of fiscal
year 1993, is expected to be more than adequate. The Company estimates that an
AMT payment of approximately $500,000 will be required in October 1995, which
should not have a material adverse impact on the Company's cash position.
Additionally, to the extent the Company incurs alternative minimum tax in
connection with the Restructuring, it will give rise to a like amount of minimum
tax credit, which can be utilized to offset regular tax liability,
dollar-for-dollar, in subsequent periods.
It is possible that the Company will incur California income or franchise
tax liabilities as a result of the Restructuring. However, such tax liabilities
are not expected to be material to the Company's financial statements.
SALE OF WORKING CAPITAL NOTES
On or after the Closing Date, it is contemplated that FCI or an affiliate
will purchase $5 million of working capital notes from the Company. The notes
will be secured by a second lien on Company's inventory and receivables and two
warehouse properties that comprise the paint facility of the Company's
wholly-owned subsidiary, Major Paint Company. The notes will have an interest
rate equal to prime rate plus 5.5% and will mature in 24 months, but the Company
has an option to extend the maturity for two consecutive six month periods upon
payment of a 2% fee for each extension. The proceeds from the sale of any such
notes will be used by the Company for working capital.
ITEM 2. PROPERTIES
As of January 29, 1995, the Company owned and leased retail footage totaling
approximately 830,000 square feet, representing the Company's 61 retail stores
(three of which are non-operating). Of the operating retail store sites, 21 are
Company-owned and 37 are leased. Manufacturing, warehousing and office
facilities owned by the Company as of January 29, 1995 are located in Torrance,
California occupying 900,100 square feet on 31 acres. All properties are well
maintained, are in good condition and provide adequate and suitable space for
the operations at each location. The Company managed 11 Company-owned properties
which are leased to non-related parties totaling 49,612 square feet of space as
of January 29, 1995 with an occupancy rate of 100%.
At the time the Liquidating Property Trust was formed, the Company retained
approximately $30.5 million of Retained Indebtedness. The terms of the
Restructuring contemplate the transfer of 15 of the Company's remaining 26
properties (not previously transferred to the Liquidating Property Trust) with a
book value of $20.9 million and a 1992 appraised value of approximately $21.5
million to the Liquidating Property Trust. The Company will continue to retain
11 properties (2 warehouse properties for its paint manufacturing operations, 6
operating stores, 1 store currently leased to a third party and 2 vacant
properties). The new properties transferred to the Liquidating Property Trust
will be leased back to the Company for an aggregate rent of approximately $2.8
million per year (on a triple net basis), adjusted every 30 months. The
aggregate rent represents a 12% capitalization rate on value of the properties.
The properties will be leased for 10 years subject to 2 renewal options of 5
years each. Renewal rent will be at 95% of market, but not less than the prior
rent.
ITEM 3. LEGAL PROCEEDINGS
Other than as discussed above and the ordinary litigation incident to its
business, the Company is not a party to any other legal proceedings material to
its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The principal market for trading in the Company's Common Stock is the New
York Stock Exchange under the symbol "SBP". As of April 7, 1995, the Company had
approximately 2,826 shareholders of record of its Common Stock. The Company has
not paid any dividends since October 1987. The Company is prohibited from paying
dividends by the terms of the Preferred Stock, unless all accrued dividends on
the Preferred Stock shall have been paid and the full dividend thereon for the
then current quarter-yearly dividend period shall have been paid or declared and
set apart for payment. Covenants in certain of the Company's loan agreements
also prohibit the payment of dividends. Accordingly, the Company does not
anticipate that it will pay any dividends on the Common Stock in the foreseeable
future. Market data for the last two fiscal years is as follows:
<TABLE>
<CAPTION>
1994 1993
-------------------- ------------------
HIGH LOW HIGH LOW
------- --------- ------- -------
<S> <C> <C> <C> <C>
First Quarter....... 2 3/8 1 3/4 2 7/8 1 1/2
Second Quarter...... 2 1 3/8 4 7/8 2
Third Quarter....... 1 5/8 1 3 5/8 2
Fourth Quarter...... 1 13/64 2 1/4 1 3/4
</TABLE>
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR 1993 FISCAL YEAR
----------- --------------------------- -------------------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
JANUARY 30, AUGUST 1,
1994 1994 1993 1992 1991 1990
----------- ----------- -------------- ----------- ----------- -----------
(SUCCESSOR (SUCCESSOR (PREDECESSOR
COMPANY) COMPANY) COMPANY) (PREDECESSOR COMPANY)
<S> <C> <C> <C> <C> <C> <C>
Continuing Operations
(in thousands)
Net Sales.................................. $ 112,188 $ 84,000 $ 115,528 $ 226,749 $ 253,017 $ 293,582
Gross Profit............................... $ 40,846 $ 31,668 $ 44,016 $ 88,083 $ 101,437 $ 130,210
Earnings (loss) from continuing
operations................................ $ (47,977) $ (20,411) $ (23,190) $ (38,337) $ (19,390) $ (6,222)
Net earnings (loss)........................ $ (47,977) $ (20,411) $ 28,561 $ (38,337) $ (18,030) $ (6,964)
----------- ----------- -------------- ----------- ----------- -----------
Per Common Share
Earnings (loss)............................ $ (2.15) $ (.91) $ 4.94 $ (7.25) $ (3.59) $ (1.53)
Tangible stockholders' equity (deficiency)
(1)....................................... $ (1.49) $ .65 $ 6.28 $ (5.71) $ (1.07) $ 2.10
Average number of shares outstanding....... 22,359,000 22,341,000 5,578,000 5,555,000 5,529,000 5,608,000
Market price (high-low).................... $2,375-.203 $3.625-1.75 $4.875-1.50 $2.375-.875 $10.00-1.63 $14.75-4.63
----------- ----------- -------------- ----------- ----------- -----------
Year-end Financial Position
(in thousands)
Current assets............................. $ 21,759 $ 35,106 $ 47,247 $ 56,460 $ 60,891 $ 80,693
Current liabilities (2).................... $ 31,402 $ 37,312 $ 41,338 $ 26,305 $ 187,867 $ 72,670
Working capital (deficiency)............... $ (9,643) $ (2,206) $ 5,909 $ 30,155 $ (126,976) $ 8,023
Total assets............................... $ 109,910 $ 169,837 $ 214,966 $ 187,982 $ 201,756 $ 229,106
Long-term debt............................... $ 99,273 $ 103,080 $ 109,684 $ 116,317 $ 147,368 $ 156,492
Mandatory redeemable preferred stock......... $ -0- $ -0- $ -0- $ 16,244 $ 15,946 $ 15,724
Tangible stockholders' equity
(deficiency)(1)............................. $ (33,386) $ 14,568 $ 35,049 $ (31,731) $ (5,132) $ 11,767
----------- ----------- -------------- ----------- ----------- -----------
Year-end Statistics
Current ratio (2)(3)....................... .69-1 .94-1 1.14-1 2.0-1 .32-1 1.1-1
Capital expenditures (in thousands)........ $ 179 $ 913 $ 1,596 $ 1,856 $ 3,849 $ 10,119
Depreciation and amortization
(in thousands)............................ $ 2,121 $ 1,744 $ 2,558 $ 5,910 $ 5,956 $ 6,734
Number of retail stores.................... 58 62 103 130 145 141
Square feet of gross retail store space.... 798,000 844,000 1,406,059 1,793,954 1,902,177 1,901,014
Square feet of support and manufacturing
facilities................................ 900,000 900,100 900,100 1,012,614 982,100 982,100
Number of employees........................ 853 1,350 1,855 1,921 2,014 2,841
<FN>
- --------------------------
(1) Excludes preferred stock subject to mandatory redemption and intangible
assets.
(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.
(3) As of January 31, 1993, all contractual debt had been classified as
non-current or as a liability subject to compromise.
</TABLE>
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<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 ("Reorganization
Plan") in June, 1993. Management believed it would be able to concentrate on
operational activities and pursue the Company's long-term growth and strategic
objectives. The Company believed that its ability to meet growth and strategic
objectives was contingent upon several factors. The Company reduced the size of
its retail paint store chain to a core group of stores concentrating on selling
paint and related merchandise requiring an increase in operating profits from
these remaining core stores. The Company also focused on its competitive and
asset strengths in paint market share, retail locations, and paint manufacturing
capabilities. In a multifaceted approach, the Company hoped 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 ("New Loan
Agreement") with the Insurance Company Lenders and FCI (defined below) and KRI
(defined below) for $10 million of new financing and a plan to restructure the
Company's then existing $103 million Amended Insurance Company Loan and existing
$6 million indebtedness with the grantor trust established pursuant to the
Reorganization Plan ("Grantor Trust").
Under the terms of the New Loan Agreement, the Company on August 1, 1994
established a Liquidating Property Trust and transferred 78 of its 103 operating
and non-operating real properties with a net book value of approximately $82.7
million in exchange for the assumption by the Liquidating Property Trust of
approximately $68.7 million of existing indebtedness ("Assumed Indebtedness")
owed to the Insurance Company Lenders (defined below) under the Amended
Insurance Company Loan. The Company estimated that the book value of the 78
properties to be sold by the Liquidating Property Trust will exceed the sale
proceeds, less applicable fees, expenses and other costs, by approximately $14.6
million and reported this loss for the fiscal year ended January 30, 1994.
Notwithstanding the additional borrowings and trust transactions, the
Company has not been successful in implementing its growth and strategic
objectives and continues to experience cash flow difficulties. To successfully
implement its strategic objectives, increase sales and reduce debt, the Company
requires significant new sources of capital.
As of February 15, 1995, the Company entered into an Investment Agreement
and certain other agreements for the financial restructuring of the Company
("Restructuring") with Corimon, S.A.C.A. and its wholly-owned subsidiary Corimon
Corporation (collectively, "CRM"), Fidelity Capital & Income Fund ("FCI"), Kodak
Retirement Income Plan Trust Fund ("KRI"), Transamerica Life Insurance and
Annuity Company, Transamerica Occidental Life Insurance Company, Sun Life
Insurance Company of America, Anchor National Life Insurance Co. (collectively
"Insurance Company Lenders"), and the Grantor Trust.
As a result of the Restructuring, the Company's financial position will be
improved by (1) $16 million of new capital comprised of $14 million of new
Common Stock and $2.0 million representing the purchase price from CRM for a 49%
residual interest in the Liquidating Property Trust, (2) $5.0 million under a
working capital facility with FCI or an affiliate and (3) a reduction in the
Company's consolidated indebtedness by an aggregate of approximately $78.3
million (in part paid for by the issuance of additional shares of Common Stock
and Preferred Stock).
16
<PAGE>
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' Reorganization 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.
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 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 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.
17
<PAGE>
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 JANUARY AUGUST 1, FISCAL
YEAR 1994 30, 1994 1993 YEAR 1992
---------- ---------- ----------- ----------
(SUCCESSOR (SUCCESSOR (PREDECESSOR (PREDECESSOR
COMPANY) COMPANY) COMPANY) COMPANY)
<S> <C> <C> <C> <C>
Decrease in retail sales (1)......... $ (76,050) $ (21,140) $ (2,341) $ (27,999)
Percentage decrease in retail sales
(1)................................. (42.5)% (21.2)% (2.3)% (12.1)%
Percentage (decrease) increase in
same store sales (1)(2)............. (10.1)% (4.0)% 4.5% (11.0)%
Gross profit percentage.............. 36.4% 37.7% 38.1% 38.8%
(Loss) earnings before interest and
taxes (3)........................... $ (36,597) $ (27,192) $ 35,007 $ (24,359)
<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
year ended January 29, 1995 and the six months ended January 30, 1994 and
August 1, 1993, same store sales reflect sales for the fifty-eight (58)
stores which the Company operated as of January 29, 1995.
(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>
SALES AND GROSS PROFIT
The following table summarizes the decrease in sales for fiscal 1994:
<TABLE>
<CAPTION>
FISCAL YEAR 1993
------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
FISCAL JANUARY 30, AUGUST 1,
YEAR 1994 1994 1993 VARIANCE
--------- ----------- ----------- ---------
(SUCCESSOR (SUCCESSOR (PREDECESSOR
COMPANY) COMPANY) COMPANY)
<S> <C> <C> <C> <C>
Continuing Paint Stores.................. $ 102,535 $ 54,134 $ 59,942 $ (11,541)
Closed Paint Stores*..................... 491 24,219 35,210 (58,938)
--------- ----------- ----------- ---------
103,026 78,353 95,152 (70,479)
Art Stores (1)........................... 0 0 5,571 (5,571)
Zynolyte Products Company (1)............ 0 0 11,821 (11,821)
Major Paint Company and Export Sales..... 9,162 5,647 2,984 531
--------- ----------- ----------- ---------
$ 112,188 $ 84,000 $ 115,528 $ (87,340)
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
<FN>
- ------------------------
* Updated to reflect additional store closures through January 29, 1995.
(1) These business units were transferred to newly formed corporations owned by
the Grantor Trust pursuant to the Reorganization Plan, to secure the
indebtedness owed to FCI and KRI under the FCI/KRI Secured Notes. Zynolyte
Products Company was sold on August 2, 1993.
</TABLE>
Consolidated sales for the year ended January 29, 1995 were $112,188 a
decrease of $87,340 compared to $84,000 and $115,528 for the six months ending
January 30, 1994 and the six months
18
<PAGE>
ended August 1, 1993, respectively. The decreased sales for fiscal 1994 were
principally caused by the closure of 60 stores and the transfer of two of the
Company's business units pursuant to its Reorganization Plan. In addition, sales
and customer traffic were impacted by weak economic conditions in California,
the Company's core market. The recent increases in interest rates have put
pressure on real estate activity in a market that is already plagued by high
unemployment and continued layoffs in the defense and aerospace industries. The
economy has also been impacted by the effects of the January 17, 1994 Northridge
earthquake and layoffs by large employers in the financial-services, oil and
high-tech industries. The decrease in sales for fiscal 1993 was principally
caused by the closure of unprofitable stores and the transfer of two of the
Company's business units as discussed above. 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.
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 36.4%, 37.7% and
38.1% for the year ended January 29, 1995, six months ended January 30, 1994 and
six months ended August 1, 1993, respectively. The decreased margin resulted
primarily from the Company providing $2,500 during the fourth quarter for slow
moving inventory and discontinued product lines. In fiscal 1993, 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal 1994, selling, general and administrative expenses decreased
25.7% as follows:
<TABLE>
<CAPTION>
FISCAL YEAR 1993
------------------------
SIX MONTHS SIX MONTHS
ENDED ENDED
FISCAL YEAR JANUARY 30, AUGUST 1,
1994 1994 1993 VARIANCE
----------- ----------- ----------- -----------
(SUCCESSOR (SUCCESSOR (PREDECESSOR (PREDECESSOR
COMPANY) COMPANY) COMPANY) COMPANY)
<S> <C> <C> <C> <C>
Paint Stores............................. $ 39,971 $ 29,314 $ 35,722 $ (25,065)
Art Stores (1)........................... 0 0 2,047 (2,047)
Zynolyte Products Company (1)............ 0 0 2,722 (2,722)
Major Paint Company and Export Sales..... 1,201 1,174 114 (87)
Corporate costs.......................... 18,542 4,154 5,103 9,285
----------- ----------- ----------- -----------
$ 59,714 $ 34,642 $ 45,708 $ (20,636)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<FN>
- ------------------------
(1) These business units were transferred to newly formed corporations owned by
the Grantor Trust pursuant to the Reorganization Plan to secure the
indebtedness owed to FCI and KRI under the FCI/KRI Secured Notes. Zynolyte
Products Company was sold on August 2, 1993.
</TABLE>
The decrease for fiscal 1994 results primarily from the closing of 60 stores
and the transfer of two of the Company's business units pursuant to its
Reorganization Plan. Selling, general and administrative expenses were 53.2% of
sales for the year ended January 29, 1995, versus 41.2% and 39.6% of sales for
the six months ended January 30, 1994 and August 1, 1993, respectively. The
increase in the percentage of sales is due to the decrease in sales and the
fixed nature of certain expenses.
Corporate costs for the year ended January 29, 1995 include $2,630 for costs
related to the Restructuring, $1,725 in costs associated with the Liquidating
Property Trust, $1,500 for increases in self-insurance reserves, $1,000 for
severance and $700 for increases in environmental reserves.
19
<PAGE>
The decrease for fiscal 1993 resulted from the closing of 57 stores and the
transfer of two of the Company's business units pursuant to its Reorganization
Plan.
RESTRUCTURING CHARGES
The results of operations for the fiscal year ended January 29, 1995 and the
six months ended January 30, 1994 reflect provisions of $700 and $6,000,
respectively, 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. During fiscal 1994, the Company identified an
additional twelve (12) stores for closure during fiscal 1995. These provisions
include $3,900 for inventory clearance markdowns, employee severance and other
store closing costs. These provisions also include $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 58 from
120 since emerging from bankruptcy on June 14, 1993.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $2,121 for the year ended January 29,
1995, versus $1,744 and $2,558 for the six months ended January 30, 1994 and
August 1, 1993, respectively. This decrease was principally due to the sale of
surplus real estate properties and the Company's adoption of Fresh-Start
Reporting whereby it restated and reallocated real estate values between
non-depreciable land and depreciable buildings and fixtures. The decrease for
fiscal 1993 was principally due to the sale of surplus real estate properties
and the Company's adoption of Fresh-Start Reporting. 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
$5,910 in fiscal 1992.
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 year ended January 29, 1995 was
$11,518, compared to $5,358 and $6,566 for the six months ending January 30,
1994 and August 1, 1993, respectively. The decrease results from the reduction
of outstanding long-term debt from the sale of real property encumbered under
the Company's Senior Notes.
The decrease for fiscal 1993 was principally due to the sale of surplus real
estate properties, the Company's adoption of Fresh-Start Reporting and
settlement of prepetition obligations pursuant to the Reorganization Plan.
Interest income for fiscal 1992 of $156 is classified as a component of
Reorganization Items in the Company's consolidated financial statements.
During its Chapter 11 case, the Company accrued interest on the Amended
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%.
OTHER INCOME
Other income primarily represents the Company's gains on the sales of real
property.
LOSS ON REAL PROPERTIES
As a result of the real property transfers and sale of its residual
interests in the Liquidating Property Trust pursuant to and in contemplation of
the Restructuring, the Company will no longer consolidate assets having a net
book value of $84.4 million and liabilities of $67.1 million. Accordingly,
20
<PAGE>
the Company has recognized a loss of $15.3 million for the year ending January
29, 1995, representing the excess of the net book value of the real properties
transferred in 1994 and the additional properties to be transferred to the
Liquidating Property Trust in 1995 over the indebtedness assumed and outstanding
and the proceeds from the sale of the Company's residual interest in the
Liquidating Property Trust.
On March 16, 1994, the Company entered into an agreement with the Insurance
Company Lenders and FCI and KRI for $10 million of new financing and a plan to
restructure the Company's existing $103 million of indebtedness under the
Amended Insurance Company Loan and existing $6 million indebtedness with the
Grantor Trust.
Under the terms of the New Loan Agreement, on August 1, 1994, the Company
established the Liquidating Property Trust to which it transferred all but
approximately 28 of its 103 operating and non-operating real properties in
exchange for the assumption by the Liquidating Property Trust of approximately
$68.7 million of Assumed Indebtedness under the Amended Insurance Company Loan.
The book value of the properties to be sold by the Liquidating Property Trust
exceeded the sale proceeds, less applicable fees, expenses and other costs by
approximately $14.6 million. Accordingly, the Company provided for this loss as
of January 30, 1994. Interest and principal on the Assumed Indebtedness is only
payable to the extent of proceeds from sales of Liquidating Property Trust
assets. The interest rate on the Assumed Indebtedness was increased to 10% per
annum. The Company provided a limited guarantee on the Assumed Indebtedness in
an amount equal to 10% of the Assumed Indebtedness.
REORGANIZATION ITEMS
Reorganization items consist of expenses directly related to the
reorganization of the Company from the Petition Date through the Closing 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 the Grantor Trust in accordance with the
Reorganization Plan. Additional information is included in Item 1 and in Note 2
to the Consolidated Financial Statements.
INCOME TAXES
Notwithstanding the large loss incurred for fiscal 1994, the Company
recorded no tax provision (benefit) as the Company's ability to utilize such
additional loss was not assured.
The tax provision (benefit) for fiscal 1993 represents the minimum due for
franchise taxes and the net change in deferred tax.
The 1992 tax provision (benefit) 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.
21
<PAGE>
LIQUIDITY AND CAPITALIZATION MEASURES
The Company considers the following as comparative measures of liquidity and
capital resources:
<TABLE>
<CAPTION>
FISCAL FISCAL YEAR 1993 FISCAL YEAR
YEAR 1994 --------------------------- 1992
---------- SIX MONTHS SIX MONTHS --------------
ENDED ENDED
(SUCCESSOR JANUARY 30, AUGUST 1, (PREDECESSOR
COMPANY) 1994 1993 COMPANY)
------------- ------------
(SUCCESSOR (PREDECESSOR
COMPANY) COMPANY)
<S> <C> <C> <C> <C>
Working capital (deficiency) (1).............. $ (9,643) $ (2,206) $ 5,909 $ 30,155
Current ratio (1)............................. .69 to 1 .94 to 1 1.14 to 1 2.15 to 1
Cash (used in) provided by operating
activities................................... $ (14,555) $ (11,413) $ (9,089) $ 648
Debt and mandatory redeemable preferred stock
to stockholders' equity ratio (1)............ (4.3 to 1) 10.7 to 1 7.05 to 1 (7.44) 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.
</TABLE>
The Company's capital structure remains highly leveraged despite its
reorganization and recapitalization under Chapter 11 of the United States
Bankruptcy Code in 1993 and a subsequent restructuring of debt in 1994.
As of January 29, 1995, the Company was not in compliance with the financial
covenants under its agreements with the Insurance Company Lenders and Foothill
Capital Corporation ("Foothill"). Pursuant to the Company's request, the
Insurance Company Lenders and Foothill have agreed to waive compliance with the
financial covenants through April 30, 1996.
As of January 29, 1995, the Company was over-advanced under its working
capital loan facility with Foothill based on a formula of inventory and
receivables and had no other alternative sources of capital available. Foothill
approved the $1.75 million over-advance and consented to the Restructuring.
To successfully implement its strategic objectives, increase sales and
reduce debt, the Company requires significant sources of new capital. The
Company's current sales levels are not sufficient to cover its operating
expenses and fund the interest expense associated with the Company's current
high level of fixed debt. In addition, the Company requires additional capital
to pay down its past due trade accounts payable and purchase new inventory to
restock its retail stores.
The Restructuring will provide $16 million of new capital. In addition, it
is contemplated that on or after the Closing Date (defined below) FCI or an
affiliate will purchase $5 million of working capital notes from the Company.
The Restructuring must be approved by the stockholders of the Company in
order for the Restructuring to be accomplished. It is contemplated that the
closing and effective date (the "Closing Date") of the Restructuring will take
place promptly after the stockholders meeting to approve the Restructuring,
subject to the satisfaction of any other conditions precedent to the Closing
Date.
As part of the Restructuring, as of February 15, 1995, CRM provided interim
financing to the Company in contemplation of the completion of the
Restructuring. CRM entered into an Interim Loan Agreement pursuant to which it
purchased $14 million of notes ("Interim Notes") from the Company on
substantially the same terms as the $10 million originally borrowed by the
Company under the New Loan Agreement. Pursuant to an intercreditor agreement,
the Interim Notes share pro rata in the collateral securing the obligations
under the New Loan Agreement and the Grantor Trust Notes,
22
<PAGE>
and the Company has granted fourth mortgages to CRM on its real properties to
secure the indebtedness. On the Closing Date, CRM will exchange the Interim
Notes for Common Stock as described above.
In addition, as of April 7, 1995, pursuant to an amendment to the Investment
Agreement and an unsecured loan agreement, CRM loaned $2 million to the Company.
The loan will be exchanged on the Closing Date as consideration for CRM's
purchase of the Company's residual interest in the Liquidating Property Trust.
Since the Restructuring has not been approved by the Company's stockholders
and formally accepted by the Insurance Company Lenders, FCI, KRI and CRM, the
report of the Company's independent auditors dated April 7, 1995 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 petition(s) under Chapter 7 of the United
States Bankruptcy Code.
The Company has no reason to believe that the Restructuring will not be
approved because CRM has obtained irrevocable proxies from stockholders who
presently own, in the aggregate, in excess of 50% of the Company's voting stock
to vote in favor of the Restructuring and against any proposals that would
impede or delay the Restructuring.
The Restructuring will improve the Company's liquidity and reduce the
Company's indebtedness. However, there can be no assurances that the Company
will be successful in the Restructuring or with any strategic changes to the
operations of the Company as proposed by CRM or that it will be able to improve
its sales or reduce its operating expenses in order to return to profitability.
According to management's expectations, the Company will need additional capital
during the fourth quarter to sustain its operations through the end of the 1995
fiscal year. CRM has confirmed to the Company that subject to the closing of the
Restructuring, it will make funds available to the Company, as necessary, to
meet its operating requirements and discharge its obligations through the end of
the 1995 fiscal year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item appears on pages F-1 - F-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each
person who is an officer or director of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Ronald I. Scharman 42 Chief Executive Officer; Director
Howard Schwartz 48 Senior Vice President and Chief Financial Officer
Edward A. Drury 42 Vice President -- Legal; Corporate Secretary
Richard Boje 58 Director
Roland F. Breault 55 Director
Robert Dangremond 52 Director
Juan Gramage 43 Director
Deborah Hicks Midanek 40 Chairman of the Board
William Yingling 51 Director
Thomas A. White 52 Director
</TABLE>
23
<PAGE>
EXECUTIVE OFFICERS AND DIRECTORS
Richard L. Boje was elected to the Board of Directors on December 10, 1993
at a meeting of the Board of Directors. Mr. Boje's term as a director expires at
the next annual meeting of stockholders to be held in 1995. Mr. Boje is Chairman
of the Company's Executive Committee and is a member of the Company's
Compensation Committee. From 1977 through 1987, Mr. Boje served in various
positions at Carter Hawley Hale Stores, Inc. and its subsidiaries and affiliates
(specialty/retail), including serving as Chairman of the Board and Chief
Executive officer of Weinstocks from 1982 through 1985 and Chairman of the Board
and Chief Executive Officer of the John Wanamaker Division from 1985 through
1987. From 1987 through 1992, Mr. Boje served as Chairman of the Board and Chief
Executive Officer of the Lynn-Edwards Corporation (office products distributor).
Mr. Boje presently is an independent investor and consultant.
Roland F. Breault is the Director of corporate planning for Dakota Services,
Inc., a subsidiary of CRM. Mr. Breault's term as a director expires at the next
annual meeting of stockholders to be held in 1995. Prior to joining CRM in 1994,
Mr. Breault was Vice-President and Area Director of the Latin American division
of Olin Corporation, a chemicals, metals and defense company. He joined Olin
Corporation in 1983 and held several positions in operations, strategic planning
and marketing.
Robert N. Dangremond was elected to the Board of Directors on December 10,
1993 at a meeting of the Board of Directors. Mr. Dangremond's term as a director
expires at the next annual meeting of stockholders to be held in 1995. Mr.
Dangremond is a member of the Company's Executive Committee and is Chairman of
the Company's Audit Committee. Mr. Dangremond was the Chairman of the Board,
President and Chief Executive Officer of AM International, Inc. (graphic arts
supplies and manufacturing). AM International is listed on the American Stock
Exchange. Mr. Dangremond was elected to his former positions at AM International
on February 6, 1993. AM International filed a voluntary petition under the
Federal bankruptcy laws on May 17, 1993. On September 29, 1993, AM
International's plan of reorganization was confirmed by the Bankruptcy Court and
became effective on October 13, 1993. Since August 1989, Mr. Dangremond has been
a Principal with Jay Alix & Associates, a consulting and accounting firm
specializing in corporate restructurings and turnaround activities. From 1981
through 1989, Mr. Dangremond was the Chief Financial Officer and Treasurer of
the Leach & Garner Company (manufacturing). From 1969 to 1981, Mr. Dangremond
held various positions with Chase Manhattan Bank, N.A. and prior to that was
with Scott Paper Company. Mr. Dangremond is also a director of Envirodyne
Industries, Inc. (manufacturing) and Barry's Jewelry, Inc. (retail).
Juan Gramage is General Manager of the Construcentro division of CRM and a
consultant with Dakota Services, Inc. Mr. Gramage's term as a director expires
at the next annual meeting of stockholders to be held in 1995. It is expected
that Mr. Gramage will be appointed the Chief Executive Officer of the Company
following the Closing Date. Prior to joining CRM in 1992, Mr. Gramage held
various positions with Industrias Plycem S.A., including General Manager from
1988 to 1992.
Deborah Hicks Midanek was elected to the Board of Directors on December 10,
1993 at a meeting of the Board of Directors and elected Chairman at the
consummation of the Interim Financing. Ms. Midanek's term as a director expires
at the next annual meeting of stockholders to be held in 1995. Ms. Midanek is
Chairman of the Company's Compensation Committee and is a member of the
Company's Audit and Human Relations Committees. Ms. Midanek presently serves as
Chairman of the Board of Trustees and the Chief Executive Officer of The Solon
Funds, a registered investment company, positions she has held since March 1,
1994. Since 1989, Ms. Midanek has served as the Chief Executive Officer of Solon
Asset Management Corporation, a registered investment advisor. In 1994, Solon
Asset Management Corporation became the general partner of Solon Asset
Management L.P., also a registered investment advisor and advisor to the Solon
Funds. During the period from 1992 through 1993, Ms. Midanek served as Managing
Director and Director of Mutual Funds for Montgomery Asset Management, L.P. From
1984 through 1990, Ms. Midanek held various positions with Drexel Burnham
Lambert, Inc. in the Mortgage Backed Securities Department.
24
<PAGE>
Ronald I. Scharman became interim Chief Executive Officer of the Company at
the consummation of the Interim Financing. Mr. Scharman served previously as
Executive Vice President of the Company, a position he held since June 14, 1993
when the Reorganization Plan became effective. Mr. Scharman was elected to the
Board of Directors in July, 1993. Mr. Scharman's term as a director expires at
the next annual meeting of stockholders to be held in 1995. Mr. Scharman is a
member of the Company's Human Relations Committee. Prior to joining the Company,
Mr. Scharman was the managing director of Fawn Holdings, a firm specializing in
financial restructuring of troubled companies, a position held since 1992.
During the period 1988 through 1992, Mr. Scharman was the managing director and
chief financial officer of Trading Alliance Corporation (TAC), a trade finance
merchant bank servicing under-capitalized and financially troubled companies.
From 1983 to 1988, Mr. Scharman held various positions with Manufacturers
Hanover Trust Company and Manufacturers Hanover World Trade Corporation.
Thomas A. White is the Director of Manufacturing for Dakota Services, Inc.,
and he has held that position since June of 1994. Mr. White's term as a director
expires at the next annual meeting of stockholders to be held in 1995. Mr. White
is responsible for manufacturing for the Paint Division coatings plants across
North and South America. Before joining CRM, Mr. White was employed at PPG
Industries, a chemicals and coatings company, from 1985 to 1994, as the Director
of Manufacturing and previously as the Director of Quality Assurance.
William E. Yingling, III was elected to the Board of Directors on December
10, 1993 at a meeting of the Board of Directors. Mr. Yingling's term as a
director expires at the next annual meeting of stockholders to be held in 1995.
Mr. Yingling is a member of the Company's Compensation and Executive Committees.
Mr. Yingling from 1991 through 1993 was the Chairman of the Board and Chief
Executive Officer of Thrifty Corporation (pharmaceuticals and specialty/retail).
During the period 1986 through 1991, Mr. Yingling was the President of the
Southern California division of Lucky Stores, Inc. (supermarket).
Howard Schwartz has served as Senior Vice President and Chief Financial
Officer since November 29, 1993. Mr. Schwartz is a member of the Company's
Pension and Benefits Committee. Prior to joining the Company, and since 1991,
Mr. Schwartz was Senior Vice President and Chief Financial Officer for Conrans-
Habitat (specialty retail). From 1987 through 1991, Mr. Schwartz served as Vice
President and Chief Financial Officer for Hoffritz for Cutlery, Inc. (specialty
retail).
Edward A. Drury has served as Vice President/Legal since October 1990. For
more than five years prior thereto, Mr. Drury was Tax Counsel, Director/Taxes
and Assistant Corporate Secretary for the Company.
25
<PAGE>
ITEMS 11, 12 AND 13
The information required by these items is contained in the Company's
definitive Proxy Statement which relates to election of the Company's directors
and which will be filed with the Commission within 120 days after the close of
the Company's fiscal year pursuant to Regulation 14A of the Securities Exchange
Act of 1934.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets as of January 29, 1995 and January 30, 1994
For the fiscal year ended January 29, 1995 and the Six Months Ended
January 30, 1994 and August 1, 1993, and the fiscal year ended January 31,
1993:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' (Deficit) Equity
and Preferred Stock Subject to Mandatory Redemption
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
None.
3. EXHIBITS
The Exhibits required to be filed hereunder are indexed on pages 29
through 33.
(B) REPORTS ON FORM 8-K
A Current Report on Form 8-K dated January 18, 1995 was filed with the
Commission on January 19, 1995 and related to the execution of a Letter of
Intent with Corimon, S.A.C.A.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
STANDARD BRANDS PAINT COMPANY
By /s/ RONALD I. SCHARMAN
-----------------------------------
Ronald I. Scharman
CHIEF EXECUTIVE OFFICER
Date: April 27, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
SIGNATURES TITLE DATE
- --------------------------------------------- ----------------- --------------
By /s/ RICHARD BOJE
--------------------------------------- Director April 27, 1995
Richard Boje
By /s/ ROLAND F. BREAULT
--------------------------------------- Director April 27, 1995
Roland F. Breault
By /s/ ROBERT N. DANGREMOND
--------------------------------------- Director April 27, 1995
Robert N. Dangremond
By /s/ JUAN GRAMAGE
--------------------------------------- Director April 27, 1995
Juan Gramage
By /s/ DEBORAH HICKS MIDANEK
--------------------------------------- Chairman of the April 27, 1995
Deborah Hicks Midanek Board
By /s/ RONALD I. SCHARMAN Director and
--------------------------------------- Chief Executive April 27, 1995
Ronald I. Scharman Officer
By /s/ THOMAS A. WHITE
--------------------------------------- Director April 27, 1995
Thomas A. White
By /s/ WILLIAM E. YINGLING, III
--------------------------------------- Director April 27, 1995
William E. Yingling, III
Senior Vice
President and
Chief Financial
By /s/ HOWARD SCHWARTZ Officer
--------------------------------------- [Principal April 27, 1995
Howard Schwartz Financial and
Accounting
Officer]
27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NUMBER
- ----------- ---------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
2.1 Fourth Amended Joint Plan of Reorganization dated March 3, 1993 filed by the Registrant and
certain of its subsidiaries, incorporated by reference herein from Exhibit 2.1 to Registrant's
Registration Statement on Form S-1 dated February 3, 1994, Registration No. 33-74744 ("1994
Form S-1")....................................................................................
3.1 Certificate of Incorporation of the Registrant, dated June 14, 1993, incorporated by reference
herein from Exhibit 3.1 of the 1994 Form S-1..................................................
3.2 Bylaws of the Registrant, dated June 5, 1987, and Amendment thereto, dated June 14, 1993,
incorporated by reference herein from Exhibit 3.2 of the 1994 Form S-1........................
10.1 The Registrant's Moneybuilder 401(k) Savings and Profit-Sharing Plan and Trust Agreement,
incorporated by reference herein from Exhibit 10(c) to Registrants Annual Report on Form 10-K
for its fiscal year ended January 27, 1985....................................................
10.2 Amended and Restated Loan Agreement by and between the Registrant and Standard Brands Paint
Co., Standard Brands Realty Co., Inc., and Sun Life Insurance Company of America, Anchor
National Life Insurance Co., Transamerica Life Insurance and Annuity Company and Transamerica
Occidental Life Insurance Company, as Servicing Agent, dated June 14, 1993, incorporated by
reference herein from Exhibit 10.2 of the 1994 Form S-1.......................................
10.3 First Waiver To Credit Agreement by and between the Registrant, Standard Brands Paint Co.,
Standard Brands Realty Co., Inc., and Sun Life Insurance Company of America, Anchor National
Life Insurance Co., Transamerica Life Insurance and Annuity Company and Transamerica
Occidental Life Insurance Company, as Servicing Agent, dated December 31, 1993 incorporated by
reference herein from Exhibit 10-3 of the Registrant's Annual Report on Form 10-K for its
fiscal year ended January 30, 1994 ("1994 Form 10-K").........................................
10.4 Second Amendment and Limited Waiver to Amended and Restated Loan Agreement by and between
Registrant, Standard Brands Paint Co., Standard Brands Realty Co., Inc., and Transamerica
Occidental Life Insurance Company as Servicing Agent, dated March 16, 1994 incorporated by
reference herein from Exhibit 10.4 of the 1994 Form 10-K......................................
10.5 Mutual Release and Waiver dated March 16, 1994, by and among Registrant, Standards Brands
Paint Co., Standard Brands Realty Co., Inc., The Art Store, and Transamerica Occidental Life
Insurance Company as Servicing Agent incorporated by reference herein from Exhibit 10.5 of the
1994 Form 10-K................................................................................
10.6 New Loan Agreement, dated March 16, 1994, by and among Registrant, Standard Brands Paint Co.,
Standard Brands Realty Co., Inc., and Sun Life Insurance Company of America, Anchor National
Life Insurance Co., Transamerica Life Insurance and Annuity Company, Standard Brands Paint
Collateral Trust and Transamerica Occidental Life Insurance Company as Servicing Agent
incorporated by reference herein from Exhibit 10.6 of the 1994 Form 10-K......................
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NUMBER
- ----------- ---------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
10.7 Amended and Restated Intercreditor Agreement dated March 16, 1994, by and between (i) Fidelity
Capital & Income Fund and Kodak Retirement Income Plan Trust Fund, (ii) Registrant, (iii)
Standard Brands Paint Co., Standard Brands Realty Co., Inc., The Art Store, (iv) Standard
Brands Paint Collateral Trust and (v) Transamerica Occidental Life Insurance Company as
Servicing Agent incorporated by reference herein from Exhibit 10.7 of the 1994 Form 10-K......
10.8 Exchange Agreement dated June 14, 1993 by and among the Registrant, SunAmerica Financial,
Inc., Transamerica Occidental Life Insurance Company and Transamerica Life Insurance and
Annuity Company, incorporated by reference herein from Exhibit 10.4 of the 1994 Form S-1......
10.9 Registration Rights Agreement dated June 14, 1993 by and among the Registrant, SunAmerica
Financial, Inc., Transamerica Occidental Life Insurance Company and Transamerica Life
Insurance and Annuity Company, and Fidelity Capital & Income Fund, incorporated by reference
herein by Exhibit 10.5 of the 1994 Form S-1...................................................
10.10 Registration Rights Agreement dated June 14, 1993, by and among the Registrant, SunAmerica
Financial, Inc., Transamerica Occidental Life Insurance Company and Transamerica Life
Insurance and Annuity Company, and Kodak Retirement Income Plan Trust Fund, incorporated by
reference herein by Exhibit 10.6 of the 1994 Form S-1.........................................
10.11 Stock Purchase Agreement, dated as of June 14, 1993, by and among Standard Brands Paint
Company, Standard Brands Paint Co., Standard Brands Realty Co., Inc. Major Paint Company, Art
Store Holding Company, Zynolyte Products Holding Company, S.B.P. Properties Holding Company
and Standard Brands Paint Collateral Trust, by Lewis C. Leighton, as trustee, incorporated by
reference herein by Exhibit 10.7 of the 1994 Form S-1.........................................
10.12 Note Purchase Agreement, dated as of June 14, 1993, by and between Standard Brands Paint
Collateral Trust and Fidelity Capital & Income Fund, incorporated by reference herein by
Exhibit 10.8 of the 1994 Form S-1.............................................................
10.13 Amendment Number One, dated September 30, 1993, to Note Purchase Agreement, by and between
Standard Brands Paint Collateral Trust and Fidelity Capital & Income Fund, incorporated by
reference herein by Exhibit 10.9 of the 1994 Form S-1.........................................
10.14 Amendment Number Two, dated January 3, 1994, to Note Purchase Agreement, by and between
Standard Brands Paint Collateral Trust and Fidelity Capital & Income Fund incorporated by
reference herein from Exhibit 10.14 of the 1994
Form 10-K.....................................................................................
10.15 Note Purchase Agreement, dated as of June 14, 1993, between Standard Brands Paint Collateral
Trust and Kodak Retirement Income Plan Trust Fund, incorporated by reference herein by Exhibit
10.11 of the 1994 Form S-1....................................................................
10.16 Amendment Number One, dated September 30, 1993, to Note Purchase Agreement, by and between
Standard Brands Paint Collateral Trust and Kodak Retirement Income Plan Trust Fund,
incorporated by reference herein by Exhibit 10.12 of the 1994 Form S-1........................
10.17 Amendment Number Two, dated January 3, 1993, to Note Purchase Agreement, by and between
Standard Brands Paint Collateral Trust and Kodak Retirement Income Plan Trust Fund
incorporated by reference herein from Exhibit 10.17 of the 1994 Form 10-K.....................
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NUMBER
- ----------- ---------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
10.18 Pledge Agreement, dated as of June 14, 1993, between Standard Brands Paint Collateral Trust
and Benjamin Aerenson, as collateral agent, incorporated by reference herein by Exhibit 10.14
of the 1994 Form S-1..........................................................................
10.19 Amendment One to Pledge Agreement, dated September 30, 1993, between Standard Brands Paint
Collateral Trust and Benjamin Aerenson, as collateral agent, incorporated by reference herein
by Exhibit 10.15 of the 1994 Form S-1.........................................................
10.20 Amendment Two to Pledge Agreement dated, January 3, 1994, between Standard Brands Paint
Collateral Trust and Benjamin Aerenson, as collateral agent incorporated by reference herein
from Exhibit 10.20 of the 1994 Form 10-K......................................................
10.21 Guarantee, dated as of June 14, 1993, by Standard Brands Paint Company, incorporated by
reference herein by Exhibit 10.17 of the 1994 Form S-1........................................
10.22 Amendment One to Guarantee, dated September 30, 1993, by Standard Brands Paint Company,
incorporated by reference herein by Exhibit 10.18 of the 1994 Form S-1........................
10.23 Amendment Two to Guarantee, dated January 3, 1994, by Standard Brands Paint Company
incorporated by reference herein from Exhibit 10.23 of the 1994 Form 10-K.....................
10.24 Amendment Three to Guarantee, dated March 16, 1994, by Standard Brands Paint Company
incorporated by reference herein from Exhibit 10.24 of the 1994 Form 10-K.....................
10.25 Liquidating Trust Agreement, dated as of June 14, 1993, by and among Standard Brands Paint
Company, Standard Brands Paint Co., Major Paint Company, Standard Brands Realty Co., Inc.,
Zynolyte Products, E.I. Du Pont DeNemours & Company, Inc., M.C.S. Industries, Inc., Diamond W.
Floor Covering, Inc., American Credit Indemnity, Inc., as trustees, incorporated by reference
herein by Exhibit 10.20 of the 1994 Form S-1..................................................
10.26 Trust Estate Transfer Agreement, dated June 14, 1993 by and among Standard Brands Paint
Company, Standard Brands Paint Co., Standard Brands Realty Co., Inc., Major Paint Company,
Zynolite Products Company, and the Standard Brands Liquidating Trust, incorporated by
reference herein by Exhibit 10.21 of the 1994 Form S-1........................................
10.27 Disbursing Agent Agreement, dated June 14, 1993 by and among Standard Brands Paint Company,
Standard Brands Paint Co., Major Paint Company, Standard Brands Realty Co., Inc., Zynolyte
Products Company, and Bankruptcy Claims Administration, as disbursing agent, incorporated by
reference herein by Exhibit 10.22 of the 1994 Form S-1........................................
10.28 Liquidating Trust Disbursing Agent Agreement dated June 14, 1993, incorporated by reference
herein by Exhibit 10.23 of the 1994 Form S-1..................................................
10.29 Loan and Security Agreement dated as of June 14, 1993, by and among Foothill Capital, Paint
Co., and Major Paint, incorporated by reference herein by Exhibit 10.24 of the 1994 Form
S-1...........................................................................................
10.30 General Continuing Guaranty, dated as of June 14, 1993, by Standard Brands Paint Company,
incorporated by reference herein by Exhibit 10.25 of the 1994
Form S-1......................................................................................
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NUMBER
- ----------- ---------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
10.31 First Amendment to Borrower Guaranty Agreement, dated June 14, 1993, by Paint Co., Standard
Brands Realty, and the Art Stores, incorporated by reference herein by Exhibit 10.26 of the
1994 Form S-1.................................................................................
10.32 Grantor Trust Agreement between Leighton and Standard Brands Paint Company, dated as of June
14, 1993, incorporated by reference herein by Exhibit 10.27 of the 1994 Form S-1..............
10.33 Amendment Number One to Grantor Trust Agreement, dated September 30, 1993, between Leighton
and Standard Brands Paint Company, incorporated by reference herein by Exhibit 10.28 of the
1994 Form S-1.................................................................................
10.34 Amendment Number Two to Grantor Trust Agreement, dated January 3, 1994, between Karl Savryn
and Standard Brands Paint Company incorporated by reference herein from Exhibit 10.34 of the
1994 Form 10-K................................................................................
10.35 Secured Guarantee, dated September 30, 1993, by Standard Brands Paint Co., incorporated by
reference herein by Exhibit 10.30 of the 1994 Form S-1........................................
10.36 Amendment Number One, dated January 3, 1994, by Standard Brands Paint Co., incorporated by
reference herein from Exhibit 10.36 of the 1994 Form 10-K.....................................
10.37 Secured Guarantee, dated September 30, 1993, by Major Paint Company, incorporated by reference
herein by Exhibit 10.32 of the 1994 Form S-1..................................................
10.38 Amendment Number One, dated January 3, 1994, by Major Paint Company incorporated by reference
herein from Exhibit 10.38 of the 1994 Form 10-K...............................................
10.39 Security Agreement, dated September 30, 1993, by and among Benjamin Aerenson, as collateral
agent for Fidelity Capital & Income Fund and Major Paint Company, incorporated by reference
herein by Exhibit 10.34 of the 1994 Form S-1..................................................
10.40 Security Agreement, dated September 30, 1993, by and among Benjamin Aerenson, as collateral
agent for Fidelity Capital & Income Fund and Kodak Retirement Income Plan Trust Fund, and
Standard Brands Paint Co., incorporated by reference herein by Exhibit 10.35 of the 1994 Form
S-1...........................................................................................
10.41 Security Agreement-Instrument, dated September 30, 1993, between Standard Brands Paint Company
and Standard Brands Paint Collateral Trust, incorporated by reference herein by Exhibit 10.36
of the 1994 Form S-1..........................................................................
10.42 Amendment Number One, dated January 3, 1994, between Standard Brands Paint Company and
Standard Brands Paint Collateral Trust, incorporated by reference herein from Exhibit 10.42 of
the 1994 Form 10-K............................................................................
10.43 Loan Agreement dated March 16, 1994 among Standard Brands Paint Company, Standard Brands Paint
Co., Standard Brands Realty Co., Inc., and Karl Savryn, as trustee of the Standard Brands
Paint Collateral Trust U/T/D 6-14-93 incorporated by reference herein from Exhibit 10.43 of
the 1994 Form 10-K............................................................................
10.44 Investment Agreement dated as of February 15, 1995 among Corimon, S.A.C.A, Corimon
Corporation, Fidelity Capital & Income Fund, Kodak Retirement Income Plan Trust Fund,
Transamerica Life Insurance and Annuity Co., Transamerica Occidental Life Insurance Co., Sun
Life Insurance Company of America, Anchor National Life Insurance Company, Standard Brands
Paint Collateral Trust and Standard Brands Paint Company incorporated by reference herein from
Exhibit 1 to the Registrant's Current Report on Form 8-K dated February 15, 1995..............
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NUMBER
- ----------- ---------------------------------------------------------------------------------------------- -------------
<S> <C> <C>
10.45 Interim Loan Agreement dated as of February 15, 1995 among Corimon Corporation, Standard
Brands Paint Company, Standard Brands Paint Co., Standard Brands Realty Co., Inc. incorporated
by reference herein from Exhibit 2 to the Registrant's Current Report on Form S-K dated
February 15, 1995.............................................................................
11. The Registrant's Statement re Computation of Per Share Earnings [(See Note 2 to Registrant's
Consolidated Financial Statements)]...........................................................
16. Letter re Change in Certifying Accountant, incorporated by reference herein by Exhibit 16 of
the Registrant's Current Report on Form 8-K dated January 22,
1993..........................................................................................
22. Subsidiaries of the Registrant................................................................
27. Financial Data Schedule.......................................................................
</TABLE>
32
<PAGE>
STANDARD BRANDS PAINT COMPANY
AVAILABILITY OF EXHIBITS
------------------------
The Company will furnish upon
request copies of the exhibits
indicated on pages 28 through 32
of Form 10-K at a cost of 25 CENTS
per page, which is the reasonable
cost to the Company in fulfilling
the request.
33
<PAGE>
STANDARD BRANDS PAINT COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets at January 29, 1995 and January 30, 1994....................................... F-3
Consolidated Statements of Operations for the year ended January 29, 1995, the six months ended January 30,
1994 and August 1, 1993, and the year ended January 31, 1993.............................................. F-4
Consolidated Statements of Stockholders' (Deficit) Equity and Preferred Stock Subject to Mandatory
Redemption for the year ended January 29, 1995, the six months ended January 30, 1994 and August 1, 1993,
and the year ended January 31, 1993....................................................................... F-5
Consolidated Statements of Cash Flows for the year ended January 29, 1995, the six months ended January 30,
1994 and August 1, 1993, and the year ended January 31, 1993.............................................. F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Standard Brands Paint Company
Torrance, California
We have audited the accompanying consolidated balance sheets of Standard
Brands Paint Company as of January 29, 1995 and January 30, 1994 (Successor
Company), and the related consolidated statements of operations, stockholders'
(deficit) equity and preferred stock subject to mandatory redemption, and cash
flows for the year ended January 29, 1995 and the six month period ended January
30, 1994 (Successor Company) and for the six month period ended August 1, 1993
and the year ended January 31, 1993 (Predecessor Company). 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Standard Brands
Paint Company at January 29, 1995 and January 30, 1994 (Successor Company), and
the consolidated results of its operations and its cash flows for the year ended
January 29, 1995 and the six month period ended January 30, 1994 (Successor
Company) and for the six month period ended August 1, 1993 and the year ended
January 31, 1993 (Predecessor Company), in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that Standard Brands Paint Company will continue as a going concern. As
more fully described in Note 1, the Company, together with four of its
subsidiaries, which filed for reorganization under Chapter 11 of the United
States Bankruptcy code in 1992, emerged from their Chapter 11 bankruptcy status
effective June 14, 1993. Since emerging from Chapter 11, the Company has
continued to incur operating losses, and is not expected to be able to meet its
fiscal year 1995 debt service requirements as they currently exist. The Company
is contemplating a restructuring which is expected to provide substantial
liquidity and reduce the Company's debt service requirements. However, the
restructuring is subject to stockholder approval as described in Note 13. Since
this restructuring has not yet been approved by the Company's stockholders and
formally accepted by the lenders and prospective investors, there is substantial
doubt about the Company's ability to meet its obligations as they become due and
therefore its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the possible inability of
Standard Brands Paint Company to restructure and service its debt and continue
as a going concern.
As discussed in Note 2 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for postretirement healthcare benefits.
ERNST & YOUNG LLP
Los Angeles, California
April 7, 1995
F-2
<PAGE>
STANDARD BRANDS PAINT COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
------------------------
JANUARY 29, JANUARY 30,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash.................................................................................. $ 1,489 $ 911
Accounts and notes receivable, net.................................................... 1,506 3,398
Inventories........................................................................... 14,750 23,849
Prepaid expenses...................................................................... 961 2,866
Deferred income taxes................................................................. 3,053 4,082
----------- -----------
Total current assets................................................................ 21,759 35,106
Property, plant and equipment......................................................... 91,002 134,370
Less accumulated depreciation and amortization...................................... 3,293 1,623
----------- -----------
87,709 132,747
Other assets............................................................................ 442 1,984
----------- -----------
Total assets........................................................................ $ 109,910 $ 169,837
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Short-term borrowings................................................................. $ 3,821 $ 6,646
Grantor Trust Notes payable........................................................... -- 6,000
Accounts payable...................................................................... 10,974 11,130
Accrued expenses...................................................................... 16,607 13,536
----------- -----------
Total current liabilities........................................................... 31,402 37,312
Senior notes, secured, payable to related parties....................................... 30,470 103,080
Liquidating Property Trust Notes........................................................ 52,803 --
Notes payable to related parties........................................................ 10,000 --
Grantor Trust Note payable.............................................................. 6,000 --
Deferred income taxes................................................................... 5,984 7,013
Other long-term liabilities............................................................. 6,637 7,864
Commitments and contingencies
Common stockholders' (deficit) equity:
Common stock, $.01 par value per share; authorized 30,000,000 shares; issued and
outstanding 22,429,000 shares at January 29, 1995 and 22,369,000 shares at January
30, 1994............................................................................. 224 223
Additional paid-in capital............................................................ 35,593 35,571
Deficit............................................................................... (68,388) (20,411)
Less treasury stock, at cost, 28,000 shares........................................... (815) (815)
----------- -----------
Total common stockholders' (deficit) equity............................................. (33,386) 14,568
----------- -----------
Total liabilities and stockholders' (deficit) equity.................................... $ 109,910 $ 169,837
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
STANDARD BRANDS PAINT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
---------------------------- --------------------------
YEAR ENDED SIX MONTHS SIX MONTHS YEAR ENDED
JANUARY 29, ENDED JANUARY ENDED AUGUST JANUARY 31,
1995 30, 1994 1, 1993 1993
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales............................................... $ 112,188 $ 84,000 $ 115,528 $ 226,749
Cost of sales........................................... 71,342 52,332 71,512 138,666
------------- ------------- ------------ ------------
Gross margin............................................ 40,846 31,668 44,016 88,083
Other costs and expenses:
Operating and general and administrative expenses..... 59,714 34,642 45,708 85,379
Provision for restructuring and store closures........ 700 6,000 -- --
Loss on real properties to be transferred to a grantor
trust................................................ 15,300 16,478 -- --
Depreciation and amortization......................... 2,121 1,716 2,323 5,443
Interest income....................................... (138) (70) (110) (156)
Interest expense...................................... 11,518 5,358 6,556 13,846
Other income, net..................................... (580) (240) (3,469) (211)
------------- ------------- ------------ ------------
Total other costs and expenses...................... 88,635 63,884 51,008 104,301
------------- ------------- ------------ ------------
Loss before reorganization items, income taxes and
extraordinary item..................................... (47,789) (32,216) (6,992) (16,218)
Reorganization items:
Fresh start adjustments............................... -- -- 41,463 --
Professional fees..................................... -- -- (4,840) (5,831)
Provision for store closing costs and real estate
valuation............................................ -- -- -- (2,000)
Provision for lease settlements....................... -- -- -- (2,000)
Write-off LESOP note receivable....................... -- -- -- (12,000)
Loss on transfer of business units and real properties
to a grantor trust................................... (188) (264) (6,441) --
------------- ------------- ------------ ------------
Total reorganization (losses) gains................. (188) (264) 30,182 (21,831)
------------- ------------- ------------ ------------
(Loss) income before income taxes and extraordinary
item................................................... (47,977) (32,480) 23,190 (38,049)
Income tax (benefit) provision.......................... -- (12,069) -- 288
------------- ------------- ------------ ------------
(Loss) income before extraordinary item................. (47,977) (20,411) 23,190 (38,337)
Extraordinary item -- gain on forgiveness of debt....... -- -- 5,371 --
------------- ------------- ------------ ------------
Net (loss) income....................................... $ (47,977) $ (20,411) $ 28,561 $ (38,337)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Net (loss) income for common stockholders:
Net (loss) income..................................... $ (47,977) $ (20,411) $ 28,561 $ (38,337)
Adjustment for preferred dividends.................... -- -- (812) (1,625)
Accretion on redeemable preferred stock............... -- -- (218) (298)
------------- ------------- ------------ ------------
$ (47,977) $ (20,411) $ 27,531 $ (40,260)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Per common share:
Net (loss) income per share:
Loss before reorganization items and extraordinary
item................................................. $ (2.14) $ (.90) $ (1.44) $ (7.25)
Reorganization items.................................. (.01) (.01) 5.42 --
Extraordinary item -- gain on forgiveness of debt..... -- -- .96 --
------------- ------------- ------------ ------------
Net (loss) income....................................... $ (2.15) $ (.91) $ 4.94 $ (7.25)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Weighted average number of common and common equivalent
shares outstanding..................................... 22,359,000 22,341,000 5,578,000 5,555,000
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
STANDARD BRANDS PAINT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
AND PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
(IN THOUSANDS)
<TABLE>
<CAPTION>
RECEIVABLES MANDATORY MANDATORY
ADDITIONAL RETAINED AND OTHER REDEEMABLE REDEEMABLE
COMMON PAID-IN EARNINGS TREASURY CONTRA PREFERRED PREFERRED
STOCK CAPITAL (DEFICIT) STOCK ACCOUNTS STOCK STOCK
------- ----------- --------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January
26, 1992........... $ 56 $ 74 $ 10,074 $ (815) $ (12,000) $ 8,151 $ 7,795
Net loss for the
year............. -- -- (38,337) -- -- -- --
Write-off of note
receivable from
LESOP............ -- -- -- -- 12,000 -- --
Shares issued for
employee plans... -- 36 -- -- -- -- --
Accretion of
preferred stock
to mandatory
redemption
value............ -- -- (298) -- -- 149 149
------- ----------- --------- --------- ------------ ----------- -----------
Balance at January
31, 1993........... 56 110 (28,561) (815) -- 8,300 7,944
Shares issued for
employee plans... -- 13 -- -- -- -- --
Net loss for the
six month
period........... -- -- (9,983) -- -- -- --
------- ----------- --------- --------- ------------ ----------- -----------
Predecessor Company
balance at August
1, 1993............ 56 123 (38,544) (815) -- 8,300 7,944
Recapitalization and
fresh-start
adjustments
Issuance of common
stock............ 112 19,329 -- -- -- -- --
Exchange of
mandatory
redeemable
preferred stock
for common
stock............ 55 16,189 -- -- -- (8,300) (7,944)
Fresh-start
adjustments...... -- -- 38,544 -- -- -- --
------- ----------- --------- --------- ------------ ----------- -----------
Successor Company
balance at August
1, 1993............ 223 35,641 -- (815) -- -- --
Issuance costs of
recapitalization
common stock..... -- (70) -- -- -- -- --
Net loss for the
six month
period........... -- -- (20,411) -- -- -- --
------- ----------- --------- --------- ------------ ----------- -----------
Successor Company
balance at January
30, 1994........... 223 35,571 (20,411) (815) -- -- --
Issuance of common
stock............ 1 22 -- -- -- -- --
Net loss for the
year............. -- -- (47,977) -- -- -- --
------- ----------- --------- --------- ------------ ----------- -----------
Successor Company
balance at January
29, 1995........... $ 224 $ 35,593 $ (68,388) $ (815) $ -- $ -- $ --
------- ----------- --------- --------- ------------ ----------- -----------
------- ----------- --------- --------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
STANDARD BRANDS PAINT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------ ------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
JANUARY 29, JANUARY 30, AUGUST 1, JANUARY 31,
1995 1994 1993 1993
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income............................................. $ (47,977) $ (20,411) $ 28,561 $ (38,337)
Adjustments to net (loss) income to obtain net cash (used in)
provided by operating activities:
Fresh start adjustments..................................... -- -- (41,463) --
Loss on transfer of business units and real properties to a
grantor trust.............................................. 188 264 6,441 --
Extraordinary item -- gain on forgiveness of debt........... -- -- (5,371) --
Write-off LESOP note receivable............................. -- -- -- 12,000
Reorganization items........................................ -- -- -- 4,000
Restructuring charges....................................... 700 6,000 -- --
Loss on real properties to be transferred to a grantor
trust...................................................... 15,300 16,478 -- --
Depreciation and amortization............................... 2,121 1,744 2,558 5,910
Interest paid-in kind....................................... 1,997 1,336 368 --
Provision for losses on accounts receivable................. 346 86 209 389
Deferred tax benefit........................................ -- (12,069) -- (33)
Gain on sale of property.................................... (580) (239) (3,469) (77)
Changes in operating assets and liabilities (net of the
effects of business units transferred to a grantor trust as
part of reorganization):
Accounts receivable....................................... 1,358 (1,408) (4,221) 2,890
Inventory, prepaid expenses and other..................... 11,004 8,928 1,447 3,228
Accounts payable, accrued expenses and other.............. 988 (12,122) 5,851 10,678
----------- ----------- ----------- -----------
Net cash (used in) provided by operating activities........... (14,555) (11,413) (9,089) 648
INVESTING ACTIVITIES
Proceeds from transfer of business units and real properties
to a grantor trust due to Chapter 11 proceeding, net of cash
transferred.................................................. -- -- 7,499 --
Decrease (increase) in other assets........................... 1,542 786 (2,221) 112
Purchases of property, plant and equipment.................... (179) (913) (1,596) (1,856)
Proceeds from sale of property, plant and equipment........... 28,376 15,134 9,194 5,238
----------- ----------- ----------- -----------
Net cash provided by investing activities..................... 29,739 15,007 12,876 3,494
FINANCING ACTIVITIES
Proceeds from stock issuance.................................. 23 -- 13 36
Costs of recapitalization stock issuance...................... -- (70) -- --
Repayment of long-term debt................................... (5,759) (10,151) (8,197) (5,326)
Repayment of Liquidating Property Trust Notes................. (16,045) -- -- --
Settlement of pre-petition claims, net........................ -- -- (9,773) --
Repayment of note payable -- Grantor Trust.................... (6,000) -- -- --
Proceeds from notes payable to related parties................ 10,000 -- -- --
Proceeds from (repayments of) short-term borrowings, net...... (2,825) 4,274 8,372 --
Refinancing of note payable -- Grantor Trust.................. 6,000 -- -- --
----------- ----------- ----------- -----------
Net cash used in financing activities......................... (14,606) (5,947) (9,585) (5,290)
----------- ----------- ----------- -----------
Net increase (decrease) in cash............................... 578 (2,353) (5,798) (1,148)
Cash at beginning of period................................... 911 3,264 9,062 10,210
----------- ----------- ----------- -----------
Cash at end of period......................................... $ 1,489 $ 911 $ 3,264 $ 9,062
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) for:
Interest.................................................. $ 9,205 $ 3,862 $ 957 $ 8,634
Income taxes.............................................. 51 (34) 35 (3,131)
</TABLE>
See accompanying notes.
F-6
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
JANUARY 29, 1995
1. REORGANIZATION AND RECAPITALIZATION
On February 11, 1992, Standard Brands Paint Company and subsidiaries (the
Company) and four (4) of its subsidiaries filed separate voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code. While
under Chapter 11, certain claims against the Company and the four subsidiaries
that were in existence prior to the filing of the petitions for relief under the
federal bankruptcy laws were stayed while the Company and the four subsidiaries
continued their business operations as Debtors-In-Possession. These claims were
reflected in the Company's consolidated balance sheet as "Prepetition
liabilities subject to compromise" as of January 31, 1993.
The Company and the four subsidiaries which filed voluntary petitions for
reorganization under Chapter 11 emerged from their Chapter 11 bankruptcy status
effective June 14, 1993 (Effective Date) in accordance with their confirmed
Fourth Amended Joint Plan of Reorganization (the Plan) (All capitalized terms
used in these notes, unless otherwise defined, shall have the meaning given to
them in the Plan). In general, the Plan provided for the resolution of all
prepetition claims as of February 11, 1992, the Chapter 11 petition date, as
well as the resolution of certain legal and environmental matters in exchange
for cash, real property, other assets, and shares of common stock.
The Plan resulted in a recapitalization of the Company and a change in
management as follows: (i) approximately $29,600 of the outstanding debt owed to
Fidelity Capital & Income Fund and Kodak Retirement Income Plan Trust Fund
(collectively, Fidelity) as successor in interest to Bank of America, was
converted into 11,283,720 shares of common stock, or approximately 50.5% of the
Company's issued and outstanding common stock as of the Effective Date; (ii) the
maturity date of the Company's Senior Notes was extended at a reduced interest
rate; (iii) unsecured priority claims were paid in cash in full; (iv) unsecured
claims were paid through the distribution of $8,800 cash plus proceeds of up to
$4,200 to be generated from the sales of eight (8) of the Company's surplus real
estate properties; (v) the Company's existing outstanding Series D Preferred
Stock and Series E Preferred Stock, including accrued but unpaid dividends, was
exchanged for 5,474,280 shares of the Company's common stock or approximately
24.5% of the issued and outstanding common stock as of the Effective Date; (vi)
all of the common stock owned by the Leveraged Employee Stock Ownership Plan
(LESOP) and Payroll Stock Option Plan (PAYSOP) was distributed to their
respective plan participants; and (vii) a new board of directors and senior
management team was elected. Existing common stockholders retained their equity
interests, with the exception of all interests arising under the Company's
Rights Agreement dated November 10, 1987, which was extinguished as a result of
this Plan. Consequently, holders of the Company's common stock, including LESOP
and PAYSOP distributees, collectively retained 25.0% of the Company's issued and
outstanding shares of common stock as of the Effective Date.
The Plan was financed, in part, by Fidelity through the purchase of a
$20,000 principal amount secured noted (Fidelity Secured Note) for $8,000 in
cash and a $12,000 note (Fidelity Exchange Note). The Fidelity Exchange Note is
secured by the capital stock of newly formed holding companies for The Art Store
and Zynolyte Products Company and certain real estate properties which were
transferred to a grantor trust (Grantor Trust) with the contemplation that these
business operations and real estate assets would be sold to raise additional
capital. The proceeds from such sales or financing is to be used to reduce the
indebtedness under the Fidelity Secured Note. The Company maintains a residuary
interest in the assets of the Grantor Trust and, upon payment in full of the
Fidelity Secured Note, will be entitled to any remaining assets. As contemplated
by the Plan, on August 2, 1993 the Capital Stock of Zynolyte Products Company
was sold to the Grow Group, Inc. for approximately $14,800. In October 1993, one
of the parcels of real estate was sold for approximately $1,400. The net
proceeds of both transactions were used to reduce the principal outstanding
under the Fidelity
F-7
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. REORGANIZATION AND RECAPITALIZATION (CONTINUED)
Secured Note to approximately $4,500 as of January 30, 1994. In addition, the
Company has guaranteed $2,500 of the principal outstanding on the Fidelity
Secured Note. On February 15, 1995, the Fidelity Secured Note and the Fidelity
Exchange Note were cancelled and the assets of the Grantor Trust were sold.
As a result of the transactions which occurred on the Effective Date,
indebtedness of $49,906 was discharged and mandatory redeemable preferred stock
of $16,244 was cancelled in the bankruptcy proceedings by the issuance of
16,758,000 shares of common stock and the exchange of other assets. Accordingly,
the Company recorded an extraordinary gain from forgiveness of debt in the
amount of $5,371.
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 reorganization value, which approximates their fair value at the
Effective Date. In addition, the accumulated deficit of the Company was
eliminated and its capital structure was recast in conformity with the Plan, and
as such, the Company has recorded the effects of the Plan and Fresh-Start
Reporting as of August 1, 1993. The January 30, 1994 consolidated balance sheet
is, therefore, the balance sheet of a new reporting entity and is not comparable
to periods prior to August 1, 1993. In addition, 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 periods ended August 1, 1993 and January 30,
1994 are not comparable with prior periods.
The reorganization value of the Company's common equity of $35,049 at August
1, 1993 was determined by the Company with the assistance of financial advisors
after consideration of several factors and by reliance on various valuation
methods, including discounted projected cash flows, price/ earnings ratios, and
other applicable ratios and economic and industry information relevant to the
operations of the Company.
The reorganization value of the Company has been allocated to specific asset
categories pursuant to Fresh-Start Reporting. Current assets were recorded at
their book value, which approximates fair value, including inventories which
were stated on a first-in, first-out basis (see Note 3). Property, plant and
equipment which includes assets held for sale were recorded at their approximate
fair market value as determined by an independent appraisal or other estimates,
based on estimated "fair market value in continued use" which assumes that the
property will be used for the purpose for which it was designed and built or to
which it is currently adapted as part of a business unit or entity (see Note 4).
2. SIGNIFICANT ACCOUNTING POLICIES
COMPANY OPERATIONS
The Company operates in one industry segment as an integrated manufacturer,
distributor and retailer of paint and home decorating products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Standard
Brands Paint Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.
F-8
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FISCAL YEAR
The Company's fiscal year ends on the last Sunday in January.
CASH FLOWS
For purposes of financial reporting, cash includes cash on hand and cash
invested in bank certificates of deposits and commercial paper with maturities
of three months or less.
ACCOUNTS RECEIVABLE
Accounts receivable are stated net of an allowance for doubtful accounts
amounting to $150, $215, and $498 at January 29, 1995, January 30, 1994 and
January 31, 1993, respectively.
INVENTORY VALUATION
The Company values inventory at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment was stated at approximate fair market value as
of August 1, 1993. Additions to property, plant and equipment subsequent to
August 1, 1993 are stated at cost with property held for sale being stated at
net realizable value. Prior to Fresh-Start Reporting, property, plant and
equipment were stated at cost.
Depreciation and amortization of plant and equipment are provided
principally by use of the straight-line method. The estimated useful lives of
the related assets are as follows:
<TABLE>
<S> <C>
Buildings and improvements................................... 15 years
Machinery and equipment...................................... 5 to 10 years
Furniture and fixtures....................................... 5 to 10 years
</TABLE>
AMORTIZATION OF INTANGIBLES
The excess cost of acquiring a subsidiary in 1961 over the related fair
value of net tangible assets amounting to $2,521 was written-off in connection
with the adoption of Fresh-Start Reporting.
PREOPENING COSTS
Expenditures associated with opening new stores are charged to expense as
incurred.
INCOME TAXES
The Company adopted the liability method of accounting for income taxes in
its financial statements for fiscal 1988. The Company adopted the provisions of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes," which had no material effect on the Company's accounting for income
taxes.
The deferred tax liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities and is measured at
the enacted tax rates that will be in effect when these differences reverse.
Deferred tax expense is determined by the change in the liability for deferred
taxes (Liability Method).
RESEARCH AND DEVELOPMENT
The Company incurred and charged to expense $172, $171, $194 and $414 in
research and development costs during the fiscal year ended January 29, 1995,
the six month periods ended January 30, 1994 and August 1, 1993, and the year
ended January 31, 1993, respectively.
LOSS PER COMMON SHARE
The weighted average number of shares is not adjusted for stock options
outstanding or the preferred stock because such impact on loss per share is
either antidilutive or immaterial.
F-9
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's $30,470 in senior notes, secured,
approximates their fair value at January 29, 1995.
POST RETIREMENT BENEFITS
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
106 on "Employer's Accounting for Postretirement Benefits other than Pensions"
during the first quarter of its fiscal year ending January 30, 1994. The
postretirement health care plans are contributory and the Company funds the
costs of these plans on a pay-as-you-go basis. The Company has computed the
accumulated postretirement benefit transition obligation (APBO), which
represents the previously unrecognized prior service cost, and during the first
quarter utilized the deferral method which records the amortization of such
costs over a 20 year period. In connection with the adoption of Fresh-Start
Reporting, the Company recorded an additional liability on the consolidated
balance sheet at August 1, 1993 for the remaining unrecognized portion of the
APBO of $8,000.
RECLASSIFICATIONS
Certain reclassifications to captions on prior years' consolidated financial
statements have been made to conform to the January 29, 1995 presentation.
3. INVENTORIES
Inventories at January 29, 1995 and January 30, 1994 consist of the
following:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
------------------------
JANUARY 29, JANUARY 30,
1995 1994
----------- -----------
<S> <C> <C>
Retail inventories............................................................ $ 12,576 $ 19,965
Manufacturing inventories..................................................... 1,792 3,380
Wholesale inventories......................................................... 382 504
----------- -----------
$ 14,750 $ 23,849
----------- -----------
----------- -----------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
------------------------
JANUARY 29, JANUARY 30,
1995 1994
----------- -----------
<S> <C> <C>
Land.......................................................................... $ 14,412 $ 42,030
Buildings and leasehold improvements.......................................... 4,143 22,211
Machinery and equipment....................................................... 159 75
Furniture and fixtures........................................................ 266 120
Construction in progress...................................................... 4 427
Property held for sale........................................................ 100,332 85,985
----------- -----------
119,316 150,848
Less reserve for loss on properties which, subject to stockholder approval,
are to be transferred to a grantor trust..................................... (28,314) (16,478)
----------- -----------
$ 91,002 $ 134,370
----------- -----------
----------- -----------
</TABLE>
Property held for sale substantially represents those properties transferred
to the Liquidating Property Trust in 1994 (see Note 7) and certain additional
properties to be transferred to the Liquidating Property Trust as part of the
contemplated Restructuring as described in Note 13.
F-10
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED EXPENSES
Accrued expenses include the following items:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
------------------------
JANUARY 29, JANUARY 30,
1995 1994
----------- -----------
<S> <C> <C>
Payroll, related taxes and employee benefits.................................. $ 3,087 $ 2,190
Self-insurance reserves....................................................... 6,000 4,500
Other taxes................................................................... 980 943
Interest...................................................................... 894 578
Reserve for store closings.................................................... 700 2,959
Transaction costs............................................................. 2,580 --
Environmental reserve......................................................... 1,200 250
Other......................................................................... 1,166 2,116
----------- -----------
$ 16,607 $ 13,536
----------- -----------
----------- -----------
</TABLE>
6. SHORT TERM BORROWINGS
Subsequent to the filings of the Company's Chapter 11 petitions, the Company
entered into a credit agreement with Foothill Capital Corp. (Foothill), pursuant
to which Foothill made available to the Company a senior secured credit facility
in the aggregate principal amount of $12,000. Pursuant to the Plan, the Company
entered into a new credit agreement with Foothill on June 14, 1993 which
provided the Company with a secured line of credit in the amount of $12,500.
Interest under the new credit agreement is equal to the prime rate of interest
plus 2% per annum. On April 14, 1994 the Company amended its agreement with
Foothill to extend the credit agreement for three additional years. The interest
rate under the amended agreement is equal to the prime rate of interest plus 3%
per annum. At January 29, 1995, the interest rate per annum was 11.75%. As of
January 29, 1995, the Company was not in compliance with its financial covenants
under the credit agreement and pursuant to the Company's request, Foothill has
agreed to waive compliance until April 30, 1996.
At January 29, 1995 and January 30, 1994, short-term borrowings consisted of
amounts outstanding to Foothill of approximately $3,821 and $6,646,
respectively. In addition, at January 29, 1995 the Company had outstanding
letters of credit of $4,376 for the State of California's Workers' Compensation
program and import purchases.
During the third and fourth quarters of fiscal 1993, the Company borrowed an
additional $6.0 million (Grantor Trust Notes) for working capital from the
Grantor Trust established under the Plan. The Grantor Trust financed the loan on
issuer notes to Fidelity Capital & Income Fund and Kodak Retirement Income Plan
Trust Fund in an aggregate amount of $6,000 upon terms substantially identical
to the previously issued Fidelity Secured Note (Note 1). On March 16, 1994 these
Grantor Trust Notes were restructured to a term of six years with interest
payable quarterly at a rate of 10% per annum. This indebtedness is secured by a
third lien on certain of the Company's real properties.
7. SENIOR NOTES AND OTHER LONG-TERM LIABILITIES
On June 14, 1993 the Company entered into an Amended and Restated Loan
Agreement (the Amended Note Agreement) with its senior lenders, Transamerica
Insurance Companies and Sun Life Insurance Companies (the Insurance Companies).
The Amended Note Agreement provides for a stated interest rate of 9.0% per annum
(reduced from 11.75%), however, for the first three years subsequent to June 14,
1993 the rate at which interest is paid is 6.5%, 7.5% and 8.5%, respectively,
with the difference between the stated rate and the pay rate added to principal
as payment of interest in-kind.
F-11
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SENIOR NOTES AND OTHER LONG-TERM LIABILITIES (CONTINUED)
The Amended Note Agreement requires the Company to meet specific affirmative
and negative covenants which include, among other requirements, limitations on
the acquisition and disposition of assets, prohibition of borrowings other than
under the Amended Note Agreement or as set forth in the Plan, prohibition of
dividend declarations, and compliance with certain financial covenants,
including, but not limited to, current ratio, minimum net worth, and interest
coverage. The Amended Note Agreement is collateralized by a perfected first
priority lien and security interest in specific real property assets of the
Company. As of January 29, 1995, the Company was not in compliance with its
financial covenants and pursuant to the Company's request, the Insurance
Companies have agreed to waive compliance until April 30, 1996.
On March 16, 1994, the Company entered into an agreement with the Insurance
Companies and the Grantor Trust for $10 million of new financing and a plan to
restructure the Company's existing $103 million in senior notes and existing $6
million indebtedness with the Grantor Trust (see Note 6).
Under the terms of the Agreement, the Company borrowed an aggregate of $10
million from the Insurance Company Lenders and the Grantor Trust (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 were used to pay existing trade debt, provide working capital and pay
for transaction expenses.
Under the terms of the restructure, on August 1, 1994, the Company
established a grantor trust (Liquidating Property Trust) to which it transferred
all but approximately 28 of its 103 operating and non-operating real properties
in exchange for the assumption by the Liquidating Property Trust of
approximately $68.7 million of existing senior notes owed to the Insurance
Companies under the Amended Note Agreement (Assumed Indebtedness). The book
value of the properties to be sold by the Liquidating Property Trust exceeded
the sale proceeds, less applicable fees, expenses and other costs by
approximately $14.6 million. Accordingly, the Company provided for this loss as
of January 30, 1994. Interest and principal on the Assumed Indebtedness is only
payable to the extent of proceeds from sales of Liquidating Property Trust
assets. The interest rate on the Assumed Indebtedness was increased to 10% per
annum. The Company provided a limited guarantee on the Assumed Indebtedness in
an amount equal to 10% of the Assumed Indebtedness.
The remaining Insurance Companies' senior notes of approximately $30.4
million not assumed by the Liquidating Property Trust (Retained Indebtedness)
were restructured to provide for principal to be due and owing in July 1999.
Interest continues to be due monthly at an annual rate of 9% per annum. The
Retained Indebtedness continues to be secured by real properties of the Company
not transferred to the Liquidating Property Trust.
The servicer of the Liquidating Property Trust is Transamerica Realty
Services, Inc. (the Servicer). The Servicer sells the Real Estate Trust assets
in the ordinary course. Proceeds from such sales will be used to repay the
Assumed Indebtedness. The Company retains an 80% residuary interest in the
Liquidating Property Trust after all of the Assumed Indebtedness has been
repaid. The Insurance Companies retain a 20% residuary interest in the
Liquidating Property Trust.
As of January 29, 1995, the Company operated 58 paint stores, 27 of which
are among the 78 parcels of real property transferred to the Liquidating
Property Trust. Under the terms of the Liquidating Property Trust, the Company
was to be given a minimum of four months notice prior to the sale of any
currently operating retail paint store. Until sold, 13 of the 27 operating
retail store properties were being leased back to the Company through July 31,
1995 at an aggregate monthly rent of approximately $178 (on a triple net basis).
After July 31, 1995, such properties which remained
F-12
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SENIOR NOTES AND OTHER LONG-TERM LIABILITIES (CONTINUED)
unsold were to be leased to the Company on a month to month basis at a fair
market rent as agreed to between the Disposition Agent and the Company. Upon the
sale of the 27 currently operating retail paint stores, the Company intends to
either remain in the same location on a leased basis or relocate to new leased
locations. The terms of the Liquidating Property Trust will be modified pursuant
to a proposal whereby stockholders will be asked to approve a financial
restructuring of the Company (see Note 13).
The establishment of the Liquidating Property Trust and transfer of the real
estate properties was approved by the stockholders at the Company's Annual
Meeting in June 1994. Upon the establishment of the Liquidating Property Trust,
the Company issued to the Insurance Companies and the Grantor Trust 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 Liquidating Property Trust, warrants
to purchase an additional aggregate of 750,000 shares will be issued to the
Insurance Companies and the Grantor Trust. In each case the warrants will be
redeemable by the Company for a price equal to $1.00 per share.
In settlement of certain pre-petition Federal Tax obligations of
approximately $377, the Company entered into an unsecured obligation with the
Internal Revenue Service which matures June 14, 1999. Interest and principal are
payable quarterly based upon a predetermined amortization schedule.
8. RESTRUCTURING AND STORE CLOSURES
During the periods ended January 29, 1995 and January 30, 1994, the Company
provided for restructuring and store closures as follows:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-----------------------------
YEAR ENDED SIX MONTHS
JANUARY 29, ENDED JANUARY
1995 30, 1994
------------- -------------
<S> <C> <C>
Inventory clearance markdowns................................................. $ 290 $ 2,300
Employee severance costs...................................................... 180 600
Advertising................................................................... 180 100
Other store closing costs..................................................... 50 200
Property taxes, utilities, maintenance and other.............................. -- 2,800
----- -------------
$ 700 $ 6,000
----- -------------
----- -------------
</TABLE>
In November 1993, the Company announced that it planned to restructure its
operations and close approximately thirty-four (34) retail outlets which were
currently operating. During fiscal 1994, the Company identified an additional
twelve (12) stores for closure. The remaining open stores will be closed during
fiscal 1995. The combined provision of $6,700 includes $3,900 for the
anticipated costs of inventory liquidation, employee severance and other store
closing costs.
In addition, the combined $6,700 provision includes $1,200 for property
taxes, utilities, maintenance and other ongoing holding costs which the Company
incurred until the stores were sold, and $1,600 for similar ongoing costs
associated with previously closed stores which remained unsold longer than
originally anticipated. As of January 29, 1995, $6,000 of this combined
provision had been used with the remaining $700 included in accrued expenses.
F-13
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
----------------------------- -----------------------------
YEAR ENDED SIX MONTHS SIX MONTHS YEAR ENDED
JANUARY 29, ENDED JANUARY ENDED AUGUST JANUARY 31,
1995 30, 1994 1, 1993 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal........................................... $ -- $ -- $ -- $ 265
State............................................. -- -- -- 56
------------- ------------- ------------- -----
-- -- -- 321
------------- ------------- ------------- -----
Deferred:
Federal........................................... -- (9,243) -- 1
State............................................. -- (2,826) -- (34)
------------- ------------- ------------- -----
-- (12,069) -- (33)
------------- ------------- ------------- -----
$ -- $ (12,069) $ -- $ 288
------------- ------------- ------------- -----
------------- ------------- ------------- -----
</TABLE>
The change in the deferred income tax liability represents the effect of
changes in the amounts of temporary differences during the year. The types of
temporary differences that give rise to significant portions of the deferred tax
liability for each fiscal year and the tax effect of changes in those temporary
differences during the years are presented below.
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------ ------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
JANUARY 29, JANUARY 30, AUGUST 1, JANUARY 31,
1995 1994 1993 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Accelerated depreciation............................ $ (9,718) $ (10,981) $ (87) $ (130)
Self-insurance and other reserves................... (1,517) 14 74 (623)
Deferred gain on sale of property................... (556) -- (208) (703)
Deferred restructuring costs........................ (144) 17 -- (1,068)
Uniform capitalization rules and change in
accounting method.................................. 371 274 1,190 100
Employee benefit plans.............................. 809 185 5,785 (4,699)
Tax effect of NOL carryforward...................... (6,344) (7,575) (3,513) (6,342)
Recognition of minimum tax credit................... (665) (1,194) -- (442)
Valuation allowance with respect to deferred tax
assets............................................. 15,201 8,459 -- 14,180
Other............................................... 2,563 (1,268) (3,241) (306)
----------- ----------- ----------- -----------
Deferred tax benefit................................ $ -- $ (12,069) $ -- $ (33)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-14
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of January 29, 1995 are as
follows:
<TABLE>
<CAPTION>
CURRENT NON-CURRENT
--------- ------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation.................................................... $ -- $ (13,652)
Uniform capitalization rules and change in accounting method................ (1,394) --
Other temporary differences................................................. (35) --
Alternative minimum tax..................................................... -- (394)
--------- ------------
Total deferred tax liabilities.............................................. (1,429) (14,046)
Deferred tax assets:
Self-insurance and other reserves........................................... 3,426 --
Deferred gains on property sales............................................ -- 1,167
Provision for loss on reorganization and restructuring costs................ 1,369 --
Employee benefit plans...................................................... 642 2,479
Other temporary differences................................................. -- 519
Tax effect of NOL carryforward.............................................. 7,498 18,439
Minimum tax credit carryforward............................................. -- 665
--------- ------------
Total deferred tax assets..................................................... 12,935 23,269
Valuation allowance........................................................... (8,453) (15,207)
--------- ------------
Net deferred tax assets....................................................... 4,482 8,062
--------- ------------
Total deferred tax asset (liability).......................................... $ 3,053 $ (5,984)
--------- ------------
--------- ------------
</TABLE>
Total income tax expense related to continuing operations differed from the
amounts computed by applying the federal income tax rate of 34% to income before
income taxes as a result of the following items:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------ ------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
JANUARY 29, JANUARY 30, AUGUST 1, JANUARY 31,
1995 1994 1993 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
"Expected" tax (benefit)............................ $ (16,312) $ (11,043) $ (4,023) $ (12,937)
State income taxes, net of federal tax.............. -- * (1,865)* -- * 14*
Redetermination of prior years' tax liabilities..... -- -- -- 265
Restructuring charges............................... 894 -- 1,104 1,685
Net deductible items to which tax benefit cannot be
ascribed........................................... 15,440 837 2,904 11,074
Other............................................... (22) 2 15 187
----------- ----------- ----------- -----------
Total income tax expense (benefit).................. $ -- $ (12,069) $ -- $ 288
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Effective income tax rate........................... -- (37.2)% -- (0.8)%
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<FN>
- ------------------------
* State income taxes net of valuation allowance
</TABLE>
F-15
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
At January 29, 1995, the Company had the following federal tax attributes
for income tax return purposes available for carryforward:
<TABLE>
<CAPTION>
FISCAL YEAR OF
--------------------------
DESCRIPTION ORIGINATION EXPIRATION AMOUNT
- -------------------------------------------- ------------- ----------- ---------
<S> <C> <C> <C>
Net operating loss.......................... 1991 2006 $ 6,457
Net operating loss.......................... 1992 2007 15,912
Net operating loss.......................... 1993 2008 25,294
Net operating loss.......................... 1994 2009 18,787
---------
$ 66,450
---------
---------
General business credits.................... 1992 2007 $ 14
---------
---------
</TABLE>
The utilization of the Company's net operating loss carryforwards for income
tax return purposes could be limited under certain provisions of the Internal
Revenue Code.
10. EMPLOYEE BENEFIT PLANS
OPTIONS
Under the terms of the Plan, all previously outstanding options under the
Company's 1981 Incentive Stock Plan and 1986 Employee Non-Qualified Stock Option
plan were cancelled upon the Company's emergence from Chapter 11 on the
Effective Date.
LESOP
The Company has established stock ownership plans to involve all employees
in the ownership of the Company. The Company originally borrowed $15,000 and
loaned such amount to the Leveraged Employee Stock Ownership Plan (LESOP) to
purchase Company shares on behalf of all qualified employees. At the end of
Fiscal 1992 the employee trusts owned 1,007,484 shares or 17.75% of the
outstanding shares. The Company has recorded compensation expense for Fiscal
1991 related to the LESOP of $2,964. No compensation expense was accrued in
Fiscal 1992 since no payments of principle or interest were made.
Under terms of the Plan, the LESOP trust arrangement was terminated upon the
Company's emergence from Chapter 11. As such, all unallocated shares in the
trust were allocated to employees based on their current ownership and all
shares were distributed directly to participants. Since the trust was unable to
repay the Note Receivable under the LESOP, the Company wrote off the $12,000
receivable from the trust during the year ended January 31, 1993.
PROFIT SHARING PLAN
The Company has a savings and investment plan for all salaried employees
which qualifies as a profit sharing plan under Section 401(k) of the Internal
Revenue Code. Contributions under the plan, which are based on specified
percentages of employee contributions for the year ended January 29, 1995, the
six month periods ended January 30, 1994 and August 1, 1993, and the year ended
January 31, 1993 amounted to $0, $0, $105 and $244, respectively. As of August
1, 1993, the Company no longer makes contributions under the plan.
RETIREMENT PLAN
The Company has three noncontributory defined benefit retirement plans which
cover substantially all non-union employees and certain bargaining unit
employees. The costs of these plans for the year ended January 29, 1995, the six
month periods ended January 30, 1994 and August 1, 1993, and
F-16
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
the year ended January 31, 1993 amounted to $(2,478), $(113), $(112) and $(117),
respectively. The Company contributes annually the amount actuarially determined
to provide the plans with sufficient assets to meet future benefit requirements.
Assets of the plans are maintained in trust funds.
The components of net periodic pension cost for the year ended January 29,
1995, the six month periods ended January 30, 1994 and August 1, 1993, and the
year ended January 31, 1993 are as follows:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------ ------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
JANUARY 29, JANUARY 30, AUGUST 1, JANUARY 31,
1995 1994 1993 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service cost........................................ $ 164 $ 236 $ 237 $ 544
Interest cost....................................... 1,106 527 527 980
Gain on assets...................................... 795 (938) (938) (1,548)
Net amortization and deferral....................... (4,543) 62 62 (153)
----------- ----------- ----------- -----------
$ (2,478) $ (113) $ (112) $ (177)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Assumptions used in accounting for net pension cost were a 7.25% discount
rate, a 6% rate of increase in compensation and an 8% expected long-term rate of
return on plan assets. The plan's assets are invested primarily in marketable
equity securities.
On December 10, 1993 the Company's Board of Directors approved resolutions
authorizing the amendment of the three noncontributory defined benefit
retirement plans to cease the benefit accruals of all participants in the plans
as soon as administratively feasible. In accordance with the approved
resolutions, the Company ceased benefit accruals during the year ended January
29, 1995.
The following sets forth the plans' status as of the most recent actuarial
valuation as projected to January 29, 1995:
Actuarial present value of benefit obligations:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
------------- --------------
<S> <C> <C>
Vested benefit obligation................................................ $ 13,754 $ --
Nonvested benefit obligation............................................. -- --
------------- --------------
Accumulated benefit obligation........................................... 13,754 --
Additional amounts related to projected salary increases................. -- --
------------- --------------
Projected benefit obligation............................................. 13,754 --
Plan assets at fair value................................................ 18,594 --
------------- --------------
Assets in excess of (less than) projected benefit obligation............. $ 4,840 $ --
------------- --------------
------------- --------------
</TABLE>
F-17
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Assets in excess of projected benefit obligations consist of the following:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED
BENEFITS ASSETS
------------- ---------------
<S> <C> <C>
Unrecognized net asset (obligation) existing at date of adoption of SFAS
No. 87.................................................................. $ -- $ --
Unrecognized net actuarial gain or loss.................................. 2,010 --
Unrecognized prior service cost.......................................... -- --
Pension costs accrued.................................................... 2,830 --
Additional liability..................................................... -- --
------------- -------
$ 4,840 $ --
------------- -------
------------- -------
</TABLE>
The Company participates in several multiemployer plans which provide
defined benefits to bargaining employees. The Company made no contributions
during the year ended January 29, 1995, the six month periods ended January 30,
1994 and August 1, 1993, and the year ended January 31, 1993.
HEALTHCARE PLAN
The Company sponsors a defined benefit health care plan that provides
postretirement medical benefits to certain fulltime employees who retired early
and certain other union employees who retired prior to July 1991. The plan is
contributory, with retiree contributions adjusted annually, and contains other
cost-sharing features such as coinsurance. The Company's policy is to fund the
cost of the medical benefits in amounts as necessary. The following table sets
forth the plan's status as follows:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
------------------------
JANUARY 29, JANUARY 30,
1995 1994
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................... $ 4,579 $ 7,073
Actives..................................................................... -- 490
----------- -----------
4,579 7,563
Plan assets................................................................... -- --
----------- -----------
Accumulated postretirement benefit obligation in excess of plan assets........ 4,579 7,563
Unrecognized net actuarial gain or loss....................................... 1,314 --
Unrecognized prior service cost............................................... 420 --
----------- -----------
Accrued postretirement benefit cost........................................... $ 6,313 $ 7,563
----------- -----------
----------- -----------
</TABLE>
F-18
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------------------- -------------
YEAR ENDED SIX MONTHS SIX MONTHS
JANUARY 29, ENDED JANUARY ENDED AUGUST
1995 30, 1994 1, 1993
------------- ------------- -------------
<S> <C> <C> <C>
Service cost..................................................... $ -- $ 26 $ 26
Interest cost.................................................... 308 224 223
Amortization of transition obligation over 20 years.............. -- -- 201
Net amortization and deferral.................................... (289) -- --
------ ----- -----
Net periodic postretirement benefit cost......................... $ 19 $ 250 $ 450
------ ----- -----
------ ----- -----
</TABLE>
The annual assumed rate of increase in the cost of covered benefits (i.e.,
medical care cost trend rate) is 12% for fiscal 1995 and is assumed to decrease
gradually to 8% for fiscal 1998 and thereafter. Increasing the assumed medical
care cost trend rates by one percentage point in each year would increase the
APBO as of January 29, 1995 by approximately $537 and the aggregate of the
service and interest cost components of the net periodic postretirement benefit
cost for the year ended January 29, 1995 and both of the six month periods ended
January 30, 1994 and August 1, 1993 by approximately $38 and $18, respectively.
The weighted-average discount rate used in determining the APBO was 7% at
January 29, 1995.
11. COMMITMENTS AND CONTINGENCIES
Rent expense for the year ended January 29, 1995, the six month periods
ended January 30, 1994 and August 1, 1993, and the year ended January 31, 1993
amounted to $1,888, $518, $571 and $1,658, respectively. The future minimum
obligations under operating leases as of January 29, 1995 are summarized as
follows:
<TABLE>
<S> <C>
1995.............................................................. $ 2,900
1996.............................................................. 1,300
1997.............................................................. 1,100
1998.............................................................. 700
1999.............................................................. 500
Thereafter........................................................ 3,600
---------
$ 10,100
---------
---------
</TABLE>
As of January 29, 1995, the Company had been notified that it is a
potentially responsible party (PRP) with respect to hazardous waste at seven (7)
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 information available 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 seven sites. The Company
believes that there will not be a future material charge to earnings due to its
PRP status at these sites based on the amounts accrued.
12. RELATED PARTIES
The law firm of Buchalter, Nemer, Fields & Younger, a Professional
Corporation, of which Irwin Buchalter, a director of the Company prior to the
Effective Date, was a member, and of which Stuart Buchalter, a director and
Chairman of the Board of Directors of the Company prior to the Effective Date,
is of counsel, has in the past performed legal services for the Company. The
dollar amount of fees
F-19
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTIES (CONTINUED)
paid by the Company to this law firm for the year ended January 29, 1995, the
six month periods ended January 30, 1994 and August 1, 1993, and the year ended
January 31, 1993 were $621, $550, $555 and $462, respectively.
13. SUBSEQUENT EVENTS
As of February 15, 1995, the Company entered into an Investment Agreement
and certain other agreements with Corimon, S.A.C.A. and its wholly-owned
subsidiary Corimon Corporation (collectively, CRM), Fidelity Capital & Income
Fund (FCI), Kodak Retirement Income Plan Trust Fund (KRI), Transamerica Life
Insurance and Annuity Company (TLIAC), Transamerica Occidental Life Insurance
Company (TOLIC), Sun Life Insurance Company of America (SAFI), Anchor National
Life Insurance Co. (ANLIC), Grantor Trust and the Company. The principal
elements of the financial restructuring (the Restructuring) contemplated by the
Investment Agreement are:
A. Amendment to the Company's Restated Certificate of Incorporation to
increase the amount of authorized capital stock of the Company, and to
effect a 1-for-10 reverse stock split (Reverse Stock Split) pursuant to
which each stockholder will hold one share of the Company's post-split
shares for every ten presently held;
B. Sale to CRM of 15,700,496 newly issued shares of the Company's
common stock (Common Stock), which will constitute approximately 76.1% of
the Company's outstanding common stock, for $14 million (such issuance is
priced at $0.89 per share post-Reverse Stock Split or $0.089 per share
pre-Reverse Stock Split, and the $14 million to be paid by CRM was
previously advanced in the form of an interim loan, as described below);
C. Exchange of $16 million of the Company's outstanding debt (including
approximately $2 million of debt held by CRM) into 2,242,928 newly issued
shares of Common Stock (at the same price per share as the CRM shares under
B. above) and 1,570,049 newly issued shares of 8% cumulative convertible
redeemable preferred stock of the Company (Preferred Stock) (priced at $8.92
per share of the Preferred Stock and including a conversion price for the
Common Stock of $1.11 per share);
D. Transfer of 15 of the Company's real estate properties to the
Liquidating Property Trust, in which the Company currently has a residual
interest; release of related long-term debt; and the sale of the Company's
residual interest in the Liquidating Property Trust to CRM and to FCI, KRI
and the Insurance Company Lenders, for an additional $2 million payable in
cash by CRM and in consideration of their participation in the
Restructuring.
In addition, the Company's existing limited guarantee, of approximately $6.8
million on the Assumed Indebtedness, will be released in exchange for the
retention by the Company of approximately $2.5 million of debt on the 15
properties being transferred to the Liquidating Property Trust and a cash
payment of $.5 million to the Insurance Companies. Upon disposition of the
residual interest in the Liquidating Property Trust and the release of the
guarantee, the Company will have no further continuing interest in the trust.
The net book value of the properties in the Liquidating Property Trust plus the
net book value of the 15 properties being transferred to the trust will exceed
the related indebtedness less the $2 million being paid by CRM by approximately
$15.3 million. Accordingly, the Company has provided for this loss as of January
29, 1995.
Such transactions taken together will effectuate the Restructuring, and to
the extent required to be approved by the stockholders of the Company (whether
by applicable law or the Company's Restated Certificate of Incorporation, bylaws
or stock exchange listing agreement), must all be approved in order for the
Restructuring to be accomplished. It is contemplated that the closing and
F-20
<PAGE>
STANDARD BRANDS PAINT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
effective date (the Closing Date) of the Restructuring will take place promptly
after the stockholders meeting to approve the Restructuring, subject to the
satisfaction of any other conditions precedent to the Closing Date.
As part of the Restructuring, as of February 15, 1995, CRM provided interim
financing to the Company in contemplation of the completion of the
Restructuring. CRM entered into an Interim Loan Agreement pursuant to which it
purchased $14 million of notes (Interim Notes) from the Company on substantially
the same terms as the $10 million originally borrowed by the Company under the
New Loan Agreement. Pursuant to an intercreditor agreement, the Interim Notes
share pro rata in the collateral securing the obligations under the New Loan
Agreement and the Grantor Trust Notes, and the Company has granted fourth
mortgages to CRM on its real properties to secure the indebtedness. On the
Closing Date, CRM will exchange the Interim Notes for Common Stock as described
above.
In addition, as of April 7, 1995, pursuant to an amendment to the Investment
Agreement and an unsecured loan agreement, CRM loaned $2 million to the Company.
The loan will be exchanged on the Closing Date as consideration for CRM's
purchase of the Company's residual interest in the Liquidating Property Trust.
Approval of the Restructuring will require the affirmative vote of a
majority of the shares of Common Stock of the Company issued and outstanding.
FCI, KRI and the Insurance Company Lenders presently own, in the aggregate, in
excess of 50% of the Company's voting stock and have granted irrevocable proxies
to CRM as part of the Restructuring to vote in favor of the Restructuring and
against any proposals that would impede or delay the Restructuring. Currently, a
Special Meeting of Stockholders has been scheduled for May 1995, at which time
the stockholders will be asked to approve the Restructuring.
Management believes that the Restructuring described above, combined with
other sources of capital, will allow the Company to meet its obligations during
the 1995 fiscal year as they become due.
F-21
<PAGE>
EXHIBIT 22
SUBSIDIARIES
Standard Brands Paint Co., a California corporation
Major Paint Company, a California corporation
Standard Brands Realty Co., Inc., a California corporation
Promark Group West, a Nevada corporation
SBP Leasing Company, a Nevada corporation
SBP Transportation Co., Inc., a California corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, BALANCE SHEETS AND CASH FLOWS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-29-1995
<PERIOD-START> JAN-31-1994
<PERIOD-END> JAN-29-1995
<CASH> 1,489
<SECURITIES> 0
<RECEIVABLES> 1,656
<ALLOWANCES> 150
<INVENTORY> 14,750
<CURRENT-ASSETS> 21,759
<PP&E> 91,002
<DEPRECIATION> 3,293
<TOTAL-ASSETS> 109,910
<CURRENT-LIABILITIES> 31,402
<BONDS> 99,273
<COMMON> 224
0
0
<OTHER-SE> (33,610)
<TOTAL-LIABILITY-AND-EQUITY> 109,910
<SALES> 112,188
<TOTAL-REVENUES> 112,188
<CGS> 71,342
<TOTAL-COSTS> 71,342
<OTHER-EXPENSES> 76,771
<LOSS-PROVISION> 346
<INTEREST-EXPENSE> 11,518
<INCOME-PRETAX> (47,977)
<INCOME-TAX> 0
<INCOME-CONTINUING> (47,977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,977)
<EPS-PRIMARY> (2.15)
<EPS-DILUTED> (2.15)
</TABLE>
