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Armored AutoGroup Inc. Table of Contents
Item 8. Financial Statements and Supplementary Data
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
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For the fiscal year ended December 31, 2013 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT |
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For the transition period from TO |
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Commission file number 333-180736
ARMORED AUTOGROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) |
27-3620112 (I.R.S. Employer Identification No.) |
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44 Old Ridgebury Road, Suite 300 Danbury, Connecticut (Address of Principal Executive Offices) |
06810 (Zip Code) |
(203) 205-2900
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Armored AutoGroup Intermediate Inc. owns 100% of the registrant's outstanding common stock and there is currently no established public trading market for such common stock. As a result, as of June 28, 2013, the aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates of the registrant was $0.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The aggregate number of shares of the registrant's common stock outstanding on March 3, 2014 was 1,000 shares of common stock $.01 par value.
Documents incorporated by reference: None
Armored AutoGroup Inc.
Table of Contents
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Cautionary Note Regarding Forward-Looking Statements
Some of the statements contained in this Annual Report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, including, in particular, statements about our plans, strategies, prospects and industry estimates. These statements identify prospective information can generally be identified by the use of forward-looking terminology, including the terms "believes," "estimates," "anticipates," "expects," "seeks," "projects," "intends," "plans," "may," "will" or "should" or, in each case, their negative or other variations or comparable terminology. Examples of forward-looking statements include, but are not limited to, statements we make regarding: (i) our liquidity, including our belief that our existing cash, cash equivalents and anticipated revenues are sufficient to fund our existing operating expenses, capital expenditures and liquidity requirements for at least the next twelve months; (ii) our outlook and expectations including, without limitation, statements made regarding continued market expansion and penetration for our products and (iii) expected new product launch dates and market exclusivity periods. The foregoing is not an exclusive list of all forward-looking statements we make. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. The matters referred to in the forward-looking statements contained in this Annual Report may not in fact occur. We caution you therefore against relying on any of these forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:
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Any forward-looking statement made by us in this Annual Report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
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Our Business
Armored AutoGroup Inc. (and together with its subsidiaries, the "Company," "Successor," "we" or "us") is a consumer products company consisting primarily of Armor All® and STP®, two of the most recognizable brands in the automotive aftermarket appearance products and performance chemicals categories, respectively. Armor All and STP were founded in 1962 and 1954, respectively. Both brands have leading category shares in the United States, with Armor All having a #1 value share of market in the appearance products category and STP a #3 value share of market in the performance chemicals category, in each case, based on sales volumes in U.S. dollars in the year ended December 31, 2013 as measured by NPD Group, Inc. and Nielsen Holdings, N.V. ("Nielsen"), our primary sources for U.S. third party industry data and forecasts. Armor All's current product line of protectants, wipes, tire and wheel care products, glass cleaners, leather care products, air fresheners and washes is designed to clean, shine, refresh and protect interior and exterior automobile surfaces. STP's offering of oil and fuel additives, functional fluids and automotive appearance products has a broad customer base ranging from professional racers to car enthusiasts and "Do-it-Yourselfers." Our brands offer multiple automotive appearance and performance chemicals that can be found in most of the major developed countries around the world. We have a diversified geographic footprint with direct operations in the United States, Canada, Mexico, Australia, the United Kingdom, and China and distributor relationships in approximately 50 countries.
Armor All is the most recognized automotive aftermarket appearance product brand in the United States with a comprehensive and competitively priced product line. Armor All's advertising campaigns, such as the "Go ahead. Stare," "Care for your car", "Armor All Way" and the new "A car is a privilege. Respect it." build on what we believe to be Armor All's strong brand equity established over its 50 year history to maintain a high level of consumer awareness. We further believe that Armor All has distinguished itself as the leader in the automotive aftermarket appearance products category based upon its household name, high quality product formulations, convenient application methods and tradition of innovation.
The STP brand has been characterized by a commitment to technology, performance and motor sports partnerships for over 50 years. Regular use of STP additives as part of basic maintenance helps engines run better by boosting the cleaning performance of gas and saving gas by keeping fuel systems clean. We believe the STP brand's fuel and oil additives, functional fluids and automotive appearance products benefit from a rich heritage in the car enthusiast and racing scenes.
On November 5, 2010, affiliates of Avista Capital Holdings, L.P. ("Avista") acquired the Armor All, STP and certain other brands from The Clorox Company ("Clorox") pursuant to the terms of a Purchase and Sale Agreement dated September 21, 2010 (the "Purchase and Sale Agreement") pursuant to which Armored Autogroup Inc. (formerly, Viking Acquisition Inc.) acquired certain equity interests, assets and liabilities of Clorox's AutoCare Products Business excluding the Prestone and YPF licensed brands (the "Acquisition"), which we refer to as "Global AutoCare" or "Predecessor," with respect to periods prior to the completion of the Acquisition. The majority of the acquired assets were in the United States, Australia, Canada and Europe, including the worldwide rights to distribute the leading Armor All and STP brands. Pursuant to the Purchase and Sale Agreement, upon the terms and subject to the conditions thereof we acquired from Clorox all of the outstanding equity interests in Clorox Europe Ltd., The Armor All / STP Products Company and STP Products Manufacturing Company. Additionally, certain assets and liabilities relating to Global AutoCare were transferred to the Company as part of the transaction; consisting of two auto care manufacturing facilities, one in the United States and one in the United Kingdom. Employees at these facilities, the existing auto care
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business management team and other employees affiliated with Global AutoCare transferred to or remained with the business.
Following the Acquisition, we began to implement initiatives to grow the business. Specifically, we invested in increased television advertising, merchandising support and increased racing sponsorships. In 2012 and 2013 we continued these initiatives in an effort to generate incremental sales and awareness. We continue to focus on innovation and building a pipeline of new products. We continue to invest in the business to build upon what we believe are strong brand equity and category positions of Armor All and STP and create strong growth momentum.
Industry overview
The automotive aftermarket industry is generally defined as the manufacturing, distribution, sales and service of all automotive products other than the purchase of an automobile from a new car dealer, according to the Automotive Aftermarket Industry Association ("AAIA"). It includes hard parts such as brakes and tires, and consumables such as Armor All and STP.
With an estimated size of $240.0 billion in the United States, according to the AAIA Digital Aftermarket Factbook and Lang Annual, the automotive aftermarket provides consumers with access to automotive maintenance services and products through several categories. Consumers have the option of repairing or improving their vehicles themselves (known as the consumer or "Do it Yourself," or "DIY" market) or taking their vehicle to a professional service facility (the "Do it for Me," or "DIFM" market). The consumer market can be segmented further into casual users and car enthusiasts. Automotive aftermarket purchases are driven by car maintenance, beautification, performance enhancements and personalization. Based on our internal market research, the typical U.S. automotive aftermarket consumer is a 40-something male whose car has between 85,000 and 90,000 miles.
Appearance products category
As a subcategory of the automotive aftermarket, the U.S. appearance products category serves retail consumers and the commercial car care and professional detailing channels. The appearance products category can be further classified into interior and exterior products, which include protectants, tire and wheel care, waxes/polishes, wipes, car wash and fabric conditioners. We believe sales of appearance products, such as Armor All, are correlated to new car purchases or "new to consumer" (e.g., used car purchases) because these car owners tend to be more dedicated to upkeep and beautification. Since purchasing a car, whether new or new to consumer, is generally the first or second most expensive purchase made by consumers, we believe auto appearance and performance are of high importance. As a result, we believe consumers exhibit strong brand loyalty by using products they trust. We believe that brand loyalty coupled with competitive price points for the average product discourages consumers from switching to private label products, which we believe explains the low level of private label penetration in this category. Countries outside the United States and Western Europe with a developing middle class and increasing automobile penetration (e.g., China), present attractive growth opportunities for appearance products.
Performance chemicals category
The U.S. performance chemicals category for additives serves consumers who are interested in increasing the performance of their automobiles or performing their own mechanical-related maintenance. This category can be further classified into fuel additives, oil additives and functional fluids and other niche performance chemicals. Regular use of STP additives as part of basic maintenance helps clean deposits that build up from engine operation and helps engines run better and be more fuel efficient. STP fuel additives also help to maintain a clean fuel system and boost the cleaning performance of gasoline. Our oil additives products reduce metal-to-metal friction by providing
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a thicker cushion between the moving engine parts, thus protecting against engine wear and reducing oil consumption. STP's functional fluids include brake and power steering fluids designed to prevent corrosion, wear and breakdown. We believe the need for fuel additives will increase, driven by our anticipation of a rising use of ethanol in fuel blends and our expectation of a growing prevalence of smaller engines. At the same time, lower fuel quality in many emerging markets is creating an acute need for fuel additives. These trends result in less clean combustion in engines and the need for more performance chemicals. Similar to the appearance products category, brand awareness and the consumer relationship with performance chemicals brands is strong, resulting in low private label penetration.
Current Armor All product offering
Armor All is the most recognized automotive aftermarket appearance product brand in the United States with a comprehensive product line. We believe that Armor All has distinguished itself as the leader in the automotive aftermarket appearance products category based upon its household name, high quality product formulations, convenient application methods and tradition of innovation. Armor All's current product line of protectants, wipes, tire and wheel care products, glass cleaners, leather care products, air fresheners and washes is designed to clean, shine, refresh and protect interior and exterior automobile surfaces.
Armor All's product offering includes the following:
Current STP product offering
The STP brand has been characterized by a commitment to technology, performance and motor sports partnerships for over 50 years. Regular use of STP additives as part of basic maintenance helps engines run better by boosting the cleaning performance of gas and saving gas by keeping fuel intake
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systems clean. We believe the STP brand's fuel and oil additives, functional fluids and automotive appearance products benefit from a rich heritage in the car enthusiast and racing scenes.
STP's product offering includes the following:
Distribution
We operate a broad distribution network, which includes big box auto, auto specialty retail, mass retailers, food and drug retailers, and convenience retailers. We utilize an experienced sales force dedicated to serving major clients globally. We also sell our products directly through brokers, distributors and licensees and via other methods.
Channel overview
We market our products in the United States through a number of channels and use a number of sales strategies. Our top three U.S. sales channels, mass merchandisers, auto retailers and dollar stores, account for a majority of total shipments in the United States. Sales personnel call directly on major accounts and have support teams for supply and marketing. Our small regional and convenience store customers are serviced by brokers and distributors.
Customer relationships
We have significant penetration of our products into flagship retailers and our top seven largest customers represented approximately 66%, 69% and 65% of U.S. net sales for the years ended December 31, 2013, 2012 and 2011, respectively. Typically, these large retailers focus their efforts and shelf space on leading brands. We provide distinctive customer support through category advisory services (CAS), shopper and sales-based information used to improve assortment, shelving, pricing and merchandising strategies to maximize category sales. CAS, coupled with brand marketing efforts, help to create programs that allow customers to drive purchases by people already in-store and attract new category purchasers.
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International distribution overview
International distribution varies by region and is often executed on a country-by-country basis. A majority of our international sales are completed using distributors, except in Canada, Mexico, the United Kingdom and Australia, where the direct model is often used.
Marketing
Brand positioning
Armor All and STP are two of the most recognizable brands in the auto care appearance products and performance chemicals categories. Our marketing strategies have historically been targeted toward the auto enthusiast. In particular, we believe our sponsorships of local and national racing series and rally teams help gain the trust of these consumers. Armor All's brand awareness is aided by its advertising programs which capture a significant share of the advertising voice within the appearance products category. In contrast, STP received little marketing investment due to our prior owner's priorities in recent years.
We believe the DIY consumer is our greatest growth opportunity and represents the focus of our marketing strategies for Armor All and STP. We believe our growth and value are driven through the integration of marketing communication, pulse period merchandising, partnering with retailers with their promotional merchandising programs and linking auto care to other DIY behavior. Empowering DIY-prone consumers to use Armor All and STP products and promoting overall auto care represents significant market opportunities. We seek to combine marketing efforts for STP and Armor All wherever appropriate, leveraging the brand equity of both brands to expand audience and reach. Additionally, we are continuing to drive value through efficient innovation in aesthetics, packaging and positioning in new and existing segments.
Distributor / retailer marketing and consumer behavior
We also reach customers through our distributors, providing print ads, point of sale, promotional materials and digital assets—all with the focus on reaching the DIY audience. Shelving is extremely important in the marketing of the product and in attracting consumers who are already in the store. Premium brands are typically found on the upper shelves, mid-tier brands at eye-level and value brands on the lower shelves. In smaller set sizes, only one brand representation per price tier is feasible; in appearance and fuel additives, Armor All and STP are the leading mid-tier brands, respectively, which insures distinction across a variety of set configurations. We believe this explains our success in gaining extensive distribution outside of the automotive channel with mass, food and drug retailers.
We are also very active in providing category management for our customers. By sharing our expertise for assortment, merchandising, pricing and shelving, we help the retailers grow their overall appearance and performance chemicals business. In addition to strengthening our overall retailer relationships, providing these services leads to clean and well-planned shelving, which favors key brands like Armor All and STP.
Raw materials
We rely upon a limited base of suppliers for some of the primary components and raw materials for our products. Our primary components and raw materials include resin based packaging, silicone and petroleum based products, which are manufactured from commodities that are subject to market price changes. The availability of these components and raw materials is affected by a variety of supply and demand factors, including global market trends, the cost of petroleum based products, plant capacity decisions and natural disasters. We expect these components and raw materials to continue to be readily available in the future. However, should any of our current third party suppliers be unable or
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unwilling to fulfill its obligations to us, we believe that arrangements for alternative service providers could be made with minimal interruption or cost to our business.
Research and development
We recognize the importance of innovation and renovation to our long-term success and are focused on and committed to research and new product development activities. Our product development team engages in consumer research, product development, current product improvement and testing activities, and also leverages our development capabilities by partnering with a network of outside resources, including our current and prospective outsource suppliers.
Seasonality
We have historically achieved our highest sales levels during the period from March to June. This pattern is largely reflective of our customers' seasonal purchasing patterns, as well as the timing of our promotional activities. Weather can also influence consumer behavior, especially for appearance products. Our products sell best during warm, dry weather, but perform less strongly if weather is cold and wet.
Manufacturing
Manufacturing is heavily focused on mixing, filling, and packaging as ingredients are purchased in varied finished states. For Armor All, we manufacture in-house or purchase bottles and fill them with products made primarily from two silicone greases, which are blended with various other ingredients. For STP, we manufacture and purchase bottles and mix the core cleaning additives packages with jet fuel. Aerosols and wipes are co-packed.
We rely on two manufacturing facilities for our molding, filling, and packaging needs. The Painesville, Ohio facility is a 104,000 square foot facility situated on approximately six acres and is the supplier of Armor All and STP protectants, fuel and oil additives. The Wales, United Kingdom plant, consisting of a 50,000 square foot production unit and 30,000 square foot warehouse unit, satisfies manufacturing needs in Europe. Our major suppliers are located in the United States and Europe, relatively close to the respective plants.
Intellectual property
Most of our brand name consumer products are protected by registered trademarks. As of December 31, 2013, we owned 1,058 trademark registrations and applications, and 76 domain name registrations, around the world, some of which are of material importance to our business. Maintenance of brand equity value is critical to our success. We take steps to maintain and protect our trademarks and pursue apparent infringements of our trademarks wherever we think the infringement could have a material adverse impact on our business. We have 65 patents and patent applications, some of which are material to our business. We are not currently engaged in any material intellectual property litigation, nor are there material intellectual property claims pending either by or against us.
Strategic Investment
On March 17, 2014, we acquired a non-controlling equity interest in IDQ Acquisition Corp. ("IDQ" or "IDQ Investment") and our sole shareholder, Armored AutoGroup Parent, Inc. and its subsidiary, AAG IDQ Acquisition Corporation, acquired a controlling equity interest in IDQ (collectively, the "IDQ Acquisition"). IDQ is a leading manufacturer of do-it-yourself air conditioner recharge and retrofit kits and related products for the automotive aftermarket. IDQ products are sold in over 25,000 retail stores principally in the United States under the brands A/C PRO, Arctic Freeze®, Sub Zero®, and Super Seal Stop Leak. Following the IDQ Acquisition, both the Company's and IDQ's
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existing capital structures will remain in place. Our minority investment in IDQ did not result in IDQ becoming an obligor of our existing 9.25% senior notes due 2018 or any of our existing credit facilities and we did not become an obligor of IDQ's debt instruments. All required steps to complete the acquisition, including amending the Change of Control definition in IDQ's existing notes, have been completed. In connection with the IDQ Investment we entered into a Shared Services and Supply Agreement (the "Shared Services Agreement") with IDQ and our sole shareholder pursuant to which certain products and services will be provided on an arm's-length basis by one party to another with the purpose of utilizing the assets and operations of each company to increase sales and lower the combined costs for the mutual benefit of both IDQ and us.
Competition
The markets for auto care products are highly competitive. Most of our products compete with other widely advertised brands and with private label brands, which typically are sold at lower prices. We also encounter competition from similar and alternative products, many of which are produced and marketed by major multinational or national companies. Some of our competitors are larger and have greater financial resources than we do. Our products generally compete on the basis of product performance, brand recognition, price, value, quality or other benefits to consumers. Newly introduced consumer products (whether improved or newly developed) usually encounter intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it normally requires continued advertising and promotional support and ongoing product improvement to maintain its relative market position.
Government regulation
For further details regarding the impact of government regulations on us, see Part I. Item 1A. Risk Factors—Risks related to our business—Compliance with environmental law and other government regulations could impose material costs and Risk factors—Risks related to our business—Operations outside the United States expose us to uncertain conditions and other risks in international markets.
Environmental matters
We are subject to various federal, state and local environmental regulations. Compliance with applicable environmental regulations has not been material to our capital expenditures, financial condition, results of operations or competitive position. However, increased focus by the United States and overseas governmental authorities on environmental matters is likely to lead to new governmental initiatives, particularly in the area of climate change. To the extent that these initiatives cause an increase in our supplies or distribution costs, they may impact our business both directly and indirectly. Furthermore, climate change may exacerbate adverse weather conditions, which could adversely impact our operations or increase our costs in ways which we cannot predict at this time. For more information, see Part I. Item 1A. Risk factors—Compliance with environmental law and other government regulations could impose material costs.
Employees
As of December 31, 2013, we employed approximately 242 employees. None of our employees is covered by collective bargaining agreements. We consider our relationship with our employees to be good.
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The following risk factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in this Annual Report on Form 10-K. If any of the following risks and uncertainties or other risks and uncertainties not currently known to us or not currently considered to be material actually occurs, our business, financial condition or operating results could be harmed substantially.
Risks related to our business
Our historical financial information may not be indicative of our future financial performance.
Demand for products sold by our customers depends on many factors including the weather, economy and rising energy prices.
All of these macroeconomic conditions could adversely affect our sales growth and margins and overhead which could adversely affect our financial condition and operations.
Our operating results and net earnings may not meet expectations.
We cannot be sure that our operating results and cash flows will meet expectations. If our assumptions and estimates are incorrect or do not come to fruition, or if we do not achieve all of our key goals, then our actual performance could vary materially from our expectations. Our operating results and net earnings may be influenced by a number of factors, including the following:
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In addition, sales volume growth, whether due to acquisitions or internal growth, can place burdens on management resources and financial controls that, in turn, can have a negative impact on operating results and net earnings. To some extent, we plan our expense levels in anticipation of future revenues. If actual revenues fall short of these expectations, operating results and net earnings are likely to be adversely affected.
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Our quarterly results of operations are subject to fluctuations due to the seasonality of our business and other events.
Our business is moderately seasonal. Our sales in the Northern Hemisphere are typically higher in the first half of the calendar year as our customers purchase stock for the spring and summer seasons when weather is warmer than in the fall and winter months. Because our business is moderately seasonal, results for any one quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal year. In addition, weather conditions in North America and Europe can have a significant impact on the timing of sales in the spring selling season and overall annual sales. An abnormally wet and/or cold spring throughout North America or Europe could adversely affect appearance products category sales and, therefore, our financial results.
Our financial results could suffer if we are unable to implement and successfully manage our core strategic initiatives or if our core strategic initiatives do not achieve the intended results.
Our success is partly dependent upon properly executing, and realizing the anticipated benefits from, our ongoing core strategic initiatives. There is no assurance that we will be able to implement and successfully manage our core strategic initiatives, including our five major strategic initiatives, or that the core strategic initiatives will achieve the intended results. Our five major strategic initiatives include: (i) maximizing the Armor All and STP brands through geographic expansion and market penetration; (ii) becoming the global leader in the Company's product categories within its prioritized platforms; (iii) developing strategic business relationships; (iv) pursuing global innovation efforts; and (v) attracting, developing and retaining essential people. These initiatives are primarily designed to increase our revenue and market share and to make us more efficient in the sales, manufacture, and distribution of our products. If we are unable to implement and successfully manage our core strategic initiatives in accordance with its business plans, our business and financial results could be materially adversely affected. Moreover, we cannot be certain that implementation of our core strategic initiatives will necessarily advance the business or financial results as intended.
Sales growth may be difficult to achieve.
Our ability to achieve sales growth will depend on our ability to drive growth through innovation, investment in our established brands and enhanced and more effective merchandising and promotional activity. Accelerated growth is partially dependent on our ability to capture market share from competitors and our ability to acquire additional brands. We may be forced to increase prices on one or more of our products in response to increased costs for components and raw materials. Product price increases may slow sales volume growth or create declines in volume in the short term as customers adjust to sales price increases. If we are unable to increase market share in existing product lines, secure additional shelf share, develop product improvements, undertake sales, advertising and trade promotions to grow our product categories, develop, acquire or successfully launch new products, provide attractive trade terms or successfully penetrate new and developing markets, we may not achieve our sales growth objectives.
We face intense competition in our business, which could lead to reduced profitability if we cannot compete effectively.
We face intense competition from automotive aftermarket product companies both in the United States and in international markets for the limited space available for the display of these products to the consumer. Most of our products compete with other widely-promoted and advertised brands within each of our product categories. We also encounter competition from similar and alternative products, many of which are produced and marketed by major multinational or domestic companies.
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Our products generally compete on the basis of product performance, brand recognition, price, value, quality or other benefits to consumers. Advertising, promotion, merchandising and packaging also have a significant impact on consumer purchasing decisions. A newly introduced consumer product, whether improved or newly developed, usually encounters intense competition requiring substantial expenditures for advertising, sales promotion and trade merchandising. If a product gains consumer acceptance, it normally requires continued advertising, promotional support and product enhancements to maintain its relative competitive position.
Some of our competitors are larger and have greater financial resources than we do. These competitors may be able to spend more aggressively on advertising and promotional activities, introduce competing products more quickly, offer customers more attractive trade terms and respond more effectively to changing business and economic conditions than we can. We also compete against premium and niche competitors. In addition, our competitors have attempted in the past, and may attempt in the future, to gain market share by offering products at prices at or below those typically offered by us. Competitive activity may require us to increase spending on advertising and promotions or reduce prices and could lead to reduced profits or a loss of market share, either of which could adversely affect our results of operations. We may not be able to compete successfully against current and future competitors and competitive pressures we face may have a material adverse effect on our business, financial condition and results of operations.
A significant portion of our net sales and net earnings is derived from a few key customers. The loss of any one or more of these customers could cause a material decline in our operating results.
A limited number of customers account for a large percentage of our net sales. We had one customer (Wal-Mart) who represented more than 10% of total net sales, specifically 20%, 19% and 20% in the years ended December 31, 2013, 2012 and 2011, respectively. Further, net sales to our seven largest customers represented approximately 66%, 69% and 65% of U.S. net sales for the years ended December 31, 2013, 2012 and 2011, respectively. Additionally, each of our individual brands may also be subjected to customer sales concentration. The loss of, or reduction in, orders from any of our most significant customers could have a material adverse effect on our brands, business, financial condition and results of operations. In addition, continued consolidation within the retail industry has resulted in an increasingly concentrated retail base. To the extent such consolidation continues to occur, our net sales and profitability may be increasingly sensitive to deterioration in the financial condition of, or other adverse developments involving our relationship with, one or more customers.
Large customers also seek price reductions, added support or promotional concessions, which may negatively impact our ability to maintain existing profit margins. We expect that a significant portion of our net sales will continue to be derived from a small number of customers. As a result, changes in the strategies of our largest customers, including a reduction in merchandising support for our products, a reduction in the number of brands they carry or a shift of shelf space to "private label" or competitors' products, may harm our sales. Reduced support from our customers has a negative effect on our profitability and may reduce our ability to bring new innovative products to consumers.
In addition, our business is based primarily upon individual sales orders, and we typically do not enter into long-term contracts with our customers. Accordingly, these customers could reduce their purchasing levels or cease buying products from us at any time and for any reason. We are also subject to changes in customer purchasing patterns. These types of changes may result from changes in the manner in which customers purchase and manage inventory levels, or display and promote products within their stores. Other potential factors such as customer disputes regarding shipments, fees, merchandise condition or related matters may also impact operating results. If we do not effectively respond to the demands of our customers, they could decrease their purchases from us or cease doing business with us, causing harm to our business, financial condition and results of operations.
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Changes in marketing distributor relationships that are not managed successfully could result in a disruption in one or more of the affected markets.
We distribute our products throughout the world in one of two ways: (1) through direct distribution, in which products are sold directly by us to wholesalers and retailers, for example, in the United States, Canada, Mexico, Australia and the United Kingdom; and (2) through marketing distribution, in which products are sold to exclusive marketing distributors who in turn sell to wholesalers and retailers. The marketing distribution model is generally used in countries where we do not have direct company owned operations. Instead, we partner with local companies who perform the sales, marketing and distribution functions. We invest time and resources in these relationships. Should key personnel change and/or the relationship change or terminate, we could be at risk until such time as a suitable replacement can be found and our key marketing strategies implemented. There is a risk that changes in such marketing distributor relationships that are not managed successfully could result in a disruption in one or more of the affected markets and that such disruption could have an adverse material effect on our business, financial condition and results of operations. Additionally, in some countries, local laws may require substantial payments to terminate existing relationships, which could also have an adverse material effect on our business, financial condition and results of operations.
Customer support of our marketing and advertising programs and new product launches is critical for our success.
The support of our customers is critical for the success of our marketing and trade promotion programs and any new strategic initiatives we seek to undertake, and the successful execution of these initiatives, will depend on our ability to maintain alignment with and support from our customers. We depend on our customers for merchandising and checkout support, and our customers set the prices for end consumers. If our efforts to build alignment with our customers are unsuccessful, it may result in a delay in the implementation of our marketing and advertising programs and other key initiatives. The failure of our customers to support our marketing programs and strategic initiatives could adversely affect our ability to implement our business strategy and could materially harm our business, results of operations and financial condition. Additionally, the success of any new product introductions will be dependent upon our ability to secure distribution from our retail partners.
Providing price concessions or trade terms that are acceptable to our customers, or the failure to do so, could adversely affect our sales and profitability.
Consumer products, particularly those that are value-priced like many of our products, are subject to significant price competition. As a result, we may need to reduce the prices for some of our products, or increase prices by an amount that does not cover manufacturing cost increases, to respond to competitive and customer pressures and to maintain market share. Any reduction in prices, or inability to raise prices sufficiently to cover manufacturing cost increases, in response to these pressures would harm profit margins. In addition, if our sales volumes fail to grow sufficiently to offset any reduction in margins, our results of operations would suffer.
Because of the competitive environment facing many of our customers, particularly our high-volume retail store customers, have increasingly sought to obtain pricing concessions or better trade terms. To the extent we provide concessions or better trade terms, our margins are reduced. Further, if we are unable to maintain terms that are acceptable to our trade customers, these trade customers could reduce purchases of our products and increase purchases of products from our competitors, which would harm our sales and profitability.
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We may not successfully develop and introduce new products and line extensions.
Our future performance and growth depend, in part, on our ability to successfully develop and introduce new products and line extensions. We may not be able to successfully achieve those goals. We compete in product categories where there are frequent introductions of new products and line extensions. The ability to understand consumer preferences and identify technological trends is critical to maintaining and improving the competitiveness of our product offerings. Our success depends on our ability to identify, originate and define automotive consumer product trends, as well as to anticipate, gauge and react to changing consumer demands in a timely manner and engender retailer support for new product introductions. Our automotive consumer products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change. We may not be able to continue to develop appealing automotive aftermarket products or meet changing consumer demands in the future. If we misjudge the market for our products, we may be faced with significant excess inventories for some products and missed opportunities for other products.
The development and introduction of new products, as well as the improvement of current products and product lines, require substantial and effective research, development and marketing expenditures, which we may be unable to recoup if the new or renovated products and line extensions do not gain widespread market acceptance. There are inherent risks associated with new product development and new product launches, including:
As we continue to focus on innovation, our business, financial condition or results of operations could be adversely affected in the event that we are not able to effectively develop and introduce new or renovated products and line extensions.
Our dependence upon third parties for the manufacture and supply of a substantial portion of our products could prevent us from delivering our products to our customers in the required quantities or within the required timeframe, which could result in order cancellations and decreased net sales.
We rely on a limited number of suppliers, including single source suppliers for certain of our raw materials, packaging, product components and other necessary supplies. Because we do not control the actual production of many of the products we sell, we may be subject to delays caused by interruptions in production based on conditions outside of our control. If we are unable to maintain supplier arrangements and relations or if we are unable to contract with suppliers at the quantity and quality levels needed for our business, find alternative suppliers or if any of our key suppliers becomes insolvent or experience other financial distress, we could experience disruptions in production, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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Volatility and cost increases in raw materials, energy, shipping and transportation and other necessary supplies or services could harm our financial condition and results of operations.
Volatility and increases in the cost of raw materials, and increases in the cost of transportation and other necessary supplies or services may harm the Company's financial condition and results of operations. The raw materials for the products that we produce include silicone, jet fuel, base oil and other chemicals. Our packaging includes resin products, which is sensitive to change in fuel costs, and corrugated materials. Petroleum based products, which constitute a significant portion of the costs for many of the Company's products, have experienced significant price volatility in the past, and may continue to do so in the future. Fluctuations in oil and diesel fuel prices have also impacted the Company's cost of transporting its products. As raw material costs are the principle component of cost of goods sold for all of the Company's products, any significant fluctuation in the costs of raw materials could have a material impact on the gross margins realized on our products. Specifically, the costs of petroleum based materials, which are included in many of our products, are exposed to fluctuations resulting from the increase in the cost of petroleum and there has been significant volatility in such costs in recent years. In the event there is significant volatility in the Company's cost of goods or increases in raw material and/or the costs of transportation and other necessary supplies or services, the Company may not be able to maintain its gross margins if it chooses not to raise its product sales prices. Should we choose to increase product sales prices to offset cost increases, such increases may adversely affect demand and unit sales. Sustained increases in the cost of raw materials, transportation and other necessary supplies or services, or significant volatility in such costs, could have a material adverse effect on the Company's financial condition and results of operations.
We are exposed to commodity fluctuation risk and may not be able to adequately hedge our exposure, if at all.
The raw materials for the products that we produce include silicone, jet fuel, base oil and other chemicals. Our packaging includes resin products, which is sensitive to change in fuel costs, and corrugated materials. Our profitability is sensitive to changes in the costs of these commodities caused by changes in supply or other market conditions, over which we have little or no control. Increases in the cost of energy, transportation and other necessary supplies or services, including the cost of diesel or jet fuel, may also harm our profits and operating results. When there are price increases for silicone, jet fuel, base oil or any of the principal raw materials or other supplies or services we use, we may not be able to pass on these increases, in whole or in part, to our customers, or we may be delayed in our ability to do so, or we may be unable to achieve cost savings to offset such price increases. In addition, if we increase the prices of our products in response to increases in the cost of commodities, and the commodity costs decline, we may not be able to sustain our price increases over time. Also, competitors may not adjust their prices, which could lead to sales declines and loss of market share. Sustained price increases may lead to declines in volume, and while we seek to project tradeoffs between price increases and volume, our projections may not accurately predict the volume impact of price increases.
Reliance on a limited base of third party contract manufacturers, logistics, procurement and information systems service providers may result in disruption to our business.
We rely on a limited number of third party contract manufacturers for the production of our finished goods and third party logistics providers for the distribution of our products to customers. We also rely on a third party procurement service provider and information systems service providers. We do not have direct control over the management or business of these third party contract manufacturers, logistics, procurement and information systems service providers, except indirectly through terms as negotiated in contracts with such third parties. Should the terms of doing business with our primary contract manufacturers, logistics, procurement and information systems service providers change, our business may be disrupted, which could have an adverse effect on our business,
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financial condition and results of operations. The general availability of contract manufacturing allows new entrants easy access to the consumer product markets in which we compete.
Our facilities and those of our suppliers, service providers and common use facilities operators such as ports are subject to disruption by events beyond our control.
Operations at our facilities and the facilities of our suppliers, service providers and common use facilities operators such as ports are subject to disruption for a variety of reasons, including work stoppages, disease outbreaks or pandemics, acts of war, terrorism, fire, earthquakes, flooding or other natural disasters. If a major disruption were to occur, it could result in harm to people or the natural environment, temporary loss of access to critical data, delays in shipments of products to customers or suspension of operations.
We may not be able to hire or retain the number of qualified personnel required for our business, which would harm the development and sales of our products and limit our ability to grow.
If we are unable to retain existing personnel, or attract and train additional qualified personnel, either because of competition in our industry for such personnel or because of insufficient financial resources, our growth may be limited and it could have a material adverse effect on our business.
If we lose the services of our key personnel, our business could be adversely affected.
Our success is substantially dependent upon the performance, contributions and expertise of our chief executive officer, executive leadership and senior management team. Members of our executive leadership and senior management team, play a significant role in generating new business and retaining existing customers. Our inability to retain our existing executive leadership and senior management team or attract and retain additional qualified personnel could have a materially adverse effect on our business.
We may be adversely affected by the current economic environment or future volatility in global economies.
Our performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. Of late, consumer spending has deteriorated significantly and could remain depressed for an extended period of time. Reduced consumer discretionary spending due to economic uncertainty or unfavorable economic conditions may lead to reduced sales volumes or cause a shift in our product mix from higher margin to lower margin products. Some of the factors that could influence the deterioration of consumer confidence and consumer spending include financial market volatility, fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, fluctuating commodity prices, higher levels of unemployment, higher consumer debt levels, reductions in net worth based on market declines, home foreclosures and reductions in home values, and general uncertainty regarding the overall future economic environment, all of which are beyond our control. The current global economic environment has weakened consumer confidence and impacted the consumer's ability and desire to spend discretionary dollars. Consumer purchases of discretionary items generally decline during periods where disposable income is adversely affected or there is economic uncertainty, and a prolonged reduction in consumer spending levels may negatively impact our financial condition and results of operations. We cannot anticipate all the ways in which the current economic climate or future volatility in global economies could adversely impact our business.
Global economic conditions may negatively impact the Company's financial condition and results of operations.
A general weakening or decline in the global economy or a reduction in business or consumer spending or confidence could delay or significantly decrease purchases of the Company's products by
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our customers, including mass retail and home center stores, automotive supply outlets, warehouse club stores, and distributors. Consumer purchases of discretionary items, which could include the Company's automotive appearance and performance chemicals, may decline during periods where disposable income is reduced or there is economic uncertainty, and this may negatively impact the Company's financial condition and results of operations. In addition, during unfavorable or uncertain economic times, consumers may increase purchases of lower-priced or non-branded products and our competitors may increase their level of promotional activities to maintain sales volumes, both of which may negatively impact the Company's financial condition and results of operations.
Our sales and operating results may be affected by uncertain or changing economic and market conditions, including inflation, deflation, prolonged weak consumer demand or other changes which may affect the principal markets in which the Company conducts its business. If economic or market conditions in the United States or other key global markets deteriorate, the Company may experience material adverse effects on its business, financial condition and results of operations. The global economy experienced a recession beginning in calendar year 2008 and the pace of recovery from that recession has been slow. In recent years, the banking system and financial markets have experienced disruptions, including among other things, bank failures and consolidations, diminished liquidity and credit availability and rating downgrades. In addition, the current political and economic environment has resulted in continued economic unpredictability, particularly in Europe where there are concerns regarding the increased sovereign debt levels in several countries and the inability of some of those countries to meet future financial obligations, and the associated overall volatility of the Euro currency. Although these factors are outside of the Company's control, they directly affect its business. The slow pace of economic recovery or any new economic downturn or recession could cause the Company's customers to delay or significantly decrease their purchases, which could reduce the Company's future sales and negatively impact its results of operations and cash flows.
Adverse economic and market conditions could also harm our business by negatively affecting the parties with whom we do business, including our customers, retailers, and distributors, and third party contract manufacturers and suppliers. These conditions could impair the ability of our customers to pay for products they have purchased from the Company. As a result, allowances for doubtful accounts and write-offs of accounts receivable from the Company's customers may increase. In addition, the Company's third party contract manufacturers and its suppliers may experience financial difficulties that could negatively affect their operations and their ability to supply us with finished goods and the raw materials, and packaging required for the Company's products.
Operations outside the United States expose us to uncertain conditions and other risks in international markets.
Our net sales outside the United States were approximately 32% of net sales in the years ended December 31, 2013, 2012 and 2011, and our strategy includes expanding our international business. We face, and will continue to face, substantial risks associated with having international operations, including:
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These risks could have a significant impact on our ability to sell our products on a competitive basis in international markets and could have a material adverse effect on our business, financial condition and results of operations.
Part of our business strategy is the expansion of our brands internationally. Our ability to identify, originate and define auto care products trends, as well as gauge and react to changing consumer demands, may be more difficult in foreign markets. We may not be able to develop appealing automotive consumer products for international markets or meet changing consumer demands in those markets.
In addition, our operations outside of the United States are subject to risks relating to appropriate compliance with legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations, import and export laws, potentially higher incidence of fraud or corruption and greater difficulty in maintaining effective internal controls, credit risk of local customers and distributors and potentially adverse tax consequences, including those related to transfer pricing regulations. We could become subject to inquiries or investigations by government and other regulatory bodies. Any determination that our operations or activities are not in compliance with United States laws, including the Foreign Corrupt Practices Act, or various international laws and regulations could expose us to significant fines, penalties or other sanctions that may harm our business and reputation.
Because we operate and sell our products in foreign countries, changes in currency exchange rates could adversely affect our operations and financial results.
With the exception of Puerto Rico and the United Kingdom, the functional currency of our foreign operations is the applicable local currency. In preparing our financial statements, we translate net sales and expenses in foreign countries from their local currencies into U.S. dollars using weighted average exchange rates. If the value of the U.S. dollar rises relative to the value of local currencies in the countries in which we have operations, the net sales reported on our financial statements for those countries will decrease. We do not use instruments to hedge foreign currency risks and as such, we are not protected against foreign currency fluctuations. Accordingly, we could be adversely affected by changes in currency exchange rates. Given our inability to predict the degree of exchange rate fluctuations, we cannot estimate the effect these fluctuations may have upon future reported results or our overall financial conditions, but they could materially and adversely affect our results of operations and financial condition. Additionally, any favorable impacts to profit margins or financial results from fluctuations in foreign currency exchange rates are likely to be unsustainable over time.
Harm to our reputation or the reputation of one or more of our leading brands could have an adverse effect on our business.
We believe that maintaining and developing our brand names, including Armor All and STP are critical to our success and that the importance of brand recognition increases as competitors offer products similar to our products. Maintaining a strong reputation with consumers, customers and trade partners is critical to the success of our business. We devote significant time and incur substantial marketing and promotional expenditures to create and maintain brand loyalty as well as increase brand awareness of our products. As a company, we also focus on ethics and compliance, sustainability, and product safety and quality initiatives, among others to protect our reputation and brand image. Despite these efforts, adverse publicity about us, including product safety or quality or similar concerns,
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whether real or perceived, could harm our image and result in an adverse effect on our business, as well as require resources to rebuild our reputation. Prior to the Acquisition investing in and promoting of our brands was significantly reduced by Clorox as it had ceased promoting motor sports to the same levels it had done in the past, which resulted in a loss of market share and lower brand awareness. If our brand-building strategy is unsuccessful, expenses for rebuilding our brands may never be recovered, and we may be unable to increase our future revenues or implement our business strategy.
We may not attain synergies for our business and the IDQ business following our investment in IDQ Acquisition Corp. which could adversely impact our financial condition and results of operations.
We may not realize the expected benefits of the IDQ Investment because the business may not perform financially as expected or because of delays or difficulties or other challenges in attaining operating synergies. The success of the IDQ Investment will depend, in part, on our ability to utilize our assets and operations and the assets and operations of IDQ to optimize the combined sales and costs for the mutual benefit of IDQ and us. This optimization will include integrating certain operational functions of our business with the IDQ business. However, due to limitations in IDQ's outstanding bonds and credit facilities, our ability to integrate operational functions with IDQ will be limited. The Company, Armored Auto Group Parent, Inc. ("Parent"), IDQ and IDQ's subsidiaries have entered into the Shared Services Agreement, pursuant to which certain products and services to be agreed upon by the parties from time to time, will be provided on an arm's-length basis by one party to another. The integration of certain operations of our business with the IDQ business through this agreement is anticipated to be complex, costly and time-consuming. Complications with the integration could result from the following circumstances, among others: failure to retain key customers; failure to retain key employees; limited ability to achieve cost synergies while IDQ's bonds and current credit facility remain outstanding; and failure to achieve anticipated synergies in purchasing, manufacturing and distribution costs due to the complexity of the cost sharing arrangement between our business and the IDQ business. In addition, following the IDQ Acquisition by Parent, a single management team will be responsible for the operations of our business and the IDQ business. This may put additional strain on management or divert management's attention from our business.
Acquisitions, new venture investments and divestitures may not be successful.
As part of our strategy, we may seek to increase growth through acquisitions and any such acquisition may be significant. Not only is the identification of good acquisition candidates difficult and competitive, but these transactions also involving numerous risks, including the ability to:
Companies, businesses or operations acquired or joint ventures created may not be profitable or may not achieve sales levels and profitability that justify the investments made. Future acquisitions could also result in the incurrence of indebtedness, the assumption of contingent liabilities, material
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expenses related to certain intangible assets and increased operating expenses, which could adversely affect our results of operations and financial condition. Future acquisitions of foreign companies would increase our exposure to foreign exchange risks. In addition, to the extent that the economic benefits associated with any of our acquisitions diminish in the future, we may be required to record write downs of goodwill, intangible assets or other assets associated with such acquisitions, which could adversely affect our operating results.
We are currently reviewing the landscape of potential opportunities and pursuing potential acquisitions. There can be no assurance that such efforts will result in a proposed transaction or in a definitive agreement for such a transaction being entered into. As part of our evolving acquisition criteria and as opportunities presented by various potential transactions appear, we may finance a potential transaction with debt, equity or a combination thereof, although any potential transaction and related financing should be accretive across our capital structure.
We may also decide to divest certain assets, businesses or brands that do not meet our strategic objectives or growth targets. With respect to any divestiture, we may encounter difficulty finding potential acquirers or other divestiture options on favorable terms. Any divestiture could affect our profitability, either as a result of the gains or losses on such sale of a business or brand, the loss of the operating income resulting from such sale or the costs or liabilities that are not assumed by the acquirer that may negatively impact profitability subsequent to any divestiture. We may also be required to recognize impairment charges as the result of a divesture.
Any potential future acquisitions, new ventures or divestitures may divert the attention of management and may divert resources from matters that are core or critical to the business.
Our substantial indebtedness, including the terms of our credit agreement governing the Credit Facilities and the indenture that governs the Senior Notes, restricts our current and future operations and could adversely affect our ability to raise additional capital to fund our operations or to exploit business opportunities, limit our ability to respond to changes in the economy or our industry and prevent us from making debt service payments.
We have a significant amount of indebtedness. As of December 31, 2013, we have aggregate gross amount of indebtedness of approximately $566.0 million, exclusive of issuance discounts. Our debt includes a senior secured credit facility ("the Credit Facilities"), consisting of a $300.0 million term loan (the "Term Loan Facility"), of which we have $291.0 million outstanding, notwithstanding $5.0 million remaining unamortized original issue discount, and our undrawn $50.0 million revolving credit facility (the "Revolving Credit Facility"). Our debt also includes $275.0 million in aggregate principle amount of 9.25% Senior Notes due 2018 (the "Senior Notes"), notwithstanding $7.4 million remaining unamortized original issue discount.
Our substantial indebtedness could have important consequences, including:
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In addition, the indenture that governs the Senior Notes and the credit agreement governing the Credit Facilities contain restrictive covenants that limit our ability to engage in activities that may be in our long-term best interest. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of substantially all of our indebtedness.
The credit agreement governing the Credit Facilities and the indenture that governs the Senior Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including, among other things, restrictions on our ability to:
In addition, the restrictive covenants in the credit agreement governing the Revolving Credit Facility require us to maintain specified financial ratios and satisfy other financial condition tests in order to utilize the Revolving Credit Facility. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we may not be able to meet them.
These restrictive covenants could adversely affect our ability to:
These restrictions may affect our ability to grow in accordance with our plans.
A breach of the covenants under the indenture that governs the Senior Notes or under the credit agreement governing the Credit Facilities could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related indebtedness and may result in the acceleration of any other indebtedness to which a cross acceleration or cross default provision applies. In addition, an event of default under the credit agreement governing the Revolving
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Credit Facility would permit the lenders under the Revolving Credit Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under the Revolving Credit Facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or note holders accelerate the repayment of our borrowings, we and our subsidiaries may not have sufficient assets to repay that indebtedness.
Our future liquidity and capital requirements will depend upon numerous factors, some of which are outside our control, including the future development of the markets in which we participate. We may need to raise additional funds to support expansion, develop new or enhanced services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of unanticipated opportunities. If our capital resources are not sufficient to satisfy our liquidity needs, we may seek to sell additional debt or equity securities or obtain other debt financing. The incurrence of additional indebtedness would result in increased expenses and could include covenants that would further restrict our operations. We may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.
Despite our current level of indebtedness, we and our subsidiaries may still be able to incur substantially more indebtedness. This could further exacerbate the risks to our financial condition.
We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the indenture that governs the Senior Notes and the credit agreement governing the Credit Facilities contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, our Revolving Credit Facility provides us commitments of up to $50.0 million in the aggregate, none of which is drawn as of December 31, 2013. Our Revolving Credit Facility could increase by $75.0 million, subject to certain conditions. We can also incur additional secured indebtedness if certain specified conditions are met under the credit agreement governing the Credit Facilities. All of those borrowings would be secured indebtedness. If new indebtedness is added to our current indebtedness levels, the related risks that we and the subsidiary guarantors now face could intensify.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations, depends on our financial condition and operating performance, which are subject to prevailing economic, industry and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional indebtedness or equity capital or restructure or refinance our indebtedness. We may not be able to take any such alternative actions on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The credit agreement governing the Credit Facilities and the indenture that governs the Senior Notes restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
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In addition, we conduct a substantial portion of our operations through our subsidiaries. Accordingly, repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of our other indebtedness, our subsidiaries do not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity, and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the indenture that governs the Senior Notes and the agreements governing certain of our other existing indebtedness limit the ability of certain of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our debt obligations.
If we cannot make scheduled payments on our indebtedness, we will be in default and holders of the Senior Notes could declare all outstanding principal and interest to be due and payable, the lenders under the Revolving Credit Facility could terminate their commitments to loan money, our secured lenders could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. All of these events could result in your losing your entire investment in the Senior Notes.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under the Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remained the same, and our net earnings and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming all revolving loans are fully drawn, each quarter point change in LIBOR interest rates above 1.75% would result in a $0.9 million change in annual interest expense on our indebtedness under the Credit Facilities. In the future, we may enter into interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk, or may create additional risks.
Goodwill, intangible and other long lived assets are subject to impairment risk.
We contemplate changing facts and circumstances that might reveal potential impairment of our long lived assets on an ongoing basis and as part of our financial and operational review of the Company. Further, we specifically assess the potential impairment of our existing goodwill and indefinite lived intangible assets during the fourth fiscal quarter of each fiscal year. In addition to assessing finite lived tangible and intangible assets for potential impairment when events and circumstances indicate that the carrying amount of the asset may not be recoverable, we consider and assess our remaining useful life assumptions for those long lived assets and may adjust our assumptions as may be appropriate. Indicators such as changes in the business, legal or regulatory environment, degradation of current period or projected cash flows, underperformance relative to historical or projected future operating results, changes in our strategy for our overall business or use of acquired assets, unexpected negative industry or economic trends, unanticipated technological change or
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competitive activities, loss of key distribution, change in consumer demand, loss of key personnel and acts by governments and courts may signal that an asset has become impaired.
During the fourth quarter of 2012, we determined the fair value of our reporting units in the first step of the goodwill impairment test as described in Item 8. Note 1 to the financial statements. We determined that fair value of our Europe, Middle East and Africa reporting unit and our Australia and New Zealand reporting unit were substantially lower than the carrying value for those reporting units. After having completed the second step of the goodwill impairment test as described in Item 8. Note 1 to the financial statements, the Company recorded a $24.1 million goodwill impairment charge.
We may be required to record further significant charges in our consolidated financial statements during the period in which any further impairment of our goodwill, intangible or other long lived assets is identified and this would negatively impact the Company's financial condition and results of operations.
Failure to protect our intellectual property rights could impact our competitiveness, allow our competitors to develop and market products with features similar to our products and demand for our products could decline.
Our commercial success depends in part on our intellectual property rights and we rely upon the trademark, trade secret, patent and copyright laws of the United States and other countries to protect our brands, products, technologies and formulations and packaging. Our intellectual property rights may not be maximized or may not be successfully asserted against others. Further, we may not be able to obtain and perfect our intellectual property rights or, where appropriate, license the intellectual property necessary to support new product introductions. These rights, if obtained, may later be invalidated, circumvented or challenged, and we could incur significant costs in connection with legal actions to assert our intellectual property rights, or to defend those rights from assertions of invalidity. In addition, even if such rights are obtained in the United States, the laws of some of the other countries in which our products are or may be sold may not protect intellectual property rights to the same extent as the laws of the United States. If other parties infringe on our intellectual property rights, they may dilute the value of our brands in the marketplace, which could diminish their value and harm our business. We will only be able to protect our intellectual property from unauthorized use by third parties to the extent that valid and enforceable patents, trademarks or copyrights cover them, and we may not be able to preempt third parties from infringing our intellectual property rights. The failure to perfect or successfully assert our intellectual property rights could make us less competitive and could have a material adverse effect on our business, financial condition and results of operations.
If we are found to have infringed the intellectual property rights of others or cannot obtain necessary intellectual property rights from others, our competitiveness could be adversely impacted.
We cannot be certain that the conduct of our business does not and will not infringe the intellectual property rights of others. If we are found liable for infringement, we could be required to cease use of a trademark, trade secret, copyrighted work or patented invention in our business, pay damages, pay legal defense fees, enter into licensing agreements, if available on acceptable terms or at all and to cease making or selling certain products. Moreover, we may need to redesign some of our products to avoid future infringement liability. Any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
In the ordinary course of business, we may be subject to product liability claims and lawsuits, including potential class actions, alleging that our products have resulted in or could result in unsafe condition or injury.
We may be required to pay for losses or injuries purportedly caused by our products. Claims could be based on allegations that, among other things, our products contain contaminants or provide
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inadequate instructions regarding their use, or inadequate warnings concerning interactions with other substances, or damage property. Product liability claims could result in negative publicity that could harm our sales, reputation, value of our brands and operating results. In addition, if one of our products is found to be defective, we could be required to recall it, which could result in adverse publicity and significant expenses. Although we maintain product liability insurance coverage, potential product liability claims may exceed the amount of insurance coverage or certain product liability claims may be excluded under the terms of the policy (e.g. breach of contract, product recall, asbestos, lead, bacteria, fungi, benzene, and silica). Any product liability claim brought against us, with or without merit, could be costly to defend and could result in an increase of our insurance premiums. Our other business activities may also expose us to litigation risks, including risks that may not be covered by insurance. If successful claims are asserted by third parties against us for uninsured liabilities or liabilities in excess of applicable insured limits of coverage, our business, financial condition and results of operations may be adversely affected.
Additionally, our products may be associated with competitor products or other products in the same category, which may be alleged to have caused harm to consumers. As a result of this association, we may be named in unwarranted legal actions. The potential costs of defense may materially affect our business, financial condition and results of operations in future periods.
We operate under an FTC consent order, which requires certain compliance policies and procedures. Should we violate our requirements thereunder, we may face significant fines and penalties.
In 1975, a predecessor entered into a consent order with the Federal Trade Commission ("FTC") settling charges that it had engaged in deceptive advertising. The order essentially prohibits certain representations about STP products and requires compliance with the law on truthful advertising. In 1995, a predecessor company settled charges that it had violated that order. Clorox maintained certain compliance practices to ensure compliance with the order which have been continued since the Acquisition. Since the 1995 complaint, the FTC has not raised any issues about our advertising practices. We are still subject to the consent order. While we believe it is unlikely that this order will result in significant future liability, we could become subject to significant fines and penalties should we be found to be in violation of the consent order.
Compliance with environmental law and other government regulations could impose material costs.
We are subject to numerous environmental laws and regulations that impose various environmental controls on our business operations, including, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and clean-up of solid and hazardous wastes and the investigation and remediation of soil and groundwater affected by hazardous substances. Such laws and regulations may otherwise relate to various health and safety matters that impose burdens upon our operations. These laws and regulations govern actions that may have adverse environmental effects and also require compliance with certain practices when handling and disposing of hazardous wastes. These laws and regulations also impose strict, retroactive and joint and several liability for the costs of, and damages resulting from, cleaning up current sites, past spills, disposals and other releases of hazardous substances. We cannot assure you that we have been or will be in compliance with environmental and health and safety laws at all times. If we violate these laws, we could be fined, criminally charged or otherwise sanctioned by regulators. We may be required to incur further costs to comply with current or future environmental and safety laws and regulations. In addition, in the event of accidental contamination or injury from these materials, we could be held liable for any damages that result and any such liability could exceed our resources. We believe that our expenditures related to environmental matters have not had, and are not currently expected to have, a material adverse effect on our business, financial condition or results of operations. However, the environmental laws under which we operate are complicated and often increasingly more stringent, and may be applied retroactively. Accordingly, we may be required to make additional expenditures to remain in, or to
29
achieve, compliance with environmental laws in the future and such additional expenditures may have a material adverse effect on our business, financial condition or results of operations.
Some of our products have chemical compositions that are controlled by various state, federal and international laws and regulations. We are required to comply with these laws and regulations and we seek to anticipate regulatory developments that could impact our ability to continue to produce and market our products. We invest in research and development to maintain product formulations that comply with such laws and regulations. We may be required to alter the chemical composition of one or more of our products in a way that will have an adverse effect upon the product's efficacy or marketability. A delay or other inability on our part to complete product research and development in response to any such regulatory requirements could have a material adverse effect on our business, financial condition and results of operations.
Generally, the manufacturing, packaging, storage, distribution and labeling of our products and our business operations all must comply with extensive federal, state and foreign laws and regulations. It is possible that the government will increase regulation of the transportation, storage or use of certain chemicals to enhance homeland security or protect the environment and that such regulation could negatively impact raw material, component or finished goods supplies or costs.
Litigation may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation by employees, customers, consumers, suppliers, stakeholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend current and future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our products, regardless of whether the allegations are valid or whether we are ultimately found liable. Conversely, we may be required to initiate litigation against others to protect the value of our intellectual property and the goodwill associated therewith or enforce an agreement or contract that has been breached. These matters are extremely time consuming and expensive, but absolutely necessary to maintain enterprise value, protect our assets and realize the benefits of the agreements and contracts that we have negotiated and safeguard our future. As a result, litigation may adversely affect our business, financial condition and results of operations.
Changes in tax laws could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the United States and certain foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with different statutory tax rates; regulations relating to transfer pricing; changes in the valuation of deferred tax assets and liabilities; changes in tax laws; the outcome of income tax audits in jurisdictions around the world; and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes.
Our judgments regarding the accounting for tax positions and the resolution of tax disputes may impact the Company's earnings and cash flow.
Significant judgment is required in determining the Company's effective tax rate and in evaluating our tax positions. We provide for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement criteria prescribed by applicable accounting standards. Fluctuations in federal, state, local and foreign taxes or a change to uncertain tax positions, including related interest and penalties, may impact the Company's effective tax rate and our financial results. When particular tax matters arise, a number of years may elapse before such matters are audited and
30
finally resolved. Unfavorable resolution of any tax matter could increase the effective tax rate. Any resolution of a tax issue may require the use of cash in the year of resolution.
Changes in our effective tax rate may adversely affect our earnings and cash flow.
The Company's future effective tax rate could be affected by changes in tax laws and regulations or their interpretation, changes in the mix of earnings in countries with differing statutory tax rates, or changes in the valuation of deferred tax assets and liabilities. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. If the actual amount of our future taxable income is less than the amount we are currently projecting with respect to specific tax jurisdictions, or if there is a change in the time period within which the deferred tax asset becomes deductible, we could be required to record a valuation allowance against our deferred tax assets. The recording of a valuation allowance would result in an increase in our effective tax rate, and would have an adverse effect on our operating results. In addition, changes in statutory tax rates may change our deferred tax assets or liability balances, which would have either a favorable or unfavorable impact on our effective tax rate.
A failure of a key information technology system could adversely impact our ability to conduct business.
We rely extensively on information technology systems, some of which are managed by third party service providers, in order to conduct business. These systems may include, but are not limited to, programs and processes relating to communicating internally and externally with other parties, ordering and managing materials from suppliers, converting materials to finished products, shipping products to customers, processing transactions, summarizing and reporting results of operations, complying with regulatory, legal and tax requirements and other processes involved in managing the business. We have implemented core hardware, software and operating systems, including initiating an international enterprise resource planning system ("ERP"), and continue to implement ancillary software and enhancements in order to support our existing operations and future growth. If our technology systems and processes do not adequately support the future growth of our business or we suffer from an ineffective administration of these systems and system changes, our business may be adversely impacted. Although we will have network security measures in place, the systems may be vulnerable to computer viruses, security breaches, and other similar disruptions from unauthorized users. While we have business continuity plans in place, if the systems are damaged or cease to function properly due to any number of causes, including catastrophic events, power outages, security breaches or other similar events, and if the business continuity plans do not effectively resolve such issues on a timely basis, we may suffer interruptions in the ability to manage or conduct business, which may adversely impact our business.
Our continued growth and expansion and increasing reliance on third party service providers could adversely affect our internal control over financial reporting, which could harm our business and financial results.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with generally accepted accounting principles in the United States ("GAAP"). Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Our continuing growth and expansion in domestic and globally dispersed markets will place significant additional pressure on our system of internal control over financial reporting. Moreover, we engage the services of third parties to assist with business operations and financial reporting processes, which inserts additional monitoring obligations and risk into the system of internal control. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and on a timely basis or to detect and prevent fraud.
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Identification of a material weakness in internal controls over financial reporting may adversely affect our financial results.
The provisions of Section 404 of the Sarbanes-Oxley Act of 2002, or "Sarbanes-Oxley," and the regulations promulgated thereunder provide for the identification and reporting of material weaknesses in our system of internal controls over financial reporting. If such a material weakness is identified, it could indicate a lack of controls adequate to generate accurate financial statements. We assess our internal controls over financial reporting, but we cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods, or maintain all of the controls necessary for continued compliance.
We may incur increased ongoing costs as a result of being obligated to file reports with the SEC and our management will be required to devote substantial time to new compliance initiatives when we are effectively registered.
We incur or will have to incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requirements under Sarbanes-Oxley and other SEC rules and regulations. We expect these rules and regulations to increase substantially our legal and financial compliance costs and to make some activities more time-consuming and costly.
Compliance with changing regulations and standards for accounting, corporate governance and public disclosure may result in additional expenses and this could negatively impact the Company's business, financial condition and results of operations.
Changing laws, regulations and standards relating to accounting and financial reporting, corporate governance and public disclosure, including new SEC regulations such as those required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, new accounting requirements, including any that result from the joint convergence projects of the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board, and the potential future requirement to transition to international financial reporting standards may create uncertainty and additional burdens and complexities for the Company. To establish and maintain high standards of accounting and financial reporting, corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with all such evolving standards and requirements. These investments may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities, either of which could negatively impact the Company's business, financial condition and results of operations.
The estimates and assumptions on which our financial statements are based may prove to be inaccurate, which may adversely affect the Company's financial condition and results of operations.
The Company's financial statements are dependent on certain estimates and assumptions related to, among other things, consumer and trade promotion accruals, future product volume and pricing estimates, future cost trends, credit worthiness of customers, allowance for excess and obsolete inventory, share based compensation costs, valuation of acquired intangible assets, useful lives for depreciation and amortization of long lived assets, future cash flows associated with impairment testing for goodwill and indefinite-lived intangible assets, uncertain income tax positions, contingencies and allowance for doubtful accounts. While our estimates and assumptions are based on historical experience and on various other considerations that we believe to be reasonable under the circumstances and at the time they are made, the Company's actual results may differ materially from its estimates which may adversely affect the Company's financial condition and results of operations.
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We can be adversely affected by the implementation of new, or changes in GAAP.
Our financial reporting complies with GAAP which is subject to change over time. If new rules or interpretations of existing rules require us to change our financial reporting, our financial condition and results from operations could be adversely affected.
As an "emerging growth company" under the JOBS Act, we are permitted to, and do, rely on exemptions from certain disclosure requirements.
As an "emerging growth company" under the Jumpstart Our Business Startups Act ("JOBS Act"), we are permitted to and do, rely on exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of: (i) the last day of the fiscal year during which we had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement; (iii) the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt or (iv) the date on which we are deemed a "large accelerated issuer" as defined under the federal securities laws. For so long as we remain an emerging growth company, we will not be required to:
We may choose to take advantage of some but not all of these reduced burdens and if we do, the information that we provide you in our public filings may be different than that of other public companies in which you hold securities. Although we do rely on certain exemptions provided in the JOBS Act, the exact implications of the JOBS Act for us are still subject to interpretations and guidance by the SEC and other regulatory agencies. In addition, as our business grows, we may no longer satisfy the conditions of an emerging growth company.
In addition, as an "emerging growth company," we have chosen to "opt out" of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period is irrevocable.
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Item 1B. Unresolved Staff Comments
None.
Properties
Our headquarters is located in Danbury, Connecticut where we currently lease approximately 18,819 square feet. This lease expires in September 2019. Our owned facilities consist of approximately 104,000 square feet of manufacturing, office, warehouse and mixed use space in Painesville, Ohio. Further, we lease our research and development facility in Pleasanton, California, manufacturing, office, warehouse and mixed use space in the United Kingdom and office space in Australia, China and Mexico. We believe our facilities, which are adequate for our current needs, are in good operating condition.
The following table summarizes information regarding our significant leased and owned properties as of December 31, 2013:
Location
|
Square Footage |
Owned / Leased |
|||
|---|---|---|---|---|---|
United States |
|||||
Danbury, Connecticut |
18,819 | Leased | |||
Pleasanton, California |
8,904 | Leased | |||
Painesville, Ohio |
104,000 | Owned | |||
United Kingdom |
|||||
Ebbw Vale, Gwent, Wales |
78,000 | Leased | |||
Brentford, Middlesex, England |
3,320 | Leased | |||
Tonbridge, Kent, England |
10,000 | Leased | |||
Australia |
|||||
Sydney, New South Wales |
5,200 | Leased | |||
China |
|||||
Shanghai, Shanghai Province |
1,500 | Leased | |||
Mexico |
|||||
Cuautitlan Izcalli |
700 | Leased | |||
Legal Proceedings
We are involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year. As of December 31, 2013, we had no material ongoing litigation, regulatory or other proceedings and had no knowledge of any investigations by governmental or regulatory authorities in which we are a target that could have a material adverse effect on our current business.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
As of March 3, 2014, Armored AutoGroup Parent Inc. ("Parent") indirectly owns all of our issued and outstanding capital stock through its direct subsidiary and our direct parent, Armored AutoGroup Intermediate Inc. There is no established public trading market for our common stock, and there are no plans, proposals, arrangements or understandings with any person with regard to the development of a trading market in our common stock.
Holders
As of immediately following the closing of the IDQ Acquisition, Avista Capital Partners II, L.P., Avista Capital Partners (Offshore) II, L.P., Avista Capital Partners (Offshore) II-A, LLP and ACP Viking Co-Invest LLC (together, the "Avista Entities") collectively owned approximately 91.1% of Parent's issued and outstanding common stock and approximately 92.0% of Parent's issued and outstanding Series A Preferred Stock of Parent. As of immediately following the closing of the IDQ Acquisition, KI-IDQ 2012 Holdings, LLC owned approximately 7% of Parent's common stock and 7% of Parent's Series A Preferred Stock. In addition to the Avista Entities and KI-IDQ 2012 Holdings, LLC, there were 24 other holders of record of Parent's capital stock as of immediately following the closing of the IDQ Acquisition, each of which owned less than 1% of the outstanding capital stock of Parent.
Dividends
We have never declared or paid cash distributions on our common stock. We currently intend to retain all available funds and any future consolidated earnings to fund our operations and the development and growth of our business and therefore do not anticipate paying any cash distributions.
Restrictions imposed by our debt instruments, including the Credit Facilities, significantly restrict us from making dividends or distributions. Future cash dividends, if any, will be at the discretion of the Board of Directors and will depend upon, among other things, our future operations and earnings, capital requirements, general financial condition, contractual restrictions and such other factors as the Board of Directors may deem relevant.
Issuer Sales of Equity Securities
During 2013, there were no unregistered sales of equity securities of the registrant and there were no shares that may yet be purchased under any repurchase plan or programs.
Issuer Purchases of Equity Securities
No purchases of equity securities were made during the fourth quarter and there were no shares that may yet be purchased under any repurchase plans or programs.
Item 6. Selected Financial Data
The following tables set forth our selected financial data for the periods and at the dates indicated. All periods prior to November 5, 2010 are referred to as the Predecessor period and all periods including and after November 5, 2010 are referred to as the Successor period. Concurrent with the Acquisition, on November 5, 2010, our board of directors approved a change in our fiscal year from a fiscal year comprised of the twelve consecutive fiscal months ending on June 30 to a fiscal year
35
comprised of the twelve consecutive fiscal months ending on December 31 of each year. This change in fiscal year commenced with the transition period beginning on July 1, 2010 and ending on December 31, 2010.
On November 5, 2010, Avista and its affiliates acquired, through the Company, Global AutoCare from Clorox. Global AutoCare, excluding the Prestone and YPF licensed brands, was a business product line of Clorox that operated through various Clorox wholly-owned or controlled legal entities throughout the world. Global AutoCare was not operated by Clorox as a standalone business or as a distinguishable reporting unit, but rather were components of various other individual businesses within the Clorox management reporting structure. In addition, Global AutoCare was not segregated in separate legal entities, the primary method by which Clorox maintained its accounting records. Rather, the revenues, expenses and assets related to Global AutoCare were derived from various data fields that utilized business assignments within the Clorox accounting records.
The combined financial statements of the Predecessor may not be indicative of our future performance and do not necessarily reflect what its combined results of operations, financial position and cash flows would have been had the Predecessor operated as an independent company during the periods presented. Further, we applied purchase accounting and began a new basis of accounting starting as of November 5, 2010 ("Successor periods"). As a result of purchase accounting, the Predecessor periods and Successor period financial statements are not directly comparable.
Moreover, our historical results are not necessarily indicative of results to be expected for any future period. The following selected financial data presented below has been derived from financial statements that have been prepared in accordance with GAAP and should be read with our audited financial statements, including the accompanying notes to the financial statements, and with "Risk
36
Factors," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.
| |
CONSOLIDATED | COMBINED | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Year ended December 31, | Year ended June 30, | ||||||||||||||||||||
| |
2013 | 2012(1) | 2011 | Period from November 5, 2010 to December 31, 2010 |
Period from July 1, 2010 to November 4, 2010 |
2010 | 2009 | |||||||||||||||
| |
(Successor) |
(Successor) |
(Successor) |
(Successor) |
(Predecessor) |
(Predecessor) |
(Predecessor) |
|||||||||||||||
Statement of operations data (in thousands): |
||||||||||||||||||||||
Net sales |
$ | 289,956 | $ | 306,468 | $ | 281,317 | $ | 35,014 | $ | 94,341 | $ | 299,537 | $ | 292,391 | ||||||||
Cost of products sold |
158,049 | 167,570 | 153,114 | 20,583 | 50,201 | 147,672 | 156,657 | |||||||||||||||
Cost of products sold—acquisition related |
— | — | 4,439 | 7,229 | — | — | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Gross profit |
131,907 | 138,898 | 123,764 | 7,202 | 44,140 | 151,865 | 135,734 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Selling and administrative expenses |
40,694 | 48,306 | 40,240 | 5,422 | 10,916 | 34,028 | 31,040 | |||||||||||||||
Advertising costs |
27,787 | 31,072 | 24,699 | 2,240 | 7,582 | 23,994 | 25,163 | |||||||||||||||
Research and development costs |
2,474 | 2,211 | 2,307 | 609 | 1,063 | 3,289 | 3,591 | |||||||||||||||
Amortization of acquired intangible assets |
36,788 | 36,701 | 36,701 | 5,709 | 1 | 3 | 2 | |||||||||||||||
Goodwill Impairment(1) |
— | 24,117 | — | — | — | — | — | |||||||||||||||
Acquisition related charges |
— | — | 1,020 | 16,026 | — | — | — | |||||||||||||||
Restructuring costs (benefits) |
— | — | — | — | (146 | ) | 11 | 994 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses |
107,743 | 142,407 | 104,967 | 30,006 | 19,416 | 61,325 | 60,790 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Operating (loss) profit |
24,164 | (3,509 | ) | 18,797 | (22,804 | ) | 24,724 | 90,540 | 74,944 | |||||||||||||
Non-operating expenses: |
||||||||||||||||||||||
Interest expense |
48,024 | 48,887 | 48,090 | 7,350 | — | — | — | |||||||||||||||
Other expense (income) |
285 | 445 | 80 | 212 | (128 | ) | 238 | 758 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
(Loss) earnings before income taxes |
(24,145 | ) | (52,841 | ) | (29,373 | ) | (30,366 | ) | 24,852 | 90,302 | 74,186 | |||||||||||
(Benefit) provision for income taxes |
(10,775 | ) | (7,040 | ) | (11,705 | ) | (8,250 | ) | 8,728 | 34,277 | 26,626 | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) earnings |
$ | (13,370 | ) | $ | (45,801 | ) | $ | (17,668 | ) | $ | (22,116 | ) | $ | 16,124 | $ | 56,025 | $ | 47,560 | ||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Cash flow data (in thousands): |
||||||||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 28,267 | $ | 10,244 | $ | (9,790 | ) | $ | (16,594 | ) | $ | (5,295 | ) | $ | 36,539 | $ | 54,423 | |||||
Net cash used in investing activities |
(7,389 | ) | (7,698 | ) | (13,011 | ) | (756,155 | ) | (1,463 | ) | (2,312 | ) | (2,407 | ) | ||||||||
Net cash (used in) provided by financing activities |
(3,661 | ) | (3,350 | ) | (2,875 | ) | 804,466 | 6,758 | (34,227 | ) | (52,016 | ) | ||||||||||
Capital expenditures |
(4,305 | ) | (7,698 | ) | (13,011 | ) | (1,539 | ) | (1,463 | ) | (2,312 | ) | (1,443 | ) | ||||||||
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| |
CONSOLIDATED | COMBINED | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Balance at December 31, | Balance at June 30, | ||||||||||||||||||||
| |
2013 | 2012 | 2011 | 2010 | Balance at November 4, 2010 |
2010 | 2009 | |||||||||||||||
| |
(Successor) |
(Successor) |
(Successor) |
(Successor) |
(Predecessor) |
(Predecessor) |
(Predecessor) |
|||||||||||||||
Balance sheet data (in thousands): |
||||||||||||||||||||||
Cash |
$ | 21,253 | $ | 4,206 | $ | 4,935 | $ | 31,701 | $ | — | $ | — | $ | — | ||||||||
Total current assets |
127,296 | 129,143 | 118,149 | 110,831 | 100,786 | 112,195 | 77,704 | |||||||||||||||
Total assets(1) |
832,247 | 880,757 | 927,476 | 950,918 | 473,665 | 484,596 | 449,555 | |||||||||||||||
Total debt |
553,511 | 553,860 | 554,331 | 554,977 | — | — | — | |||||||||||||||
Total liabilities |
678,111 | 704,152 | 709,143 | 713,176 | 39,640 | 74,187 | 64,437 | |||||||||||||||
Total equity |
154,136 | 176,605 | 218,333 | 237,742 | 434,025 | 410,409 | 385,118 | |||||||||||||||
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward- looking statements as a result of various factors, including the factors we describe under "Cautionary note regarding forward-looking statements," "Risk factors" and elsewhere in this Annual Report.
Overview
We are a consumer products company consisting primarily of Armor All and STP, two of the most recognizable brands in the automotive aftermarket appearance products and performance chemical products categories, respectively. Armor All's current product line of protectants, wipes, tire and wheel care products, glass cleaners, leather care products, air fresheners and washes are designed to clean, shine, refresh and protect interior and exterior automobile surfaces. STP's offering of oil and fuel additives, functional fluids and automotive appearance products has a broad customer base ranging from professional racers to car enthusiasts and "Do-it-Yourselfers." Our brands offer multiple automotive appearance and performance chemical products that can be found in most of the major developed countries around the world. We have a diversified geographic footprint with direct operations in the United States, Canada, Mexico, Australia, the United Kingdom and China and distributor relationships in approximately 50 countries.
Armor All is the most recognized automotive aftermarket appearance product brand in the United States with a comprehensive and competitively priced product line. Armor All's advertising campaigns, such as the "Go ahead. Stare," "Care for your car", "Armor All Way" and the new "A car is a privilege. Respect it." build on what we believe to be Armor All's strong brand equity established over its 50 year history to maintain a high level of consumer awareness. We further believe that Armor All has distinguished itself as the leader in the automotive aftermarket appearance products category based upon its household name, high quality product formulations, convenient application methods and tradition of innovation.
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The STP brand has been characterized by a commitment to technology, performance and motor sports partnerships for over 50 years. Regular use of STP additives as part of basic maintenance helps engines run better by boosting the cleaning performance of gas and saving gas by keeping fuel intake systems clean. We believe the STP brand's fuel and oil additives, functional fluids and automotive appearance products benefit from a rich heritage in the car enthusiast and racing scenes.
The Company was formerly known as The AutoCare Products Business, excluding the Prestone and YPF licensed brands, a business of The Clorox Company ("Clorox") that operated through various Clorox wholly owned or controlled legal entities throughout the world.
Fiscal year end
The Company's fiscal year end is December 31.
Industry trends
The general economic environment in our primary markets has stabilized in the latest 12 to 18 months allowing for moderate growth in the appearance and performance chemical products categories. We believe the current economic environment and category growth trends are indicative of sustaining trends. We also believe the trend toward an aging car fleet in our primary markets has reached its height and will likely decrease somewhat as sales of new cars increased as the economy stabilized.
We believe innovation is an important contributor to category growth because new product introductions stimulate consumer interest in the category by fulfilling unmet consumer needs and bringing attention to the appearance and performance chemical products categories. Truly innovative products have a history of driving category growth in appearance and performance chemical products. We continue to introduce new products and invest in advertising and promotion to elevate engagement of our customers and consumers with our brands.
Competition remains intense in the categories we serve. Recently, smaller brands in both the appearance and performance chemical products categories continued to have success gaining market share. Established brands continue to invest significant resources in advertising campaigns and with trade partners on promotional activities. While we believe our brands and customer relationships are strong, there is no assurance we will be able to maintain or improve our current competitive position.
Key performance indicators
Management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of, and potential variability of, our earnings and cash flows. These key performance indicators include:
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Results of Operations
Year Ended December 31, 2013 compared to Year Ended December 31, 2012
Net sales
Our sales are typically higher in the first half of the calendar year as our customers purchase stock for the spring and summer seasons when weather is warmer in the northern hemisphere than in the fall and winter months. This pattern is largely reflective of our customers' seasonal purchasing patterns, as well as the timing of our promotional activities. Weather can also influence consumer behavior, especially for appearance products. Our appearance products sell best during warm, dry weather, and sell less strongly if weather is cold and wet.
Net sales for our North America segment include products marketed and sold to customers in the United States and Canada. Our International segment represents net sales to all other regions outside of the United States and Canada, primarily being Europe, Australia and Latin America. The following table summarizes our net sales for the years ended December 31, 2013 and 2012 (in thousands, except percentages):
| |
Year ended December 31, |
Change from Prior Year |
% of Net Sales |
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | $ | % | 2013 | 2012 | |||||||||||||
Net sales |
|||||||||||||||||||
North America: |
|||||||||||||||||||
Armor All products |
$ | 153,147 | $ | 163,679 | $ | (10,532 | ) | -6 | % | 53 | % | 53 | % | ||||||
STP products |
54,985 | 60,875 | (5,890 | ) | -10 | % | 19 | % | 20 | % | |||||||||
Other brands |
7,033 | 7,913 | (880 | ) | -11 | % | 2 | % | 3 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | |
Total North America |
215,165 | 232,467 | (17,302 | ) | -7 | % | 74 | % | 76 | % | |||||||||
International |
74,791 | 74,001 | 790 | 1 | % | 26 | % | 24 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Consolidated net sales |
$ | 289,956 | $ | 306,468 | $ | (16,512 | ) | -5 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
In North America, approximately $10.5 million of the decrease in net sales for 2013 as compared to 2012 was driven by our Armor All products which were impacted by the much colder and wetter weather conditions in the first half of 2013 as compared to the much warmer and drier conditions in 2012. Additionally, volume related to the sale of our holiday gift pack at one retailer was down year over year and drove most of the decline in the fourth quarter. STP was impacted in part due to one less promotional event in the third quarter of 2013 as compared to 2012. Both brands were also impacted by reductions in inventory levels by certain of our customers in the first half of 2013.
The International net sales increase in 2013 as compared to 2012 was primarily driven by the continued momentum of our international growth strategy especially in our export business to Latin America and Asia as well as the addition of a new product line in Europe as the result of an acquisition. Our business in Australia was negatively impacted by unfavorable foreign exchange.
Gross profit
Our gross profit for the years ended December 31, 2013 and 2012 are as follows (in thousands, except percentages):
| |
Year ended December 31, |
Decrease | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | $ | % | |||||||||
Gross profit |
$ | 131,907 | $ | 138,898 | $ | (6,991 | ) | -5 | % | ||||
Stated as a percentage of net sales |
45.5 | % | 45.3 | % | |||||||||
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Gross profit dollars in 2013 were $7.0 million lower than 2012 mainly due to the impact of reduced volume and lower royalty income as a result of management's decision to exit several licensing contracts. Gross profit as a percentage of net sales increased 0.2% in 2013 as compared to 2012 mainly due to improvements in freight and warehousing costs as 2012 included excess costs to transition to a standalone company. Partially offsetting the freight and warehousing favorability was the impact of lower volume on the fixed elements of cost of goods sold.
Selling and administrative expense, advertising costs, and research and development costs
Our selling and administrative expenses, advertising costs, and research and development costs for the years ended December 31, 2013 and 2012 are as follows (in thousands, except percentages):
| |
Year ended December 31, |
Increase (decrease) |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2013 | 2012 | $ | % | |||||||||
Selling and administrative expenses |
$ | 40,694 | $ | 48,306 | $ | (7,612 | ) | -16 | % | ||||
Advertising costs |
27,787 | 31,072 | (3,285 | ) | -11 | % | |||||||
Research and development costs |
2,474 | 2,211 | 263 | 12 | % | ||||||||
| | | | | | | | | | | | | | |
|
$ | 70,955 | $ | 81,589 | $ | (10,634 | ) | -13 | % | ||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Stated as a percentage of net sales |
24.5 | % | 26.6 | % | |||||||||
The decrease in the selling and administrative expenses in 2013 as compared to 2012 of $7.6 million was primarily due to the elimination of excess costs of $13.0 million incurred in 2012 versus $3.9 million incurred in 2013 related to the transition to a standalone company. The lower selling and administrative costs is due to our business reaching its expected selling and administrative cost structure to support growth initiatives.
The decrease in our advertising costs in 2013 as compared to 2012 of $3.3 million was primarily due to lower production costs and other discretionary costs related to advertising.
The increase in our research and development costs in 2013 as compared to 2012 of $0.3 million was primarily due our business reaching its expected research and development cost structure mainly to support new product growth initiatives.
Year Ended December 31, 2012 compared to Year Ended December 31, 2011
Net sales
Net sales for our North America segment include products marketed and sold to customers in the United States and Canada. Our International segment represents net sales to all other regions outside of the United States and Canada, primarily being Europe, Australia and Latin America. The following
41
table summarizes our net sales for the years ended December 31, 2012 and 2011 (in thousands, except percentages):
| |
Year ended December 31, |
Change from Prior Year |
% of Net Sales |
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ | % | 2012 | 2011 | |||||||||||||
Net sales |
|||||||||||||||||||
North America: |
|||||||||||||||||||
Armor All products |
$ | 163,679 | $ | 143,903 | $ | 19,776 | 14 | % | 53 | % | 51 | % | |||||||
STP products |
60,875 | 60,079 | 796 | 1 | % | 20 | % | 21 | % | ||||||||||
Other brands |
7,913 | 8,132 | (219 | ) | -3 | % | 3 | % | 3 | % | |||||||||
| | | | | | | | | | | | | | | | | | | | |
Total North America |
232,467 | 212,114 | 20,353 | 10 | % | 76 | % | 75 | % | ||||||||||
International |
74,001 | 69,203 | 4,798 | 7 | % | 24 | % | 25 | % | ||||||||||
| | | | | | | | | | | | | | | | | | | | |
Consolidated net sales |
$ | 306,468 | $ | 281,317 | $ | 25,151 | 9 | % | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
In North America, approximately $19.8 million of the increase in net sales for 2012 as compared to 2011 was driven by volume related to the launch of new Armor All and STP products and product extensions, with the remaining growth being principally on account of a price increase that was effective June 2011 across both product lines. The increase in the volume of Armor All sales was aided by the warmer and drier weather conditions in much of North America for the early part of 2012. Our investments in racing sponsorships and advertising spend on television, print and online also contributed to our growth. Partially offsetting this new product growth and price increase was the base business decline of STP in the first half of 2012. This trend was reversed in the second half of 2012 primarily as a result of the introduction of new STP products and additional promotional activities.
The International net sales increase in 2012 as compared to 2011 was primarily driven by the continued momentum of our international growth strategy.
Gross profit
Our gross profit for the years ended December 31, 2012 and 2011 are as follows (in thousands, except percentages):
| |
Year ended December 31, |
Increase | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ | % | |||||||||
Gross profit |
$ | 138,898 | $ | 123,764 | $ | 15,134 | 12 | % | |||||
Stated as a percentage of net sales |
45.3 | % | 44.0 | % | |||||||||
Gross profit in 2011 included the amortization of inventory step-up resulting from purchase accounting stemming from the Acquisition in November 2010. Excluding the impact of that purchase accounting, gross profit as a percentage of net sales for 2011 would have been 45.6%. As discussed above, the impact of the excess freight and warehousing costs negatively impacted our gross profit in 2012. Excluding the excess freight and warehousing costs, the gross profit rates for 2012 would have been approximately 46.9%.
The increase in the cost of products sold is primarily driven by higher sales volumes in 2012 as compared to 2011. We have experienced higher freight and warehouse costs in 2012 as compared to 2011 in part because we have maintained higher average inventory levels as we worked to establish our new supply chain model and information systems independent of Clorox. Further, our overall product costs have been favorably impacted as a result of favorable commodity costs, negotiated reductions in the costs of purchased materials and products, and process improvements.
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Selling and administrative expense, advertising costs, and research and development costs
Our selling and administrative expenses, advertising costs, and research and development costs for the years ended December 31, 2012 and 2011 are as follows (in thousands, except percentages):
| |
Year ended December 31, |
Increase (decrease) |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2012 | 2011 | $ | % | |||||||||
Selling and administrative expenses |
$ | 48,306 | $ | 40,240 | $ | 8,066 | 20 | % | |||||
Advertising costs |
31,072 | 24,699 | 6,373 | 26 | % | ||||||||
Research and development costs |
2,211 | 2,307 | (96 | ) | (4 | )% | |||||||
| | | | | | | | | | | | | | |
|
$ | 81,589 | $ | 67,246 | $ | 14,343 | 21 | % | |||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Stated as a percentage of net sales |
26.6 | % | 23.9 | % | |||||||||
The increase in the selling and administrative expenses in 2012 as compared to 2011 was due to a redundancy in our workforce as we transitioned from the Clorox Transition Services Agreement ("TSA") to our permanent selling, marketing, finance and administrative staff. This overlap resulted in additional costs of $5.4 million. In addition to these transitional costs, there are $3.7 million of expenses related to our new ERP system during 2012. These redundant costs have declined each quarter in 2012 and are expected to be minimal in 2013. Offsetting these costs on a year over year basis is the overall reduction in the TSA costs as we transition to a standalone company.
The increase in our advertising costs in 2012 as compared to 2011 was primarily due to the increase in spending related to reinvigoration of the STP brand.
The decrease in our research and development costs in 2012 as compared to 2011 was primarily due to the July 1, 2011 cessation of research and development services rendered by Clorox under the TSA.
Goodwill impairment
During the fourth quarter of 2012, we revised our pricing structure for intercompany purchases and sales of goods ("Intercompany Pricing"). The change in Intercompany Pricing had the effect of increasing the cost of intercompany purchases in our Europe, Middle East and Africa reporting unit, our Australia and New Zealand reporting unit and our Latin America and Asia reporting unit. These increased costs of intercompany purchases are offset by increased value of intercompany sales from our North America reporting unit. As a result of this change in Intercompany Pricing, when we determined the fair value of the assets and liabilities of our reporting units in the first step of the goodwill impairment test as described in Part II. Item 8. Note 1 to the financial statements the fair value of our Europe, Middle East and Africa reporting unit and Australia and New Zealand reporting unit were lower than the carrying values of those reporting units. This apparent diminishment in value resulted primarily from the change in the Intercompany Pricing structure. After completing the second step of the goodwill impairment test as described in Item 8. Note 1 to the financial statements, we recorded a $24.1 million non-cash goodwill impairment charge.
The future occurrence of a potential indicator of additional impairment, such as declining net sales or margins caused by competition, changing consumer preferences, technological advances or reductions in advertising and promotional expenses, a decrease in expected net earnings, adverse market conditions, a decline in current market multiples, a significant adverse change in legal factors or business climates, an adverse action or assessment by a regulator, unanticipated competition, strategic decisions made in response to economic or competitive conditions, or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or disposed of, could require an interim assessment for some or all of the reporting units before the next required annual assessment. In the event of significant adverse changes of the nature described above, we might have to recognize an additional non-cash impairment of goodwill or other of our long-lived assets.
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Income taxes
A reconciliation of the statutory federal income tax rate to our effective tax rate on (loss) earnings before income taxes is summarized as follows:
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Statutory federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||
Non-deductible impairment of goodwill |
— | (12.3 | ) | — | ||||||
State taxes (net of federal tax benefits) |
6.8 | (1.9 | ) | 0.8 | ||||||
Foreign rate differential |
(1.3 | ) | (3.0 | ) | 2.9 | |||||
Domestic production activities deduction |
0.8 | 0.6 | — | |||||||
Acquisition related |
— | 0.4 | (0.6 | ) | ||||||
Change in Valuation Allowance |
(2.3 | ) | — | — | ||||||
UK interest deduction |
1.8 | — | — | |||||||
Other differences |
3.8 | (5.5 | ) | 1.7 | ||||||
| | | | | | | | | | | |
Effective tax rate |
44.6 | % | 13.3 | % | 39.8 | % | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Our effective benefit rate for 2013 differs from the statutory tax rate primarily due to state taxes. Our effective benefit rate for 2012 differed from the statutory tax rate primarily due to the non-deductibility of goodwill impairment charges. Other items impacting our effective benefit rate relate primarily to differences in the foreign rates when compared to the statutory rate, adjustments resulting from the filing of the income tax returns, and changes in valuation allowance in certain foreign jurisdictions.
At December 31, 2013, we have a net deferred tax liability of $86.0 million arising from differences between book and tax carrying amounts of intangible and other long-lived assets. Deferred tax assets, within that net liability, result from book and tax differences in certain Acquisition related items, inventory costs, accruals and reserves and net operating loss carry-forwards. As of December 31, 2013, the Company had aggregate foreign net operating losses of approximately $10.0 million.
Liquidity and capital resources
Our principle sources of liquidity are our cash of $21.3 million as of December 31, 2013, and our $50.0 million revolving credit loan which is fully available to us as of December 31, 2013. Our principle source of operating cash in-flows is from sales of product to customers. Our principle operating cash out-flows relate to the purchase and production of inventory and related costs, advertising, selling and administrative expenses, and capital expenditures. Approximately $6.4 million of our cash is held by foreign subsidiaries to fund their working capital needs. Excess cash abroad is repatriated largely without restriction to fund domestic operations.
We believe that, as of December 31, 2013, cash on hand, cash expected to be generated from future operating activities and cash available under the Revolving Credit Facility will be sufficient to fund our operations, including contractual obligations and capital expenditures for the next 12 months. During the years ended December 31, 2013 and 2012, net cash generated in operations and borrowed funds under our Revolving Credit Facility were sufficient to service our debts and other obligations and fund seasonal and other cash flow requirements. As of December 31, 2013, we expect that we will generate cash from the underlying operations of the business and we will be able to obtain needed funds under the Revolving Credit Facility when requested. However, in the event that funds are not available from our operating activities or from the Revolving Credit Facility, we may have to delay certain business initiatives and adjust our strategy accordingly.
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On March 17, 2014, we invested $11.3 million to acquire a non-controlling equity interest in IDQ Acquisition Corp. ("IDQ" or "IDQ Investment"). The investment was funded from our available cash on hand and was comprised of $10.0 million to purchase common stock of IDQ and $1.3 million for fees and expenses related to the IDQ Investment (of which $0.3 million was paid to a director of the Company). In conjunction with the IDQ Investment, we amended the agreement governing our revolving credit loan to exclude fees and expenses related to the IDQ Investment including potential future costs related to pursuit of cost savings, expense reductions and other operating improvements and synergies related to the IDQ Investment.
Cash flows
The following table summarizes our cash flows (in thousands):
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Net cash provided by (used in) operating activities |
$ | 28,267 | $ | 10,244 | $ | (9,790 | ) | |||
Net cash used in investing activities |
(7,389 | ) | (7,698 | ) | (13,011 | ) | ||||
Net cash used in financing activities |
(3,661 | ) | (3,350 | ) | (2,875 | ) | ||||
Operating activities
Net cash provided by operating activities of $28.3 million for the year ended December 31, 2013 was primarily attributable to our net loss of $13.4 million and a decrease in net operating assets of $8.2 million offset by non-cash charges of $33.4 million for depreciation and amortization of our long lived, tangible and intangible assets, deferred financing costs and debt discount amortization. Net cash provided by operating activities of $10.2 million for the year ended December 31, 2012 was primarily attributable to our net loss of $45.8 million and an increase in net operating assets of $4.7 million, more than offset by non-cash charges of $60.7 million for depreciation and amortization of our long lived, tangible and intangible assets, goodwill impairment charge, deferred financing costs and debt discount amortization. Net cash used in operating activities of $9.8 million for the year ended December 31, 2011 was primarily attributable to our net loss of $17.7 million and an increase in net operating assets of $23.9 million, partially offset by non-cash charges of $31.8 million.
The decrease in our operating assets in 2013 was comprised of a decrease of $9.0 million in accounts receivable which was attributable to better collection efforts and the result of the transition of receivables team from Clorox; a decrease in inventories of $9.3 million which was attributable to our efforts to reduce inventory levels and a decrease of $10.6 in accounts payable and accrued liabilities largely in part due to a lower interest accrual resulting from less borrowings against the Company's revolver and reduced trade accruals.
Our cash flows in operating activities includes significant interest payments attendant to our Credit Facilities and our Term Loan. Cash we paid for interest decreased to $43.1 million in the year ended December 31, 2013 as compared $45.3 million in 2012. Substantial interest payments will continue for the term of our indebtedness. Cash income tax payments decreased to $4.1 million in the year ended December 31, 2013 as compared to $8.2 million in 2012.
Investing activities
Net cash used in investing activities of $7.4 million for year ended December 31, 2013 and $7.7 million for the year ended December 31, 2012 was comprised of capital expenditures and in 2013 $3.8 million for an acquisition made in Europe in the third quarter. Capital spending declined to 1.5%
45
of net sales in 2013 as compared to 2.5% of net sales in 2012 and is largely attributable to the decline in requisite activity related to our ERP system implementation.
Financing activities
Net cash used in financing activities of $3.7 million for the year ended December 31, 2013 included seasonal borrowings and repayments on our Revolving Credit Facility and $3.0 million of principal payments on our Term Loan Facility. Net cash of $3.4 million used in financing activities for the year ended December 31, 2012 also included seasonal use of the Revolving Credit Facility, $3.0 million of principal payments on our term loan and $0.4 million of debt financing costs incurred related to amending our credit facility.
Indebtedness and Amendment to Credit Facility
We have a significant amount of indebtedness stemming from the November 5, 2010 Acquisition. As of December 31, 2013, we have aggregate gross amount of indebtedness of approximately $566.0 million, exclusive of issuance discounts, including a remaining $291.0 million owed on our Term Loan having quarterly principal payments of $750,000 and the remaining principal maturing in November 2016, and $275.0 million in aggregate principle amount of 9.25% Senior Notes due 2018. Our significant indebtedness could affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from making debt service payments. Further, the terms of our credit agreement governing the Credit Facilities and the indenture that governs the Senior Notes contain a number of restrictive covenants that impose significant operating and financial restrictions on our current and future operations, particularly our ability to respond to changes or to take certain actions. Although such encumbrances have not proven unexpectedly burdensome to date, these restrictions may limit our ability to engage in certain financial and operational business activities that may be in our long-term best interest. For additional details related to our debts, please see Note 9 of the Notes to the Consolidated Financial Statements, "Debt", contained in Part II. Item 8. Financial Statements and Supplementary Data.
We have made significant progress since our separation from Clorox in November 2010; we are independent of Clorox with our own sales force, autonomous supply chain, and standalone administration of the business; and we are pursuing our strategy for growth with product innovation and development of our Armor All and STP brands. However, the costs to separate and operate as an independent operation proved greater than we had anticipated, and we have invested considerably in advertising and promoting the Armor All and STP brands. In light of our results during this important period, in September 2012 we entered into an amendment of our Credit Agreement, dated November 5, 2010, among Armored Auto Group Intermediate Inc. (f/k/a Viking Intermediate Inc.), the Company, the several lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents parties thereto (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Credit Facility") revising the maximum consolidated leverage ratio and the minimum consolidated interest coverage ratio as applicable to the Company's $50.0 million Revolving Credit Facility. The amendment to our Credit Facility did not affect our results of operations for 2012 and, although our ability to meet the revised financial ratios can be affected by events beyond our control, we expect to satisfy them.
Off-balance sheet arrangements
We currently have no material off-balance sheet arrangements.
46
Inflation
Inflationary factors such as increases in the costs of raw materials, packaging materials, purchased product and overhead may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial condition or results from operations since the Acquisition, a high rate of inflation in the future could have a material adverse effect on our business, financial condition or results from operations. The raw materials for the products that we produce include silicone, jet fuel, base oil and other chemicals. Our packaging includes resin products, which is sensitive to change in fuel costs, and corrugated materials. Petroleum based products, which constitute a significant portion of the costs for many of our products, have experienced significant price volatility in the past, and may continue to do so in the future. Fluctuations in oil and diesel fuel prices have also impacted the Company's cost of transporting its products. Although we take efforts to minimize the impact of inflationary factors, including raising prices to our customers, a high rate of pricing volatility associated with crude oil supplies may have an adverse effect on our operating results.
Certain Information Concerning Contractual Obligations
We lease various manufacturing, warehousing and office facilities under non-cancelable operating lease agreements. We also have engaged a number of third party service providers covering aspects of the administration of the business, including procurement, contract manufacturing, logistics, transportation, warehousing, software maintenance, systems support and hosting. In our marketing and brand support we employ, among other strategies, racing and rally sponsorships, and television, print, digital and online advertising. The following table presents information relating to our contractual obligations. Amounts set forth below are on an actual basis as of December 31, 2013, our most recent fiscal year end for which audited financial statements are available (in thousands). Future events could cause actual payments to differ significantly from these amounts.
| |
Payments due by Period | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Total | Less than 1 year |
1 - 3 years | 4 - 5 years | After 5 years |
|||||||||||
| |
(in thousands) |
|||||||||||||||
Debt, including interest |
$ | 737,938 | $ | 45,898 | $ | 370,405 | $ | 321,635 | — | |||||||
Operating leases |
5,504 | 1,573 | 2,480 | 1,119 | 332 | |||||||||||
Procurement, contract manufacturing, warehousing and logistics obligations(a) |
27,861 | 19,374 | 6,511 | 1,976 | — | |||||||||||
Software maintenance, systems support and hosting(b) |
1,742 | 1,065 | 677 | — | — | |||||||||||
Sponsorship and media agreements(c) |
10,466 | 8,801 | 1,665 | — | — | |||||||||||
Advisory services and monitoring(d) |
6,000 | 1,000 | 2,000 | 2,000 | 1,000 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total contractual obligations(e) |
$ | 789,511 | $ | 77,711 | $ | 383,738 | $ | 326,730 | $ | 1,332 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
47
party distribution centers in accordance with agreed upon shipment terms. We purchase and maintain title and control of raw materials and components packaged by other of our Contract Manufacturers and are only obligated further for the services themselves. We typically do not have definitive minimum purchase obligations included in the contract terms with our Contract Manufacturers or other raw material or component suppliers. In the ordinary course of business, supply and service needs are communicated by us to our Contract Manufacturers based on orders and short-term projections, ranging typically three months. We are committed to purchase the products produced by the Contract Manufacturers based on the projections provided.
Subsequent to December 31, 2013, there have been no material changes to our contractual obligations that are outside the normal course of business.
Commitments and Contingencies
The Company is subject to various lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, employee and other matters. Although the results of claims and litigation cannot be predicted with certainty, it is the opinion of management that the ultimate disposition of these matters will not have a material adverse effect, individually or in the aggregate, on the Company's financial statements taken as a whole.
Critical accounting policies
Preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. These estimates are based on our best knowledge of current events and actions we may undertake in the future.
Estimates are used in accounting for, among other items, consumer and trade promotion accruals, future product volume and pricing estimates, future cost trends, credit worthiness of customers, allowance for excess and obsolete inventory, share based compensation costs, valuation of acquired intangible assets, useful lives for depreciation and amortization of long lived assets, future cash flows associated with impairment testing for goodwill and indefinite-lived intangible assets, uncertain income tax positions, contingencies and allowance for doubtful accounts. Actual results may ultimately differ from our estimates, although we do not generally believe such differences would materially affect the financial statements in any individual year. However, in regard to ongoing impairment testing of goodwill and indefinite-lived intangible assets, significant deterioration in future cash flow projections or other assumptions used in valuation models, versus those anticipated at the time of the valuations,
48
could result in impairment charges that may materially affect the financial statements in a given year. As to our receivables, the loss of a single significant customer to bankruptcy or otherwise leading to a bad debt write-off could materially affect the financial statements in a given year. Similarly, an unexpected write-off or obsolescence of an item or category of inventory or a material litigation, regulatory or other proceeding against us could materially affect the financial statements.
We believe certain estimates described above are incorporated into our Critical Accounting policies as follows:
Revenue recognition
Sales are recognized as revenue when: (i) persuasive evidence of a firm sales arrangement exists; (ii) the product has been shipped and the customer takes ownership, which can be on the date of shipment or the date of receipt by the customer, and assumes the risk of loss; (iii) the selling price is fixed or determinable; and (iv) collection of the resulting receivable is reasonably assured. Sales are recorded net of allowances for cash discounts, trade promotions, and damaged goods at the time of the sale based upon customer terms and our historical experience in the same period that the revenue is recognized.
Trade promotions, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Sales are recorded net of trade promotion spending, which is accrued at the time of the sale. Most of these arrangements have terms of approximately one year. Accruals for expected payouts under these programs are included as accrued expenses and other liabilities in the Consolidated Balance Sheets.
Trade accruals are calculated based primarily on historical rates and consideration of recent promotional activities. We maintain liability reserves at the end of each financial reporting period for the estimated expenses incurred, but unpaid for these programs. The determination of accrued trade and the related liabilities require us to use judgment for estimates that include current and past trade promotion spending patterns, status of trade promotion activities and the interpretation of historical spending trends by customer and category. We review our assumptions and adjust our reserves accordingly on a quarterly basis. We believe that the estimation methodologies employed, combined with the nature of the promotional campaigns, make the likelihood remote that our obligation would be misstated by a material amount. However, our financial statements could be materially impacted if the actual promotion rates are different from the estimated rates. Our related trade and promotional expense accrual as of December 31, 2013 was $8.8 million as compared to $9.0 million as of December 31, 2012. If our accrual estimates for expected trade payouts at December 31, 2013 were to differ by 10%, the impact on net sales would be approximately $0.9 million.
Inventories and cost of products sold
Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity.
Under GAAP, shipping and handling costs may be reported as either a component of cost of products sold or selling and administrative expenses. We report such costs, primarily related to warehousing and outbound freight, in the Consolidated Statements of Comprehensive Loss as a component of cost of products sold. Accordingly, our gross profit margin is not comparable with the gross profit margin of those companies that include shipping and handling charges within their selling and administrative expenses.
49
Inventories include materials, direct labor, and related manufacturing overhead, and are stated at the lower of cost (on a first-in, first-out or average cost basis) or market. Accordingly, we reduce our inventories for the decrease of value resulting from product obsolescence, damage or other issues affecting marketability equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) current market conditions and sales data, (ii) historical buying patterns and return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, and (v) component and packaging obsolescence. A significant change in customer demand or market conditions could render certain inventory obsolete and thus could have a material impact on our operating results in the period the change occurs. At December 31, 2013, we reported $34.0 million of inventories, net of our allowance for obsolescence of $2.3 million as compared to a $2.0 million obsolescence allowance on $42.4 million of inventories at the end of 2012. If our allowance for obsolescence at December 31, 2013 were to differ by 10%, the impact on inventories and gross profit would be approximately $0.2 million.
Income taxes
Our effective tax rate is based on income by tax jurisdiction, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions.
We provide for uncertain tax positions when such tax positions do not meet certain recognition thresholds or measurement standards. Amounts for uncertain tax positions are adjusted in quarters when new information becomes available or when positions are effectively settled.
United States federal income tax expense is provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested. United States income taxes and foreign withholding taxes are not provided when foreign earnings are indefinitely reinvested. We determine whether our foreign subsidiaries will invest their undistributed earnings indefinitely and reassesses this determination on a periodic basis. A change to our determination may be warranted based on our experience as well as plans regarding future international operations and expected remittances. Changes in our determination would likely require an adjustment to the income tax provision in the quarter in which the determination is made.
A significant change in local tax legislation, market conditions or our performance against the projections used in arriving at our effective tax rate could have a material impact on our provision for income taxes in the period the change occurs. At December 31, 2013, we reported a tax benefit of $10.8 million in our Consolidated Statement of Comprehensive Loss. If our provision for income taxes at December 31, 2013 were to differ by 10%, the impact on our net loss would be approximately $1.1 million.
Valuation of goodwill and other long lived intangible assets
Goodwill impairment occurs when the carrying amount of one of our reporting unit's goodwill exceeds its implied fair value. We would then record an impairment charge being the difference between the carrying amount and the implied fair value of the reporting unit's goodwill. For trademarks and brand intangible assets with indefinite lives, impairment occurs when the carrying amount of an asset is greater than its estimated fair value and an impairment charge is recorded for the difference between the carrying amount and the fair value. Our estimates of fair value are based primarily on a discounted cash flow approach and supplemented by a market based approach. Significant judgment is necessary in the preparation of assumptions and estimates inherent in such valuation approaches, particularly with respect to the determination of future volumes, revenue and expense growth rates, changes in working capital use, foreign-exchange rates, inflation, the selection of an appropriate discount rate and the calculation of an average earnings before interest, tax,
50
depreciation and amortization ("EBITDA") multiple of a selected public-company peer group. In particular, the discount rates we utilize in these analyses, as well as expectations for future cash flows, may be influenced by such factors as changes in interest rates, rates of inflation and changes in regional risk. We test our goodwill and trademark and brand intangible assets with indefinite lives annually on October 1st unless there are indications during a different interim period that these assets may have become impaired.
Our property, plant and equipment and finite-lived intangible assets are stated at cost less accumulated depreciation and amortization. We calculate depreciation and amortization expenses by the straight-line method using estimated useful lives of the related assets. We review property, plant and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset or asset group may not be recoverable. Our impairment review is based on an estimate of the undiscounted cash flows at the lowest level for which identifiable cash flows exist and impairment occurs when the book value of the asset group exceeds the estimated future undiscounted cash flows generated by the asset group. When impairment is indicated, a charge is recorded for the difference between the book value of the asset group and its fair value. Depending on the asset or asset group, estimated fair value may be determined either by use of a discounted cash flow model or by reference to estimated selling values of assets in a similar condition.
Our fourth quarter 2012 change in Intercompany Pricing had the effect of increasing the cost of intercompany purchases in our Europe, Middle East and Africa reporting unit, our Australia and New Zealand reporting unit and our Latin America and Asia reporting unit, while increasing the value of intercompany sales from the Company's North America reporting unit. As a result of this change in Intercompany Pricing, when the Company determined the fair value of our reporting units in the first step of the goodwill impairment test as described in Part II. Item 8. Note 1 to the financial statements, the fair value of our Europe, Middle East and Africa reporting unit and our Australia and New Zealand reporting unit were lower than the carrying values of those reporting units. This decrease in value resulted primarily from the change in the Intercompany Pricing structure. After completing the second step of the goodwill impairment test as described in Part II. Item 8. Note 1 to the financial statements, we recorded a $24.1 million non-cash goodwill impairment charge. For more information, see Part II. Item 8. Notes 1 and 7 to the financial statements.
Based on our fourth quarter 2012 analysis, the estimated fair values of our North America ("NA") reporting and our Latin America, Asia ("LAA") and rest of world reporting unit were 76.0% and 66.0% higher, respectively, than their carrying values, including goodwill. The estimated fair values of our Europe, Middle East and Africa ("EMEA") reporting unit and our Australia and New Zealand ("AUZ")reporting unit, however, were 43.0% and 19.0% below their carrying values, including goodwill after impairment charges. This results because of the reduction in fair value of certain finite lived assets within the Europe, Middle East and Africa reporting unit and within the Australia and New Zealand reporting unit, while the asset groups that contain the long-lived assets of those reporting units continue to have undiscounted cash flows in excess of their carrying value. Under GAAP, impairment of finite lived assets only occurs when the carrying value of an asset or asset group exceeds estimated undiscounted cash flows of the asset or asset group. At October 1, 2013, the estimated fair values of our NA, LAA, EMEA and AUZ reporting units exceeded their respective carrying values by 9.0%, 149.0%, 27.0% and 16.0%, respectively.
In addition, during the fourth quarter of 2012 the Company determined the fair value of its Armor All and STP trademarks and brand intangible assets. The Company estimates the fair value of these assets using a relief from royalty method under an income approach as described in Note 1. The key assumptions for this method are revenue projections, a royalty rate and a discount rate. Based on our analysis, the estimated fair value of the indefinite lived Armor All and STP trademarks and brands were 43.0% and 24.0% higher, respectively, than their historical book values and no impairment charge
51
was required. At October 1, 2013, the estimated fair values of Armor All and STP trademarks and brand intangible assets exceeded their respective carrying values by 31.0% and 18.0%, respectively.
The Company also evaluated the recoverability of its customer relationships and licensing arrangements intangible assets as well as its tangible, long lived assets. When there is prevalent indication of an impairment of a finite and long-lived asset or asset group, the Company tests for recoverability by comparing the carrying value of an asset or asset group to their undiscounted cash flows. However, the Company concluded there was not a prevalence of evidence any impairment was present at the asset group level for any of its definite lived assets.
Recently issued accounting pronouncements
As an "emerging growth company," we have made an irrevocable decision to opt out of available extended transition periods for complying with new or revised accounting standards. As a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
In February 2013 the FASB issued ASU No. 2013-04—Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). The ASU requires reporting and disclosure about obligations resulting from joint and several liability arrangements within its scope for which the total amount of the obligation is fixed at the reporting date. For the Company, ASU 2013-04 is effective January 1, 2014 for fiscal year 2014 and interim periods therein. The guidance in ASU 2013-04 is to be applied retrospectively for those obligations resulting from joint and several liability arrangements within its scope that exist at January 1, 2014. Adoption of ASU 2013-04 is not expected to have a material impact on the Company.
In September 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under IRC Section 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and determined they will not have a material impact on our consolidated results of operations, cash flows or financial position.
The Company adopted the following pronouncements effective January 1, 2013:
In July 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists (ASU 2013-11). The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with an exception in certain circumstances where an unrecognized tax benefit, or portion thereof, is to be presented in the financial statements as a liability. ASU 2013-11 is effective for the Company January 1, 2014 for fiscal year 2014 and interim periods therein. The guidance in ASU 2013-11 is to be applied prospectively to all unrecognized tax benefits that exist at January 1, 2014. The Company adopted the provisions of ASU 2013-11 in 2013 (see Note 15).
In February 2013, the FASB issued ASU 2013-02—Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02). Substantially all of the information that this update requires already is required to be disclosed elsewhere in financial statements under U.S. GAAP. However, the new requirement to present information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on net income will present, in one place, information about significant amounts reclassified and, in some cases, cross-references to related footnote disclosures.
52
During July 2012, the FASB issued ASU 2012-02 Intangibles—Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02) which was intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how the Company tests those assets for impairment and to improve consistency in impairment testing guidance among long lived asset categories. Under ASU 2012-02, the Company has the option first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The Company will be able to resume performing the qualitative assessment in any subsequent period.
In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11") to amend the requirement for an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. Adoption of 2011-11 did not have an impact on the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks that may impact our financial statements due primarily to foreign currency exchange risk, changing interest rates, concentration of business in large customers and fluctuations in commodity prices.
Foreign currency risk
We sell our products in many countries outside of the United States and, as such, are exposed to foreign currency exchange risk. However, our foreign currency exchange exposure is limited due to the concentration of our revenues and profitability in the United States. Additionally, our net sales are typically earned in the same currency in which we incur our expenses in the United States and Europe, which also mitigates for foreign exchange exposure. Given management's belief that our business faces limited foreign exchange risk, we currently do not have any currency hedging programs in place; however, we will continue to assess our foreign exchange risk management strategy as our business outside of the United States grows.
Interest rate risk
We are exposed to interest rate risk associated with our debt instruments. As of December 31, 2013, we have $566.0 million of total debt outstanding, excluding $50.0 million of unused and available commitments under the Revolving Credit Facility, of which $291.0 million bear interest at a variable a rate of the sum of (i) the greater of LIBOR or 1.75% and (ii) 4.25%. As LIBOR is currently more than one percentage point less than 1.75%, even a one percentage point change on our variable rate debt would not have affected our interest expense for the year ended December 31, 2013. However, if six month LIBOR, for example, were 1.5 percentage points higher during the year ended December 31, 2013 and 2012 our interest expense would have increased approximately $0.2 million and $0.6 million, respectively for the periods. We currently do not have any interest rate swaps; however, we continually assess our interest rate risk for purposes of determining whether interest rate swaps would be consistent with our overall risk management strategy.
53
Concentration of business with large customers
We have significant penetration of our products into flagship retailers and our top seven largest customers represented approximately 66%, 69% and 65% of U.S. net sales for the years ended December 31, 2013, 2012 and 2011, respectively. We had one customer (Wal-Mart) who represented more than 10% of total net sales, specifically 20%, 19% and 20% of total net sales in the years ended December 31, 2013, 2012 and 2011, respectively.
Commodity price fluctuations
The raw materials for the products that we produce in the U.S. and the United Kingdom include silicone, jet fuel, base oil and other chemicals. Our packaging includes resin products, which is sensitive to change in fuel costs, and corrugated materials. Our profitability is sensitive to changes in the costs of these commodities caused by changes in supply or other market conditions, over which we have little or no control. Increases in the cost of energy, transportation and other necessary supplies or services, including the cost of diesel or jet fuel, may also harm our profits and operating results. During 2013 we experienced an increase in the prices of certain commodities which negatively impacted our margins, most notably in resins, silicone materials and corrugate, while our commodity prices improved in 2012 versus 2011.
54
Item 8. Financial Statements and Supplementary Data
55
Report of Independent Registered Public Accounting Firm
The Board of Directors of Armored AutoGroup Inc.
We have audited the accompanying consolidated balance sheets of Armored AutoGroup Inc. as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive loss, shareholder's equity and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used, and significant estimates made by management, and 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 Armored AutoGroup Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013 in conformity with U.S. generally accepted accounting principles.
|
/s/ Ernst & Young LLP |
Stamford,
Connecticut
March 19, 2014
56
Armored AutoGroup Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Current assets: |
|||||||
Cash |
$ | 21,253 | $ | 4,206 | |||
Accounts receivable, net |
62,210 | 69,602 | |||||
Inventories |
34,043 | 42,444 | |||||
Other current assets |
9,790 | 12,891 | |||||
| | | | | | | | |
Total current assets |
127,296 | 129,143 | |||||
Property, plant and equipment, net |
28,936 | 31,473 | |||||
Goodwill |
358,826 | 362,216 | |||||
Intangible assets, net |
313,470 | 352,905 | |||||
Deferred financing costs and other assets, net |
3,719 | 5,020 | |||||
| | | | | | | | |
Total assets |
$ | 832,247 | $ | 880,757 | |||
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDER'S EQUITY |
|||||||
Current liabilities: |
|||||||
Accounts payable |
$ | 8,128 | $ | 13,158 | |||
Accrued expenses and other current liabilities |
23,455 | 28,571 | |||||
Due to Clorox |
91 | 137 | |||||
Due to Parent |
745 | 795 | |||||
Current portion of long-term debt, less discount |
71 | 279 | |||||
| | | | | | | | |
Total current liabilities |
32,490 | 42,940 | |||||
Long-term debt, less discount and current portion |
553,511 | 553,581 | |||||
Other liability |
2,500 | 2,500 | |||||
Deferred income taxes |
89,610 | 105,131 | |||||
| | | | | | | | |
Total liabilities |
678,111 | 704,152 | |||||
Commitments and contingencies (Note 11) |
|||||||
Shareholder's Equity: |
|||||||
Common stock ($0.01 par value, one thousand shares authorized, one thousand shares issued and outstanding at December 31, 2013 and 2012) |
— | — | |||||
Additional paid-in capital |
261,040 | 260,750 | |||||
Accumulated deficit |
(98,955 | ) | (85,585 | ) | |||
Accumulated other comprehensive (loss) income |
(7,949 | ) | 1,440 | ||||
| | | | | | | | |
Total shareholder's equity |
154,136 | 176,605 | |||||
| | | | | | | | |
Total liabilities and shareholder's equity |
$ | 832,247 | $ | 880,757 | |||
| | | | | | | | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
57
Armored AutoGroup Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | 289,956 | $ | 306,468 | $ | 281,317 | ||||
Cost of products sold |
158,049 | 167,570 | 153,114 | |||||||
Cost of products sold—acquisition related |
— | — | 4,439 | |||||||
| | | | | | | | | | | |
Gross profit |
131,907 | 138,898 | 123,764 | |||||||
Operating expenses: |
||||||||||
Selling and administrative expenses |
40,694 | 48,306 | 40,240 | |||||||
Advertising costs |
27,787 | 31,072 | 24,699 | |||||||
Research and development costs |
2,474 | 2,211 | 2,307 | |||||||
Amortization of acquired intangible assets |
36,788 | 36,701 | 36,701 | |||||||
Goodwill impairment |
— | 24,117 | — | |||||||
Acquisition related charges |
— | — | 1,020 | |||||||
| | | | | | | | | | | |
Total operating expenses |
107,743 | 142,407 | 104,967 | |||||||
| | | | | | | | | | | |
Operating profit (loss) |
24,164 | (3,509 | ) | 18,797 | ||||||
Non-operating expenses: |
||||||||||
Interest expense |
48,024 | 48,887 | 48,090 | |||||||
Other expense |
285 | 445 | 80 | |||||||
| | | | | | | | | | | |
Loss before income taxes |
(24,145 | ) | (52,841 | ) | (29,373 | ) | ||||
Benefit for income taxes |
10,775 | 7,040 | 11,705 | |||||||
| | | | | | | | | | | |
Net loss |
$ | (13,370 | ) | $ | (45,801 | ) | $ | (17,668 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Other comprehensive (loss) income: |
||||||||||
Foreign currency translation (loss) gain |
(9,389 | ) | 3,807 | (2,007 | ) | |||||
| | | | | | | | | | | |
Comprehensive loss |
$ | (22,759 | ) | $ | (41,994 | ) | $ | (19,675 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
58
Armored AutoGroup Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(In thousands)
| |
Common Stock | |
Accumulated Other Comprehensive (Loss) Income |
|
|
||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Additional Paid-in Capital |
Accumulated Deficit |
Total Shareholder's Equity |
||||||||||||||||
| |
Shares | Amount | |||||||||||||||||
Balance at December 31, 2010 |
1 | — | $ | 260,218 | $ | (360 | ) | $ | (22,116 | ) | $ | 237,742 | |||||||
Share based compensation |
— | — | 266 | — | — | 266 | |||||||||||||
Translation adjustments |
— | — | — | (2,007 | ) | — | (2,007 | ) | |||||||||||
Net loss |
— | — | — | — | (17,668 | ) | (17,668 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 |
1 | — | 260,484 | (2,367 | ) | (39,784 | ) | 218,333 | |||||||||||
Share based compensation |
— | — | 266 | — | — | 266 | |||||||||||||
Translation adjustments |
— | — | — | 3,807 | — | 3,807 | |||||||||||||
Net loss |
— | — | — | — | (45,801 | ) | (45,801 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 |
1 | $ | — | $ | 260,750 | $ | 1,440 | $ | (85,585 | ) | $ | 176,605 | |||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Share based compensation |
— | — | 290 | — | — | 290 | |||||||||||||
Translation adjustments |
— | — | — | (9,389 | ) | — | (9,389 | ) | |||||||||||
Net loss |
— | — | — | — | (13,370 | ) | (13,370 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 |
1 | $ | — | $ | 261,040 | $ | (7,949 | ) | $ | (98,955 | ) | $ | 154,136 | ||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
59
Armored AutoGroup Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||
Net loss |
$ | (13,370 | ) | $ | (45,801 | ) | $ | (17,668 | ) | |
Adjustments: |
||||||||||
Depreciation and amortization |
47,846 | 46,813 | 45,262 | |||||||
Goodwill impairment |
— | 24,117 | — | |||||||
Share based compensation |
290 | 266 | 266 | |||||||
Deferred income taxes |
(14,783 | ) | (10,612 | ) | (14,126 | ) | ||||
Other |
63 | 157 | 375 | |||||||
Cash effects of changes, net of acquisition effects in: |
||||||||||
Accounts receivable |
8,955 | (15,302 | ) | (18,934 | ) | |||||
Inventories |
9,276 | (5,194 | ) | 972 | ||||||
Prepaid taxes |
1,215 | (4,436 | ) | 306 | ||||||
Other current assets |
781 | (753 | ) | (476 | ) | |||||
Book overdraft |
— | (1,987 | ) | 1,987 | ||||||
Accounts payable and accrued liabilities |
(10,622 | ) | 10,509 | 2,299 | ||||||
Due to Clorox |
(46 | ) | 11,864 | (10,053 | ) | |||||
Other |
(1,338 | ) | 603 | — | ||||||
| | | | | | | | | | | |
Net cash provided by (used in) operating activities |
28,267 | 10,244 | (9,790 | ) | ||||||
| | | | | | | | | | | |
Cash flows from investing activities: |
||||||||||
Capital expenditures |
(4,305 | ) | (7,698 | ) | (13,011 | ) | ||||
Acquisition, net |
(3,084 | ) | — | — | ||||||
| | | | | | | | | | | |
Net cash used in investing activities |
(7,389 | ) | (7,698 | ) | (13,011 | ) | ||||
| | | | | | | | | | | |
Cash flows from financing activities: |
||||||||||
Borrowings under revolver |
23,000 | 64,001 | 29,500 | |||||||
Payments on revolver |
(23,000 | ) | (64,001 | ) | (29,500 | ) | ||||
Principal payments on notes payable and other |
(3,611 | ) | (3,000 | ) | (3,000 | ) | ||||
Payment on advance from Parent |
(50 | ) | — | — | ||||||
Advance from Parent |
— | — | 795 | |||||||
Deferred financing costs |
— | (350 | ) | (670 | ) | |||||
| | | | | | | | | | | |
Net cash used in financing activities |
(3,661 | ) | (3,350 | ) | (2,875 | ) | ||||
| | | | | | | | | | | |
Effect of exchange rate changes on cash |
(170 | ) | 75 | (1,090 | ) | |||||
| | | | | | | | | | | |
Net increase (decrease) in cash |
17,047 | (729 | ) | (26,766 | ) | |||||
Cash at beginning of period |
4,206 | 4,935 | 31,701 | |||||||
| | | | | | | | | | | |
Cash at end of period |
$ | 21,253 | $ | 4,206 | $ | 4,935 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Supplemental cash flow disclosures: |
||||||||||
Cash paid for interest |
$ | 43,878 | $ | 45,314 | $ | 40,866 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Cash paid for income taxes |
$ | 4,099 | $ | 8,207 | $ | 2,116 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
60
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—The Company and Summary of Significant Accounting Policies
The Company
Armored AutoGroup Inc. is a consumer products company consisting primarily of Armor All and STP, two of the most recognizable brands in the automotive aftermarket appearance products and performance chemicals categories, respectively. Armored AutoGroup Inc. delivers its products to distributors, resellers and end users (collectively the customers) through its direct operations in the United States, Canada, Mexico, Australia, China and the United Kingdom and distributor relationships in approximately 50 countries. The Armor All and STP brands offer multiple automotive appearance and performance chemicals that can be found in most of the major developed countries around the world.
The Company was formerly known as The AutoCare Products Business, excluding the Prestone and YPF licensed brands, a business of The Clorox Company ("Clorox") that operated through various Clorox wholly owned or controlled legal entities throughout the world.
In September 2010, Viking Acquisition Inc., an entity owned by affiliates of Avista Capital Holdings, L.P. ("Avista"), entered into an agreement to acquire the AutoCare Products Business, Armor All, STP and certain other brands from Clorox pursuant to the terms of a Purchase and Sale Agreement dated September 21, 2010 (the "Acquisition"). The Acquisition closed on November 5, 2010 and included employees in the United States and other countries dedicated to the Company, related product patent and developed technology and certain other assets, including the manufacturing facilities located in Painesville, Ohio and Wales, U.K. Viking Acquisition Inc. was subsequently renamed as Armored AutoGroup Inc. ("AAG"). Armored AutoGroup Parent Inc. ("AAG Parent" or "Parent") indirectly owns all of AAG's issued and outstanding capital stock through its direct subsidiary and AAG's direct parent, Armored AutoGroup Intermediate Inc., ("Intermediate").
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The Company's fiscal year end is December 31. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Specific areas, among others, requiring the application of management's estimates and judgment include assumptions pertaining to allowances for excess and obsolete inventory, provisions for cash discounts on amounts due from customers, share based compensation awards, fair values assigned to assets acquired and liabilities assumed in connection with acquisitions (see Note 7), accruals for consumer and trade promotion programs, future product volume and pricing estimates, future cash flows utilized in impairment testing of goodwill and other long lived assets, creditworthiness of customers and potential income tax. Actual results could differ materially from the estimates and assumptions made.
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—The Company and Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation
Local currencies are the functional currencies for substantially all of the Company's foreign operations. When the transactional currency is different than the functional currency, transaction gains and losses are included as a component of other expense (income), net. Assets and liabilities of foreign operations are translated into U.S. dollars using the exchange rates in effect at the respective balance sheet reporting date. Income and expenses are translated at the average exchange rate during the period. Gains and losses on foreign currency translations are reported as a component of accumulated other comprehensive (loss) income. Deferred taxes are not provided on cumulative translation adjustments where the Company expects earnings of a foreign subsidiary to be indefinitely reinvested.
Accounts Receivable, net
We record accounts receivable at net realizable value. This value includes allowances for discounts and estimated uncollectible accounts to reflect losses anticipated on accounts receivable balances. The allowance for uncollectible accounts is based on historical write-offs, an analysis of past due accounts based on the contractual terms of the receivables, and the economic status of customers, if known. We believe that the allowance is sufficient to cover uncollectible amounts; however, there can be no assurance that unanticipated future business conditions of customers will not have a negative impact on our results of operations. Accounts receivable are written off against the allowance for estimated uncollectible accounts should we conclude their collection is improbable.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. Concentrations of credit risk with respect to accounts receivable, which are typically unsecured, are limited to an extent due to the large number of entities comprising the Company's customer base and their dispersion across many geographical regions. The Company performs ongoing credit evaluations of the financial condition of its customers and requires credit enhancements, such as letters of credit and bank guarantees, in certain circumstances.
The Company does, however, sell a significant portion of its products through third party distributors, resellers and significant retail customers (See Note 3) and, as a result, maintains at times significant receivables balances with these parties. If the financial condition of these distributors, resellers or significant retail customers should deteriorate substantially, the Company's results of operations, financial position and cash flows could be adversely affected.
Cash at times may exceed FDIC insurable limits.
Inventories
Inventories are stated at the lower of cost or market under a first-in, first-out ("FIFO") basis. When necessary, the Company provides allowances to adjust the carrying value of its inventory to the lower of cost or market, including any costs to sell or dispose. Consideration is given to obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value for the purposes of determining the lower of cost or market.
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—The Company and Summary of Significant Accounting Policies (Continued)
Property, Plant and Equipment, net
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expenses are calculated by the straight-line method using the estimated useful lives of the related assets. Routine repairs and maintenance are expensed when incurred. Leasehold improvements are depreciated over a period no longer than the lease term. Internal and external costs incurred in developing or obtaining computer software for internal use are capitalized in property, plant and equipment and are amortized on a straight-line basis, over the estimated useful life of the software. General and administrative costs related to developing or obtaining such software are expensed as incurred.
The following table provides estimated useful lives generally assigned to property, plant and equipment by asset classification:
Classification
|
Expected Useful Lives | |
|---|---|---|
Land improvements |
10 - 30 years | |
Buildings |
7 - 40 years | |
Machinery and equipment |
2 - 15 years | |
Computer software |
3 - 7 years |
Property, plant and equipment are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset (or asset group) may not be recoverable. The Company's impairment review requires significant management judgment including estimating the future success of product lines, future sales volumes, revenue and expense growth rates, alternative uses for the assets and estimated proceeds from the disposal of the assets. The Company conducts reviews of idle and underutilized equipment when events or circumstances arise indicating that future cash flows are insufficient to recover the book value of asset groups, and reviews business plans for possible impairment indicators. Impairment occurs when the carrying amount of the asset (or asset group) exceeds its estimated future undiscounted cash flows. When impairment is indicated, an impairment charge is recorded for the difference between the asset's (or asset group's) book value and its estimated fair value. Depending on the asset, estimated fair value may be determined either by use of a discounted cash flow ("DCF") model or by reference to estimated selling values of assets in similar condition. The use of different assumptions would increase or decrease the estimated fair value of assets and would increase or decrease any impairment measurement. There have been no instances of impairment identified.
Finite Lived Intangible Assets
Amortization of intangible assets with finite lives (customer relationships and licensing arrangements) is recognized over estimated useful lives ranging from 5 to 10 years, which the Company believes reasonably represents the time period in which the economic benefits of the intangible assets are consumed or otherwise realized. The Company has experienced a negligible attrition rate in its customer base, and is not able to identify a reliable pattern of attrition and, as such, is utilizing the straight-line amortization method to amortize customer relationship intangible assets. Finite lived intangible assets are reviewed for possible impairment whenever events or changes in circumstances occur that indicate that the carrying amount of an asset may not be recoverable. There have been no instances of impairment identified.
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—The Company and Summary of Significant Accounting Policies (Continued)
Indefinite Lived Intangible Assets
The Company tests its trademarks and brand names with indefinite lives for impairment annually on the first day of the fourth quarter unless there are indications during an interim period that these assets are more likely than not to have become impaired. For trademarks and brand names with indefinite lives, impairment occurs when the carrying amount of an asset is greater than its estimated fair value. An impairment charge is recorded for the difference between the carrying amount and the fair value. The Company uses an income approach, the relief-from-royalty method, to estimate the fair value of its trademarks and trade names with indefinite lives. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. The determination of the fair values of trademarks and brand name assets with indefinite lives requires significant judgments in determining both the assets' estimated cash flows as well as the appropriate discount and royalty rates applied to those cash flows to determine fair value. Changes in such estimates or the application of alternative assumptions could produce different results. There have been no instances of impairment identified.
Goodwill
The Company tests its goodwill for impairment annually as of the first day of the fourth quarter unless there are indications during an interim period that these assets are more likely than not to have become impaired. The first step of the goodwill impairment test is to compare the fair value of each reporting unit to its carrying amount to determine if there is potential impairment. If the fair value of the reporting unit is less than its carrying value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss.
The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination at the date of the evaluation and the fair value was the purchase price paid to acquire the reporting unit.
The Company estimates the fair value of reporting units using a weighting of fair values derived from an income approach and a market approach. Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit (including unrecognized intangible assets) under the second step of the goodwill impairment test is inherently subjective in nature and often involves the use of significant estimates and assumptions based on known facts and circumstances at the time the Company performs the valuation. The use of different assumptions, inputs and judgments or changes in circumstances could materially affect the results of the valuation and could have a significant impact on whether or not an impairment charge is recognized and the magnitude of any such charge.
Income approach—To determine fair value, the Company uses a DCF approach for each of the reporting units. Under this approach, the Company estimates the future cash flows of each reporting unit and discounts these cash flows at a rate of return that reflects their relative risk. The cash flows
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—The Company and Summary of Significant Accounting Policies (Continued)
used in the DCF are consistent with the Company's long-range forecasts, and give consideration to historic and projected long-term business trends and strategies. The other key estimates and factors used in the DCF include, but are not limited to, discount rates, future sales volumes, revenue and expense growth rates, changes in working capital, capital expenditure forecasts, foreign exchange rates, currency devaluation, inflation, and a perpetuity growth rate.
Market approach—The Company uses the guideline public company method to select reasonably similar/guideline publicly traded companies for each of the Company's reporting units. Using the guideline public company method, the Company calculates earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples for each of the public companies using both historical and forecasted EBITDA figures. By applying these multiples to the appropriate historical and forecasted EBITDA figures for each reporting unit, fair value estimates are calculated.
Revenue Recognition
Sales are recognized when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment or the date of receipt by the customer and when all of the following have occurred: a firm sales arrangement exists, pricing is fixed and determinable, and collection is reasonably assured. Revenue includes shipping and handling costs, which generally are included in the list price to the customer. Taxes collected from customers and remitted to governmental authorities are not included in sales. A provision for payment discounts and product return allowances is recorded as a reduction of sales in the same period that the revenue is recognized.
The Company routinely commits to on-going and one-time trade promotion programs with customers, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons offered through various programs to customers and consumers. Accruals for expected payouts under these programs are included as accrued marketing and promotion in the accrued expenses and other liabilities line item in the Consolidated Balance Sheets and are recorded as a reduction of sales in the Statements of Comprehensive Loss.
Amounts received by the Company from the licensing of certain trademarks are recorded as deferred revenue on the Consolidated Balance Sheets and are recognized as revenue on a straight-line basis over the term of the licensing agreement when the underlying royalties are earned.
Cost of Products Sold
Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacturing of product, as well as manufacturing labor, depreciation expense, direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product, contract manufacturing costs, and provisions for inventory losses (including losses relating to excess and obsolete inventory). Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity as well as costs associated with developing and designing new packaging.
Selling and Administrative Expenses
Selling and administrative expense is primarily comprised of marketing expenses, selling expenses, administrative and other indirect overhead costs, depreciation and amortization expense on
65
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—The Company and Summary of Significant Accounting Policies (Continued)
non-manufacturing assets and other miscellaneous operating items. Non-advertising related components of the Company's total marketing spending include costs associated with consumer promotions, product sampling and sales aids, all of which are included in selling and administrative expenses.
Advertising Costs
Advertising and sales promotion costs are expensed as incurred. Costs associated with the Company's television, print, radio, internet and in-store campaigns are expensed when the advertising or promotion is published or presented to consumers. Costs associated with the Company's racing sponsorships and promotional events are expensed at the time or during the period of the race or promotional event.
Share Based Compensation
The Company has granted both time based stock option awards and performance based stock option awards that vest subject to a liquidity event (e.g., an initial public offering or change in control, as defined) and based upon the attainment of specified minimum returns on capital to Parent shareholders. The Company measures share based compensation associated with the time based awards based on their fair values on the dates they were granted. The expense is recognized by amortizing the fair value on a straight-line basis over the vesting period. Although the Company has estimated the fair value of its performance based stock option awards, given that the performance condition (a liquidity event) is not probable of occurrence, the Company has not to-date recognized any share based compensation expense attendant to these awards (see Note 14).
Employee Benefits
In November 2010, the Company established a defined contribution plan for its U.S. employees, which qualifies as a tax deferred savings plan under Section 401(k) of the Internal Revenue Code ("IRC" or the "Code"). Eligible U.S. employees may contribute a percentage of their pre-tax compensation, subject to certain IRC limitations. The plan provides for employer matching contributions of 100% of participant income deferrals to a maximum of $1,000 and employer contributions up to 10% of a participant's annual base salary, subject to limits prescribed under U.S. federal regulations.
Operating Leases
The Company recognizes rental expense for operating leases, including those with rent abatement and escalation provisions, on a straight-line basis over the applicable lease term.
Research and Development Costs
Research and development costs are charged to expense as incurred.
Deferred Financing Costs
Deferred financing costs represent legal, other professional and bank underwriting fees incurred in connection with the issuance of debt. Such fees are amortized over the life of the related debt using the interest method and are included in interest expense.
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—The Company and Summary of Significant Accounting Policies (Continued)
Income Taxes
The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to the differences between the financial statement amounts and their respective tax bases. Management reviews the Company's deferred tax assets to determine whether their value can be realized based upon available evidence. A valuation allowance is established when management believes that it is more likely than not that some portion or all of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Company's tax provision in the period of change. In addition to valuation allowances, the Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by accounting guidance on the accounting for uncertainty in income taxes. Amounts for uncertain tax positions are adjusted when new information becomes available or when positions are effectively settled.
None of the Company's goodwill is expected to be deductible for tax purposes.
The Company files a consolidated federal and certain state income tax returns with its Parent. Income taxes have been prepared on a separate return basis. The Company pays its tax liability on behalf of its Parent.
Recent Accounting Pronouncements
In February 2013 the FASB issued ASU No. 2013-04—Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (ASU 2013-04). The ASU requires reporting and disclosure about obligations resulting from joint and several liability arrangements within its scope for which the total amount of the obligation is fixed at the reporting date. For the Company, ASU 2013-04 is effective January 1, 2014 for fiscal year 2014 and interim periods therein. The guidance in ASU 2013-04 is to be applied retrospectively for those obligations resulting from joint and several liability arrangements within its scope that exist at January 1, 2014. Adoption of ASU 2013-04 is not expected to have a material impact on the Company.
In September 2013, Treasury and the Internal Revenue Service issued final regulations regarding the deduction and capitalization of expenditures related to tangible property. The final regulations under IRC Section 162, 167 and 263(a) apply to amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property and are generally effective for tax years beginning on or after January 1, 2014. We have evaluated these regulations and determined they will not have a material impact on our consolidated results of operations, cash flows or financial position.
The Company adopted the following pronouncements effective January 1, 2013:
In July 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11—Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward exists (ASU 2013-11). The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with an exception in certain circumstances where an unrecognized tax benefit, or portion thereof, is to be presented in the financial statements as a liability. ASU 2013-11 is effective for the Company January 1, 2014 for fiscal year 2014 and interim periods
67
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1—The Company and Summary of Significant Accounting Policies (Continued)
therein. The guidance in ASU 2013-11 is to be applied prospectively to all unrecognized tax benefits that exist at January 1, 2014. The Company adopted the provisions of ASU 2013-11 in 2013 (see Note 15).
In February 2013, the FASB issued ASU 2013-02—Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02). Substantially all of the information that this update requires already is required to be disclosed elsewhere in financial statements under U.S. GAAP. However, the new requirement to present information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on net income will present, in one place, information about significant amounts reclassified and, in some cases, cross-references to related footnote disclosures.
During July 2012, the FASB issued ASU 2012-02 Intangibles—Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02) which was intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how the Company tests those assets for impairment and to improve consistency in impairment testing guidance among long lived asset categories. Under ASU 2012-02, the Company has the option first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The Company also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. The Company will be able to resume performing the qualitative assessment in any subsequent period. The Company did not use the qualitative assessment during 2013.
In December 2011, the FASB issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11") to amend the requirement for an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. Adoption of 2011-11 did not have an impact on the Company.
Note 2—Related-Party Transactions
In conjunction with the Acquisition, the Company entered into a Transition Services Agreement ("TSA") with Clorox whereby Clorox would provide certain services, equipment and office space to the Company. Additionally under the TSA, the Company provided certain services to Clorox. Related party transactions and activities involving Clorox are not always consummated on terms equivalent to those that would prevail in an arm's-length transaction where conditions of competitive, free-market dealings may exist. On November 1, 2011, the Company completed the transition of its North American and export operations from Clorox provisioning to standalone operations. The Company completed the transition of certain international operations from Clorox in the second quarter of 2012 and terminated the remaining service components of the TSA.
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2—Related-Party Transactions (Continued)
Net expenses under the TSA were (in thousands):
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Cost of products sold |
$ | — | $ | — | $ | 6,616 | ||||
Selling and administrative expense |
— | 732 | 3,436 | |||||||
Research and development costs |
— | — | 621 | |||||||
| | | | | | | | | | | |
Total TSA expenses |
$ | — | $ | 732 | $ | 10,673 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Further, on conclusion of the TSA we entered into a subsequent arrangement with Clorox for continuation of services in Australia and New Zealand, including warehousing, logistics, customer service and information systems facilities and support. Expenses for these services were (in thousands):
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Cost of products sold |
$ | — | $ | 1,326 | $ | 1,154 | ||||
Selling and administrative expense |
— | 712 | 333 | |||||||
| | | | | | | | | | | |
Total TSA expenses |
$ | — | $ | 2,038 | $ | 1,487 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Avista
Avista and several of its employees together own approximately 99.3% of Parent, which is the sole stockholder of Intermediate, the Company's parent. As a result, Avista has the power to elect our board of directors and has the ability to exercise significant influence or control over the Company's operations.
The Company has entered into a monitoring agreement with Avista and affiliates of Avista whereby Avista provides services for a fixed fee of $1.0 million annually to the Company. Selling and administrative expenses, including out of pocket expenses related to this monitoring agreement were (in thousands):
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Avista monitoring agreement fees |
$ | 1,127 | $ | 1,055 | $ | 1,114 | ||||
In connection with the Acquisition and the issuance of its long-term debt, the Company paid $4.1 million to Avista and affiliates of Avista for consulting expenses and recorded these as deferred financing costs which are amortized over the term of the debt using the effective interest method. Related amortization expense was (in thousands):
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Amortization of Avista consulting expenses |
$ | 604 | $ | 605 | $ | 605 | ||||
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2—Related-Party Transactions (Continued)
Directors and Officers
In connection with the Acquisition and issuance of the Company's long-term debt, the Company incurred costs of $1.8 million for consulting expenses from individuals that later became directors and officers of the Company. Of this amount, $0.4 million was paid to certain directors and officers of the Company and $1.4 million was reinvested in the Company through the purchase of common stock. Of these consulting expenses, $1.3 million are included in acquisition related charges for the period from November 4, 2010 to December 31, 2010 with the remaining $0.5 million deferred and amortized over the term of the respective debt using the effective interest method. Related amortization expense was (in thousands):
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Amortization of directors' and officers' consulting expenses |
$ | 68 | $ | 68 | $ | 68 | ||||
The Company engaged Charles McIlvaine, a former Director of the Company, to provide services associated with corporate development and other strategic initiatives on a consulting basis. Pursuant to this arrangement the Company recorded charges of $0.1 million and $0.2 million in the years ended December 31, 2012 and 2011, respectively, in selling and administrative expenses.
Parent
In May 2011, the Company received $795,000 on behalf of its Parent related to the sale of the Parent's stock to certain of the Company's employees. In 2013, the Company repurchased from a certain employee $50,000 of stock as a result of termination. As of December 31, 2013 and December 31, 2012 the Company had $745,000 and $795,000, respectively, non-interest bearing and due on demand to the Company's Parent related to sales of the Parent's stock to the Company's employees.
Note 3—Accounts Receivable, net
The percentage of accounts receivable due from the Company's largest customers were:
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
First |
24 | % | 22 | % | |||
Second |
7 | % | 9 | % | |||
The percentage of the Company's net sales to the Company's largest customer (Wal-Mart) was:
| CONSOLIDATED | ||||
|---|---|---|---|---|
| Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
||
| 22% | 22% | 20% | ||
Sales to the Company's largest customer are principally made in North America. No other customers exceeded 10% of net sales in any period.
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3—Accounts Receivable, net (Continued)
The Company's allowance for doubtful accounts is summarized as follows (in thousands):
| |
Beginning Balance |
Provision for Doubtful Accounts |
Amounts Written- Off |
Other Deductions— Purchase Accounting |
Ending Balance |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Year ended December 31, 2013 |
$ | 682 | $ | 174 | $ | (408 | ) | $ | — | $ | 448 | |||||
Year ended December 31, 2012 |
390 | 370 | (78 | ) | — | 682 | ||||||||||
Year ended December 31, 2011 |
108 | 282 | — | — | 390 | |||||||||||
Note 4—Inventories
Inventories consisted of the following (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Finished goods |
$ | 28,400 | $ | 33,386 | |||
Raw materials and packaging |
7,896 | 11,087 | |||||
Allowances for obsolescence |
(2,253 | ) | (2,029 | ) | |||
| | | | | | | | |
|
$ | 34,043 | $ | 42,444 | |||
| | | | | | | | |
| | | | | | | | |
The Company's allowance for obsolescence is summarized as follows (in thousands):
| Year Ended December 31, |
Beginning Balance |
Provision for obsolescence |
Amounts Written- Off |
Other Deductions— Purchase Accounting |
Ending Balance |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2013 |
$ | 2,029 | $ | 3,599 | $ | (3,375 | ) | $ | — | $ | 2,253 | |||||
2012 |
2,051 | 1,195 | (1,217 | ) | — | $ | 2,029 | |||||||||
2011 |
20 | 2,480 | (449 | ) | — | 2,051 | ||||||||||
Note 5—Other Current Assets
Other current assets consisted of the following (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Current deferred taxes |
$ | 3,555 | $ | 4,315 | |||
Deferred financing costs |
1,767 | 1,843 | |||||
Prepaid income taxes |
2,453 | 3,963 | |||||
Other |
2,015 | 2,770 | |||||
| | | | | | | | |
|
$ | 9,790 | $ | 12,891 | |||
| | | | | | | | |
| | | | | | | | |
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Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6—Property, Plant and Equipment, net
Property, plant and equipment consisted of the following (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Land and improvements |
$ | 1,784 | $ | 1,405 | |||
Buildings |
3,769 | 3,679 | |||||
Machinery and equipment |
27,178 | 23,096 | |||||
Capitalized software |
12,182 | 12,040 | |||||
Construction in progress |
1,541 | 1,999 | |||||
| | | | | | | | |
|
46,454 | 42,219 | |||||
Less: accumulated depreciation |
(17,518 | ) | (10,746 | ) | |||
| | | | | | | | |
|
$ | 28,936 | $ | 31,473 | |||
| | | | | | | | |
| | | | | | | | |
Depreciation expense related to property, plant and equipment and amortization of capitalized software was (in thousands):
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||
Depreciation |
$ | 4,953 | $ | 4,639 | $ | 4,505 | ||||
Amortization of capitalized software |
2,017 | 1,605 | 220 | |||||||
| | | | | | | | | | | |
|
$ | 6,970 | $ | 6,244 | $ | 4,725 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Note 7—Goodwill and Intangible Assets, net
During the fourth quarter of 2012, the Company revised its pricing structure for intercompany purchases and sales of goods ("Intercompany Pricing"). The change in Intercompany Pricing had the effect of increasing the cost of intercompany purchases in the Company's Europe, Middle East and Africa reporting unit, its Australia and New Zealand reporting unit and its Latin America and Asia reporting unit, while increasing the value of intercompany sales from the Company's North America reporting unit. As a result of this change in Intercompany Pricing, when the Company determined the fair value of the assets and liabilities of its reporting units in the first step of the goodwill impairment test as described in Note 1 the fair value of the Company's Europe, Middle East and Africa reporting unit and its Australia and New Zealand reporting unit were lower than the carrying values of those reporting units. This decrease in value resulted primarily from the change in the Intercompany Pricing structure. After completing the second step of the goodwill impairment test as described in Note 1, the Company recorded a $24.1 million non-cash goodwill impairment charge, which is included in impairment of goodwill in the consolidated statement of comprehensive loss.
The Company also evaluated the recoverability of its customer relationships and licensing arrangements intangible assets as well as its tangible, long lived assets. When there is prevalent indication of impairment of a finite and long-lived asset or asset group, the Company tests for recoverability by comparing the carrying value of an asset or asset group to their undiscounted cash flows. However, the Company concluded there was not a prevalence of evidence any impairment was present at the asset group level for any of its finite lived assets.
72
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7—Goodwill and Intangible Assets, net (Continued)
Changes in the carrying amount of goodwill and intangible assets were as follows (in thousands):
| |
|
Trademarks and Other Intangible Assets | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Goodwill | Trademarks and Brands Not Subject to Amortization |
Customer Relationships Subject to Amortization |
Licensing Arrangements Subject to Amortization |
Total | |||||||||||
Balance at December 31, 2011 |
$ | 384,793 | $ | 99,176 | $ | 284,001 | $ | 4,998 | $ | 388,175 | ||||||
Amortization |
— | — | (35,401 | ) | (1,300 | ) | (36,701 | ) | ||||||||
Impairment |
(24,117 | ) | — | — | — | — | ||||||||||
Translation adjustments |
1,540 | 421 | 1,010 | — | 1,431 | |||||||||||
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 |
$ | 362,216 | $ | 99,597 | $ | 249,610 | $ | 3,698 | $ | 352,905 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Amortization |
— | — | (35,488 | ) | (1,300 | ) | (36,788 | ) | ||||||||
Acquisition, net |
580 | — | 1,823 | — | 1,823 | |||||||||||
Translation adjustments |
(3,970 | ) | (1,384 | ) | (3,086 | ) | — | (4,470 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2013 |
$ | 358,826 | $ | 98,213 | $ | 212,859 | $ | 2,398 | $ | 313,470 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Customer relationships and licensing arrangements subject to amortization are reported on the Consolidated Balance Sheet net of accumulated amortization of $114.7 million, and $79.3 million, at December 31, 2013 and 2012, respectively. The weighted average remaining amortization period for customer relationships and licensing arrangements subject to amortization is 6 years and 2 years, respectively. In the third quarter of 2013, the Company made an acquisition in Europe, increasing goodwill and customer relationships by $0.6 million and $1.8 million (which will be amortized over 7 years), respectively. Licensing royalties were $2.3 million, $3.0 million and $3.3 million in the years ended December 31, 2013, 2012 and 2011, respectively. Although licensing agreements may not be renewed for strategic or other reasons, the Company generally maintains and extends its existing license arrangements.
Expected future amortization expense for these intangible assets as of December 31, 2013 is as follows:
Fiscal Years
|
|
|||
|---|---|---|---|---|
2014 |
$ | 36,961 | ||
2015 |
36,759 | |||
2016 |
35,661 | |||
2017 |
34,173 | |||
2018 |
26,090 | |||
Thereafter |
49,117 | |||
| | | | | |
|
$ | 218,761 | ||
| | | | | |
| | | | | |
73
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8—Accrued Expenses and Other Current Liabilities
The following summarizes the Company's accrued expenses and other current liabilities (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Trade, sales promotion and advertising |
$ | 8,777 | $ | 9,022 | |||
Accrued interest |
8,029 | 8,191 | |||||
Accrued taxes |
50 | 3,421 | |||||
Compensation and benefits |
2,156 | 2,928 | |||||
Other |
4,443 | 5,009 | |||||
| | | | | | | | |
|
$ | 23,455 | $ | 28,571 | |||
| | | | | | | | |
| | | | | | | | |
Note 9—Debt
The following summarizes the Company's debt (in thousands):
| |
December 31, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Credit Facility | |
|
||||||||||
| |
|
Total Long-Term Debt |
|||||||||||
| |
Revolver | Term Loan | Senior Notes | ||||||||||
Balance |
$ | — | $ | 291,000 | $ | 275,000 | $ | 566,000 | |||||
Less: discount |
— | (5,018 | ) | (7,400 | ) | (12,418 | ) | ||||||
| | | | | | | | | | | | | | |
|
$ | — | 285,982 | 267,600 | 553,582 | ||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Less: current portion, net of discount |
(1,324 | ) | 1,253 | (71 | ) | ||||||||
| | | | | | | | | | | | | | |
Long-term portion, net of discount |
$ | 284,658 | $ | 268,853 | $ | 553,511 | |||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| |
December 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Credit Facility | |
|
||||||||||
| |
|
Total Long-Term Debt |
|||||||||||
| |
Revolver | Term Loan | Senior Notes | ||||||||||
Balance |
$ | — | $ | 294,000 | $ | 275,000 | $ | 569,000 | |||||
Less: discount |
— | (6,610 | ) | (8,530 | ) | (15,140 | ) | ||||||
| | | | | | | | | | | | | | |
|
$ | — | 287,390 | 266,470 | 553,860 | ||||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Less: current portion, net of discount |
(1,414 | ) | 1,135 | (279 | ) | ||||||||
| | | | | | | | | | | | | | |
Long-term portion, net of discount |
$ | 285,976 | $ | 267,605 | $ | 553,581 | |||||||
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
74
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9—Debt (Continued)
Credit Facility
In connection with the Acquisition on November 5, 2010, the Company entered into a credit agreement, among Intermediate, the Company, several lenders, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents parties thereto (the "Credit Facility"). Borrowings under the Credit Facility bear interest at a rate of the sum of (i) the greater of the London Interbank Offered Rate ("LIBOR") or 1.75% and (ii) 4.25%. The Credit Facility provided revolving credit and a Term Loan as follows:
Revolver—A secured $50.0 million revolving credit loan (the "Revolver"), which continues into November 2015. Further to interest as described above on the Revolver, an annual commitment fee of 0.75% is charged quarterly based on the average daily unused portion of the Revolver. No amounts were outstanding against the Revolver at December 31, 2013 and 2012.
Term Loan—A $300.0 million term loan (the "Term Loan") with quarterly principal payments of $0.8 million and the remaining principal maturing in November 2016.
In September 2012, the Company entered into an amendment of the Credit Facility revising the maximum consolidated leverage ratio and the minimum consolidated interest coverage ratio as applicable to the Company's $50.0 million Revolver. Costs associated with the amendment of $0.4 million have been deferred and are recorded as other current assets and other non-current assets on the Company's Consolidated Balance Sheets, and will be amortized to interest expense together with other of the Company's deferred financing costs using the effective interest method.
The Credit Facility is collateralized by substantially all of the assets of the Company. The Credit Facility is subject to certain covenants which restrict the payment of dividends, the Company's ability to incur indebtedness or liens, or make certain investments and requires the Company to maintain certain financial ratios. As of December 31, 2012, the Company was in compliance with all covenants related to the Credit Facility. The Company's payment obligations under the Credit Facility are guaranteed, jointly and severally, by all of the Company's wholly owned domestic subsidiaries. See Note 18 for financial information for the Company and its subsidiaries.
Senior Notes
In connection with the Acquisition on November 5, 2010, the Company issued 9.25% senior unsecured notes ("Senior Notes") in an aggregate principal amount of $275.0 million, which will mature in November 2018. The coupon interest on these notes is payable semiannually on May 1 and November 1.
Under terms of a registration rights agreement the Company entered into with respect to the Senior Notes, the Company agreed to use commercially reasonable efforts to complete an exchange offer related to the Senior Notes by April 28, 2012. Until the exchange offer was completed on August 23, 2012, additional interest of $0.3 million accrued on the Senior Notes that was paid November 2012.
The indenture that governs the Senior Notes is subject to certain covenants which restrict the payment of dividends, the Company's ability to incur indebtedness or liens, or make certain investments. The Company's payment obligations under the Senior Notes are guaranteed, jointly and
75
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9—Debt (Continued)
severally, by all of the Company's wholly owned domestic subsidiaries. See Note 18 for financial information for the Company and its subsidiaries.
Interest Expense
Interest expense associated with the Credit Facility and the Senior Notes including commitment fees for unused borrowings, and amortization of original issue discount and deferred financing costs was (in thousands):
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
Credit Facility |
||||||||||
Revolver |
$ | 864 | $ | 1,485 | $ | 1,076 | ||||
Term Loan |
19,954 | 20,110 | 20,096 | |||||||
Senior Notes |
27,089 | 26,980 | 26,907 | |||||||
Other |
117 | 312 | 11 | |||||||
| | | | | | | | | | | |
|
$ | 48,024 | $ | 48,887 | $ | 48,090 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Debt Maturities
Debt maturities are as follows as of December 31, 2013 (in thousands):
Fiscal Years
|
|
|||
|---|---|---|---|---|
2014 |
$ | 3,000 | ||
2015 |
3,000 | |||
2016 |
285,000 | |||
2017 |
— | |||
2018 |
275,000 | |||
| | | | | |
|
$ | 566,000 | ||
| | | | | |
| | | | | |
Deferred Financing Costs, net
Costs associated with the establishment of the Credit Facility and Senior Notes have been deferred and are recorded as other current assets and other non-current assets on the Company's Consolidated Balance Sheets as follows (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Balance |
$ | 9,979 | $ | 9,979 | |||
Less: accumulated amortization |
(4,814 | ) | (3,228 | ) | |||
| | | | | | | | |
|
5,165 | 6,751 | |||||
Less: current portion, net of amortization |
(1,767 | ) | (1,843 | ) | |||
| | | | | | | | |
Long-term portion, net of amortization |
$ | 3,398 | $ | 4,908 | |||
| | | | | | | | |
| | | | | | | | |
76
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10—Fair Value Measurement of Assets and Liabilities
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company established a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value which is intended to increase consistency and comparability and related disclosures. An asset or liability's classification is based on the lowest level of input that is significant to the fair value measurement and is disclosed in one of the following three categories:
Level 1—Quoted market prices in active markets for identical assets or liabilities. |
Level 2—Observable market-based inputs or unobservable inputs that are corroborated by market data. |
Level 3—Unobservable inputs reflecting the reporting entity's own assumptions. |
The Company's financial instruments consist of cash, trade accounts receivable, trade accounts payable and long-term debt. Due to their short-term maturity, the carrying amounts of cash, trade accounts receivable and trade accounts payable approximate their fair market values. The carrying and fair values of the Company's long-term debt were as follows (in thousands):
| |
December 31, 2013 | December 31, 2012 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||
Term loan |
$ | 285,982 | $ | 291,000 | $ | 287,390 | $ | 281,138 | |||||
Senior notes |
267,600 | 267,438 | 266,470 | 233,063 | |||||||||
The fair value of the Term Loan and Senior Notes was determined using broker quotes (Level 2). The broker quotes are determined on an analysis of discounted cash flows together with applicable forward LIBOR rates.
Note 11—Commitments and Contingencies
The Company leases various manufacturing, warehousing and office facilities under non-cancelable operating lease agreements which expire at various dates through 2019. The Company also has a number of third party service providers covering aspects of the administration of the business, including procurement, contract manufacturing, logistics, transportation, warehousing, software maintenance, systems support and hosting. In its marketing and brand support, the Company employs sponsorships, television, print, digital and online advertising. In sourcing of these services the Company generally enters into enforceable and legally binding agreements specifying all significant terms, including quantity, price and the approximate timing of the provision of the good or service to the Company.
77
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11—Commitments and Contingencies (Continued)
Under its existing non-cancelable contracts, as of December 31, 2013 the Company is required to pay minimum annual payments as follows (in thousands):
Year Ended December 31,
|
Operating Leases |
Procurement, Contract Manufacturing, Warehousing and Logistics Obligations |
Software Maintenance, Systems Support and Hosting |
Sponsorship and Media Agreements |
Advisory Services and Monitoring |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2014 |
$ | 1,573 | $ | 19,374 | $ | 1,065 | $ | 8,801 | $ | 1,000 | ||||||
2015 |
1,315 | 3,386 | 534 | 820 | 1,000 | |||||||||||
2016 |
1,165 | 3,125 | 143 | 845 | 1,000 | |||||||||||
2017 |
604 | 1,976 | — | — | 1,000 | |||||||||||
2018 |
515 | — | — | — | 1,000 | |||||||||||
Thereafter |
332 | — | — | — | 1,000 | |||||||||||
| | | | | | | | | | | | | | | | | |
|
$ | 5,504 | $ | 27,861 | $ | 1,742 | $ | 10,466 | $ | 6,000 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Operating lease arrangements—Certain of the Company's operating lease agreements contain rent abatement and rent escalation clauses. The Company expenses rent on a straight-line basis over the life its leases, which commences on the date the Company has the right to control leased property. Certain of the Company's facility operating lease agreements also provide for additional conditional payments in connection with the lease of the property (e.g., share of operating expenses, insurance, and real estate taxes). These additional payments are not included in the summary of above.
Rental expense for all operating leases was (in thousands):
| Years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||
| $ | 1,744 | $ | 2,773 | $ | 1,966 | |||
Procurement, contract manufacturing, warehousing and logistics obligations—The Company secures procurement capabilities, its warehousing facilities and attendant services, and logistics and transportation expertise under several contracts extending into 2017. These outsourcing arrangements typically provide for a base fee and variable costs determined with reference to volume or the provision of additional services, and terms providing for termination for convenience on 120 days' notice and the payment of stipulated fees and additional costs. Only fixed or base fees on an ongoing basis for the term of the contracted services are included in the above summary. Further, the Company has ongoing relationships with various suppliers who procure, manufacture and/or package the Company's products ("Contract Manufacturers"). Certain of the Company's Contract Manufacturers maintain title and control of raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to the Company's customers or third party distribution centers in accordance with agreed upon shipment terms. The Company purchases and maintains title and control of raw materials and components packaged by other of its Contract Manufacturers and is only obligated further for the services themselves. The Company typically does not have definitive minimum purchase obligations included in the contract terms with its Contract Manufacturers or other raw material or component suppliers. In the ordinary course of business, supply and service needs are communicated by the Company to its Contract Manufacturers based on orders and short-term
78
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11—Commitments and Contingencies (Continued)
projections, ranging typically three months. The Company is committed to purchase the products produced by the Contract Manufacturers based on the projections provided.
Software maintenance, systems support and hosting—The Company outsources much of its information technology infrastructure. These arrangements typically provide for a base or fixed fee and additional costs associated with added systems users and supplementary services, and terms providing for early contract termination with notice and the payment of stipulated fees. Only fixed or base fees on an ongoing basis for the term of the contracted services are included in the above summary.
Sponsorship and media agreements—The Company's marketing campaigns rely heavily on racing and rally sponsorships, promotional events, television, print and online advertising. Sponsorship commitments extend into 2016 and the Company's media plan extends through 2014.
Advisory Services and Monitoring Agreement—Under the Company's Advisory Services and Monitoring Agreement, Avista is providing the Company ongoing advisory services with respect to strategic business plans, corporate development and financial monitoring.
Note 12—Litigation and Other Legal Matters
The Company is subject to various lawsuits and claims relating to issues such as contract disputes, product liability, patents and trademarks, advertising, employee and other matters. Although the results of claims and litigation cannot be predicted with certainty, it is the opinion of management that the ultimate disposition of these matters will not have a material adverse effect, individually or in the aggregate, on the Company's financial position or results of operations.
In connection with the Acquisition, Clorox retained liability associated with a potential contract claim and the Company has agreed to indemnify and reimburse Clorox for 50% of the first $5.0 million in costs related to the contract claim. As of December 31, 2013 and 2012, the Company has accrued a $2.5 million long-term liability related to this contingency.
Note 13—Common Stock
The Company has one thousand shares of $0.01 par value common stock authorized, issued and outstanding at December 31, 2013 and 2012. Through Intermediate, Parent indirectly owns all of the Company's common stock. 99.3% of Parent's issued and outstanding common stock is owned by Avista, with the remaining aggregate 0.7% owned by certain members of management and the Board of Directors ("Management Stockholders") and purchased in connection with the Acquisition.
Repurchase right
Under the terms of the Stockholders' Agreement dated November 5, 2010 among Parent, Avista, and the Management Stockholders, Parent has the option but not an obligation to repurchase all of the shares of Parent common stock held by former Company employees whether acquired directly on Acquisition or issued pursuant to the exercise of stock options to former Company employees who terminate employment under certain circumstances. The purchase price of the Parent's call option as prescribed in the Stockholders' Agreement is to be determined through a valuation of Parent common stock on a minority, non-marketable interest basis or, under certain circumstances, based on cost, as defined therein. As there is no active market for Parent's common stock, the Company estimates the
79
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13—Common Stock (Continued)
fair value of its common stock as determined by the Board of Directors in good faith. If a participant in the 2010 AAG Stock Option Plan (see Note 14) were to terminate employment with the Company, the Parent's exercise of its repurchase right under the Stockholders' Agreement on shares received by the former Company employee through the exercise of stock options may require equity awards to be expensed in the Company's statement of comprehensive loss in the period in which the termination occurs.
Note 14—Share Based Compensation Plans
The following table presents details of total share based compensation expense that is included in the Company's statements of comprehensive loss (in thousands):
| |
Year ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
Cost of products sold |
$ | 15 | $ | 13 | $ | 13 | ||||
Selling and administrative expenses |
260 | 243 | 243 | |||||||
Research and development costs |
15 | 10 | 10 | |||||||
| | | | | | | | | | | |
Total share based compensation costs |
$ | 290 | $ | 266 | $ | 266 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
In November 2010, the Parent's board of directors approved the 2010 Equity Incentive Plan (the "2010 AAG Option Plan"), which authorized equity awards to be granted for up to 26,500,000 shares of Parent's common stock. Under the 2010 AAG Option Plan, certain management and key employees of the Company have been or may be granted a combination of time based and performance based options to purchase the Parent's common stock. Share based compensation expense related to employee grants under the 2010 AAG Option Plan has been reflected in these financial statements. As of December 31, 2013, equity awards for approximately 5,992,000 shares of Parent's common stock remain available for grant under the 2010 AAG Option Plan.
The Company utilizes an option pricing method employing a Black Scholes model to estimate the fair value of stock options granted. The following weighted average assumptions were used for time based and performance based option grants in the periods:
| |
Year ended December 31, 2013 |
Year ended December 31, 2012 |
Year ended December 31, 2011 |
|||
|---|---|---|---|---|---|---|
Expected life |
6.5 years | 6.5 years | 6.5 years | |||
Expected volatility |
34.0% | 35.0% | 50.0% | |||
Risk-free interest rate |
1.23% - 2.03% | 0.91% - 1.36% | 1.45% - 3.05% | |||
Dividend yield |
0% | 0% | 0% |
Time based and performance based options expire ten years from the date of grant. The expected life of the stock options on the option grants during the period is determined based on the average of the weighted vesting term and the contractual term of the options. The Company estimates stock option forfeitures based on historical data from Clorox and will adjust the rate to expected forfeitures when Company-specific experience indicates a different trend. Expected volatility for the period is determined consistently based on a five-company peer group, all of which have publicly traded stock.
80
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14—Share Based Compensation Plans (Continued)
The risk-free interest rate is based on the implied yield on a U.S. Treasury yield curve with a term similar to the expected remaining term of the option on the date of the grant. Dividend yield for the period is determined based on projected annual dividend payments.
The following table summarizes stock option activity for time based options under the 2010 AAG Option Plan for the periods presented (in thousands, except per share amounts):
| |
Number of Time based Shares |
Weighted- Average Exercise Price |
|||||
|---|---|---|---|---|---|---|---|
Non-vested at December 31, 2011 |
5,867 | 1.01 | |||||
Granted |
493 | 1.00 | |||||
Forfeited |
(354 | ) | 1.00 | ||||
Vested |
(1,298 | ) | 1.01 | ||||
| | | | | | | | |
Non-vested at December 31, 2012 |
4,708 | 1.02 | |||||
Granted |
935 | 1.00 | |||||
Forfeited |
(614 | ) | 1.00 | ||||
Vested |
(1,153 | ) | 1.01 | ||||
| | | | | | | | |
Non-vested at December 31, 2013 |
3,876 | 1.02 | |||||
Vested and exercisable at December 31, 2013 |
2,827 | 1.00 | |||||
| | | | | | | | |
Outstanding at December 31, 2013 |
6,703 | 1.01 | |||||
| | | | | | | | |
| | | | | | | | |
Under the 2010 AAG Option Plan, time based options vest ratably over the applicable service period, five years, on each anniversary of the date of grant and, regardless, immediately upon a change in control event, subject to certain conditions. The Company recognizes share based compensation expense on a straight-line basis over the vesting period. There have been no vested, time based stock options exercised to date under the 2010 AAG Option Plan and no cash received. The weighted average fair value of time based options granted in 2013, 2012 and 2011 was $0.15, $0.15 and $0.21, respectively. The aggregate fair value of options vested in 2013, 2012 and 2011 was $0.2 million, $0.3 million and $0.2 million, respectively. At December 31, 2013, the total amount of unrecognized compensation cost for time based options granted is $0.6 million. At December 31, 2013, vested and exercisable options and total time based options outstanding have weighted average remaining contractual terms of 7.1 and 7.8 years, respectively, and carry no intrinsic value.
81
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14—Share Based Compensation Plans (Continued)
The following table summarizes stock option activity for performance based options under the 2010 AAG Option Plan for the periods presented (in thousands, except per share and year amounts):
| |
Number of Performance based Shares |
Weighted- Average Exercise Price |
|||||
|---|---|---|---|---|---|---|---|
Non-vested at December 31, 2011 |
12,848 | 1.01 | |||||
Granted |
985 | 1.00 | |||||
Forfeited |
(971 | ) | 1.00 | ||||
| | | | | | | | |
Non-vested at December 31, 2012 |
12,862 | 1.01 | |||||
Granted |
1,869 | 1.00 | |||||
Forfeited |
(926 | ) | 1.00 | ||||
| | | | | | | | |
Non-vested and outstanding at December 31, 2013 |
13,805 | 1.01 | |||||
| | | | | | | | |
| | | | | | | | |
Under the 2010 AAG Option Plan, performance based options vest subject to a liquidity event (e.g., an initial public offering or change in control, as defined) and based upon the attainment of specified minimum returns on capital to Parent shareholders. Compensation expense on performance based option grants is not recognized until it is probable that the liquidity event will occur. For all periods the Company did not recognize share based compensation expense related to its performance based grants given that the performance condition (a liquidity event) has not occurred in any of those periods. The weighted average fair value of performance based options granted to date has been $0.06. At December 31, 2013, the total amount of unrecognized compensation costs and the weighted average remaining contractual term for performance based options was $0.8 million and 7.5 years, respectively.
Note 15—Income Taxes
The benefit provision for income taxes on loss before income taxes, by tax jurisdiction, consisted of the following (in thousands):
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
Current: |
||||||||||
Federal |
$ | 3,006 | $ | 1,425 | $ | 1,323 | ||||
State |
537 | 364 | 994 | |||||||
Foreign |
892 | 1,783 | 104 | |||||||
| | | | | | | | | | | |
Total current |
4,435 | 3,572 | 2,421 | |||||||
Deferred: |
||||||||||
Federal |
(11,874 | ) | (11,060 | ) | (12,069 | ) | ||||
State |
(2,818 | ) | 1,206 | (1,343 | ) | |||||
Foreign |
(518 | ) | (758 | ) | (714 | ) | ||||
| | | | | | | | | | | |
Total deferred |
(15,210 | ) | (10,612 | ) | (14,126 | ) | ||||
| | | | | | | | | | | |
Total |
$ | (10,775 | ) | $ | (7,040 | ) | $ | (11,705 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
82
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15—Income Taxes (Continued)
The components of loss before income taxes, by tax jurisdiction, were as follows (in thousands):
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
United States |
$ | (19,478 | ) | $ | (24,880 | ) | $ | (20,823 | ) | |
Foreign |
(4,667 | ) | (27,961 | ) | (8,550 | ) | ||||
| | | | | | | | | | | |
|
$ | (24,145 | ) | $ | (52,841 | ) | $ | (29,373 | ) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
A reconciliation of the statutory federal income tax rate to the Company's effective tax rate on loss before income taxes follows:
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
Statutory federal tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||
Non-deductible impairment of goodwill |
— | (12.3 | ) | — | ||||||
State taxes (net of federal tax benefits) |
6.8 | (1.9 | ) | 0.8 | ||||||
Foreign rate differential |
(1.3 | ) | (3.0 | ) | 2.9 | |||||
Domestic production activities deduction |
0.8 | 0.6 | — | |||||||
Acquisition related |
— | 0.4 | (0.6 | ) | ||||||
Change in Valuation Allowance |
(2.3 | ) | — | — | ||||||
UK interest deduction |
1.8 | — | — | |||||||
Other differences |
3.8 | (5.5 | ) | 1.7 | ||||||
| | | | | | | | | | | |
Effective tax rate |
44.6 | % | 13.3 | % | 39.8 | % | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company's effective benefit rate for 2013 differs from the statutory rate primarily due to state taxes. Other items impacting the Company's effective benefit rate relate primarily to differences in the foreign rates when compared to the statutory rate and adjustments resulting from the filing of the income tax returns and change in valuation allowance in certain foreign jurisdictions.
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax
83
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15—Income Taxes (Continued)
rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Deferred tax assets: |
|||||||
Accrual and reserves |
$ | 1,841 | $ | 1,718 | |||
Inventory costs |
2,064 | 2,743 | |||||
Acquisition related |
2,225 | 2,438 | |||||
Net operating losses |
1,806 | 1,190 | |||||
Other |
— | 42 | |||||
| | | | | | | | |
Total deferred tax assets |
7,936 | 8,131 | |||||
| | | | | | | | |
Deferred tax liabilities: |
|||||||
Fixed and intangible assets |
(93,388 | ) | (108,947 | ) | |||
| | | | | | | | |
Total deferred tax liabilities |
(93,388 | ) | (108,947 | ) | |||
| | | | | | | | |
Valuation Allowance |
(603 | ) | — | ||||
| | | | | | | | |
Net deferred tax liabilities |
$ | (86,055 | ) | $ | (100,816 | ) | |
| | | | | | | | |
| | | | | | | | |
The net deferred tax assets and liabilities are included in the balance sheets as follows (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
Current deferred tax assets |
$ | 3,555 | $ | 4,315 | |||
Non-current deferred tax liabilities |
(89,610 | ) | (105,131 | ) | |||
| | | | | | | | |
Net deferred tax liabilities |
$ | (86,055 | ) | $ | (100,816 | ) | |
| | | | | | | | |
| | | | | | | | |
The Company periodically reviews its deferred tax assets for recoverability. A valuation allowance is established when the Company believes that it is more likely than not that some portion or all of its deferred tax assets will not be realized. As of December 31, 2013, the Company had aggregate foreign net operating losses of approximately $10.0 million, which is comprised of losses of $8.2 million, $1.1 million, $0.5 million and $0.2 million in the United Kingdom, China, Puerto Rico, and other foreign jurisdictions, respectively. Losses in the United Kingdom are subject to an indefinite carryforward period; however, due to limitations on the ability to utilize such losses to offset income from only certain members of the United Kingdom group, a full valuation allowance has been provided on such losses. Losses in China and Puerto Rico are subject to five and ten year carryforward periods, respectively, and also carry a full valuation allowance.
In connection with Acquisition, Clorox has agreed to indemnify the Company for any taxes and interest associated with the periods prior to November 4, 2010.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2013 and December 31, 2012, the total balance of accrued interest and penalties related to uncertain tax positions was $0.1 million and $0.2 million, respectively.
84
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15—Income Taxes (Continued)
The following is a reconciliation of the beginning and ending amounts of the Company's gross unrecognized tax benefits (in thousands):
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
Unrecognized tax benefits—beginning of period |
$ | 379 | $ | 417 | $ | 586 | ||||
Gross increases—tax positions in prior periods |
625 | — | — | |||||||
Gross increase—current period tax positions |
— | 75 | — | |||||||
Statute of limitations lapse |
(51 | ) | — | — | ||||||
Settlements |
(88 | ) | (113 | ) | (169 | ) | ||||
| | | | | | | | | | | |
Unrecognized tax benefits—end of period |
$ | 865 | $ | 379 | $ | 417 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
As of December 31, 2013 and December 31, 2012, the total amount of unrecognized tax benefits was $0.9 million, and $0.4 million, respectively, which would affect the effective tax rate, if recognized. Of the 2013 and 2012 balances above, $0.2 million and $0.3 million, respectively, relates to periods which were included within Clorox tax returns. An offsetting receivable has been recorded in other assets for the Clorox indemnity as of December 31, 2013 and 2012. As of December 31, 2013, the Company had an uncertain tax position of $0.6 million which was offset against a corresponding net operating loss in accordance with ASU 2013-11.
The Company is subject to exam by the U.S. federal, state, and foreign tax authorities on its filings since 2010. During 2013, the U.S. federal tax return filed by the Company for 2010 was examined by the IRS, and resulted in no change.
In the twelve months succeeding December 31, 2013, the Company expects total unrecognized tax benefits to change by $0.1 million due to the lapse of statute of limitations on a portion of the unrecognized tax benefit indemnified by Clorox. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.
The Company provides for U.S. income taxes on the earnings of foreign subsidiaries unless the earnings are considered indefinitely invested outside of the U.S. No provision has been made for U.S. income taxes or foreign withholding taxes on $0.7 million of cumulative unremitted earnings of certain foreign subsidiaries as of December 31, 2013 due to existing tax law and the Company's intention to indefinitely reinvest these earnings outside the U.S. The Company determined that the calculation of the amount of unrecognized deferred tax liability related to these cumulative unremitted earnings was not practicable. If these earnings were distributed to the Company's U.S. entity, the Company would be subject to additional U.S. income taxes and foreign withholding taxes would be reduced by available foreign tax credits.
85
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 16—Retirement Income and Health Benefit Plans
Defined Contribution Plans
The Company established a defined contribution plan in the United States for the Company's employees that contain two components, a 401(k) component and a profit-sharing component, which qualifies as a tax deferred savings plan under Section 401(k) of the IRC ("The Plan"). Eligible U.S. employees may contribute a percentage of their pre-tax compensation, subject to certain IRC limitations. The Plan provides for employer matching contributions to be made up to $1,000 per year and profit sharing contributions at the discretion of the Board of Directors. The Company's aggregate cost of the defined contribution plans was (in thousands):
| Year Ended | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2013 | December 31, 2012 |
December 31, 2011 |
||||||||
| $804 | $ | 1,622 | $ | 1,137 | ||||||
Note 17—Segment Data
The Company manages its business through two geographic segments: North America and International.
The Company does not allocate its cost of products sold—acquisition related, acquisition related charges, amortization of intangible assets or interest expense between its North America and International segments but includes them in the tables below under Corporate in order to reconcile the North America and International segments' performance to the Company's Statements of Comprehensive Loss. All intersegment sales are eliminated and are not included in the Company's reportable segments' net sales.
The following summarizes the financial performance of the Company's operating segments (in thousands):
| |
Year ended December 31, 2013 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
North America | International | Corporate | Consolidated | |||||||||
Net sales |
$ | 215,165 | $ | 74,791 | $ | — | $ | 289,956 | |||||
Earnings (loss) before income taxes |
52,118 | 8,549 | (84,812 | ) | (24,145 | ) | |||||||
Capital expenditures |
3,848 | 457 | — | 4,305 | |||||||||
Depreciation and amortization |
6,133 | 841 | 36,788 | 43,762 | |||||||||
Share based compensation |
266 | 24 | — | 290 | |||||||||
86
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17—Segment Data (Continued)
| |
Year ended December 31, 2012 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
North America | International | Corporate | Consolidated | |||||||||
Net sales |
$ | 232,467 | $ | 74,001 | $ | — | $ | 306,468 | |||||
Earnings (loss) before income taxes(1) |
48,909 | (16,162 | ) | (85,588 | ) | (52,841 | ) | ||||||
Capital expenditures |
6,481 | 1,217 | — | 7,698 | |||||||||
Depreciation and amortization |
5,622 | 431 | 36,701 | 42,754 | |||||||||
Share based compensation |
256 | 10 | — | 266 | |||||||||
| |
Year ended December 31, 2011 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
North America | International | Corporate | Consolidated | |||||||||
Net sales |
$ | 212,114 | $ | 69,203 | $ | — | $ | 281,317 | |||||
Earnings (loss) before income taxes |
33,327 | 27,553 | (90,253 | ) | (29,373 | ) | |||||||
Capital expenditures |
11,986 | 1,025 | — | 13,011 | |||||||||
Depreciation and amortization |
7,454 | 1,107 | 36,701 | 45,262 | |||||||||
Share based compensation |
256 | 10 | — | 266 | |||||||||
The following is a summary of sales by product categories for the Company's North America segment (in thousands):
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
North America: |
||||||||||
Appearance products |
$ | 160,180 | $ | 171,592 | $ | 152,035 | ||||
Performance chemicals products |
54,985 | 60,875 | 60,079 | |||||||
| | | | | | | | | | | |
Total net sales |
$ | 215,165 | $ | 232,467 | $ | 212,114 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
The Company has not historically tracked net sales by product categories for its International segment.
The Company has three products that have accounted for 10% or more of total net sales:
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
Armor-All wipes |
18 | % | 17 | % | 18 | % | ||||
Armor-All protectant |
21 | % | 22 | % | 26 | % | ||||
STP fuel and oil additives |
16 | % | 18 | % | 19 | % | ||||
87
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17—Segment Data (Continued)
The Company has operations in the United States and abroad, including Canada, Europe, Australia and other international locations. Net sales based on geography are summarized as follows (in thousands):
| |
Year Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
December 31, 2013 |
December 31, 2012 |
December 31, 2011 |
|||||||
U.S. |
$ | 194,745 | $ | 210,086 | $ | 191,436 | ||||
Canada |
20,420 | 22,381 | 20,678 | |||||||
Europe |
25,229 | 24,518 | 22,270 | |||||||
Australia and rest of world |
49,562 | 49,483 | 46,933 | |||||||
| | | | | | | | | | | |
Total net sales |
$ | 289,956 | $ | 306,468 | $ | 281,317 | ||||
| | | | | | | | | | | |
| | | | | | | | | | | |
Long lived, tangible assets based on geography are summarized as follows (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
U.S. |
$ | 26,095 | $ | 28,079 | |||
Rest of world |
2,841 | 3,394 | |||||
| | | | | | | | |
Total long lived tangible assets |
$ | 28,936 | $ | 31,473 | |||
| | | | | | | | |
| | | | | | | | |
The Company does not allocate intangible assets or debt and its associated deferred financing costs to its North America and International segments but includes them as Corporate balance sheet items. The following summarizes total assets of the Company's operating segments (in thousands):
| |
December 31, 2013 |
December 31, 2012 |
|||||
|---|---|---|---|---|---|---|---|
North America |
$ | 123,964 | $ | 128,461 | |||
International |
30,823 | 30,424 | |||||
Corporate |
677,460 | 721,872 | |||||
| | | | | | | | |
Total assets |
$ | 832,247 | $ | 880,757 | |||
| | | | | | | | |
| | | | | | | | |
Note 18—Financial Information for the Company and Its Subsidiaries
The Company's payment obligations under the Senior Notes are guaranteed, jointly and severally, by all of the Company's wholly owned domestic subsidiaries that guarantee the obligations of the Company under the Credit Facility. These guarantees are full and unconditional, subject, in the case of the subsidiary guarantors, to customary release provisions. The Company conducts substantially all of its business through its subsidiaries. In servicing payments to be made on the Senior Notes and other indebtedness, and to satisfy other liquidity requirements, the Company will rely, in large part, on cash flows from these subsidiaries, mainly in the form of dividends, royalties and advances or payments on account of intercompany loan arrangements. The ability of these subsidiaries to make dividend payments to the Company will be affected by, among other factors, the obligations of these entities to their creditors, requirements of corporate and other law, and restrictions contained in agreements entered into by or relating to these entities.
88
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
The following supplemental consolidating financial information sets forth, on a combining basis, balance sheets, statements of comprehensive income (loss) and statements of cash flows for the Company, the guarantor subsidiaries, the non-guarantor subsidiaries and elimination entries necessary to consolidate the Company and its subsidiaries. This information is presented in lieu of separate financial statements and other related disclosures pursuant to Regulation S-X Rule 3-10 of the Securities Exchange Act of 1934, as amended, "Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered."
The operating and investing activities of the separate legal entities are fully interdependent and integrated. Accordingly, the results of the separate legal entities are not representative of what the operating results would be on a standalone basis.
89
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Balance Sheet
Year Ended December 31, 2013
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash |
$ | 14,843 | $ | — | $ | 6,410 | $ | — | $ | 21,253 | ||||||
Accounts receivable |
78 | 44,885 | 17,247 | — | 62,210 | |||||||||||
Inventory |
— | 24,553 | 9,490 | — | 34,043 | |||||||||||
Other current assets |
53,853 | (45,072 | ) | 1,009 | — | 9,790 | ||||||||||
| | | | | | | | | | | | | | | | | |
Total current assets |
68,774 | 24,366 | 34,156 | — | 127,296 | |||||||||||
Property, plant and equipment |
8,061 | 18,037 | 2,838 | — | 28,936 | |||||||||||
Goodwill |
— | 310,576 | 48,250 | — | 358,826 | |||||||||||
Intangible assets |
— | 276,461 | 38,198 | (1,189 | ) | 313,470 | ||||||||||
Investment in subsidiaries |
647,107 | 115,394 | — | (762,501 | ) | — | ||||||||||
Other assets |
3,632 | 87 | — | — | 3,719 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total assets |
$ | 727,574 | $ | 744,921 | $ | 123,442 | $ | (763,690 | ) | $ | 832,247 | |||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
LIABILITIES AND |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 169 | $ | 5,103 | $ | 2,856 | $ | — | $ | 8,128 | ||||||
Accrued expenses and other current liabilities |
10,063 | 8,263 | 5,129 | — | 23,455 | |||||||||||
Due to Clorox |
69 | 23 | (1 | ) | — | 91 | ||||||||||
Due to Parent |
745 | — | — | — | 745 | |||||||||||
Notes payable, current portion |
71 | — | — | — | 71 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total current liabilities |
11,117 | 13,389 | 7,984 | 32,490 | ||||||||||||
Notes payable, less current portion and discount |
553,511 | — | — | — | 553,511 | |||||||||||
Other liabilities |
2,500 | — | — | — | 2,500 | |||||||||||
Deferred income taxes |
5,121 | 84,425 | 64 | — | 89,610 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total liabilities |
572,249 | 97,814 | 8,048 | — | 678,111 | |||||||||||
Shareholder's equity |
155,325 | 647,107 | 115,394 | (763,690 | ) | 154,136 | ||||||||||
| | | | | | | | | | | | | | | | | |
Total liabilities and shareholder's equity |
$ | 727,574 | $ | 744,921 | $ | 123,442 | $ | (763,690 | ) | $ | 832,247 | |||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
90
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Balance Sheet
Year Ended December 31, 2012
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash |
$ | 1,477 | $ | — | $ | 2,729 | $ | — | $ | 4,206 | ||||||
Accounts receivable |
105 | 49,635 | 19,862 | — | 69,602 | |||||||||||
Inventory |
— | 31,718 | 10,726 | — | 42,444 | |||||||||||
Other current assets |
50,116 | (38,357 | ) | 1,132 | — | 12,891 | ||||||||||
| | | | | | | | | | | | | | | | | |
Total current assets |
51,698 | 42,996 | 34,449 | — | 129,143 | |||||||||||
Property, plant and equipment |
8,682 | 19,397 | 3,394 | — | 31,473 | |||||||||||
Goodwill |
— | 310,577 | 51,639 | — | 362,216 | |||||||||||
Intangible assets |
— | 307,401 | 45,887 | (383 | ) | 352,905 | ||||||||||
Investment in subsidiaries |
687,226 | 122,893 | — | (810,119 | ) | — | ||||||||||
Other assets |
4,943 | 77 | — | — | 5,020 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total assets |
$ | 752,549 | $ | 803,341 | $ | 135,369 | $ | (810,502 | ) | $ | 880,757 | |||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
LIABILITIES AND |
||||||||||||||||
Current liabilities: |
||||||||||||||||
Accounts payable |
$ | 888 | $ | 8,868 | $ | 3,402 | $ | — | $ | 13,158 | ||||||
Accrued expenses and other current liabilities |
12,397 | 7,215 | 8,959 | — | 28,571 | |||||||||||
Due to Clorox |
— | 22 | 115 | — | 137 | |||||||||||
Due to Parent |
795 | — | — | — | 795 | |||||||||||
Notes payable, current portion |
279 | — | — | — | 279 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total current liabilities |
14,359 | 16,105 | 12,476 | 42,940 | ||||||||||||
Notes payable, less current portion and discount |
553,581 | — | — | — | 553,581 | |||||||||||
Other liabilities |
2,500 | — | — | — | 2,500 | |||||||||||
Deferred income taxes |
5,121 | 100,010 | — | — | 105,131 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total liabilities |
575,561 | 116,115 | 12,476 | — | 704,152 | |||||||||||
Shareholder's equity |
176,988 | 687,226 | 122,893 | (810,502 | ) | 176,605 | ||||||||||
| | | | | | | | | | | | | | | | | |
Total liabilities and shareholder's equity |
$ | 752,549 | $ | 803,341 | $ | 135,369 | $ | (810,502 | ) | $ | 880,757 | |||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
91
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Statement of Comprehensive (Loss) Income
Year Ended December 31, 2013
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | — | $ | 235,897 | $ | 75,557 | $ | (21,498 | ) | $ | 289,956 | |||||
Cost of products sold |
— | 124,194 | 55,353 | (21,498 | ) | 158,049 | ||||||||||
| | | | | | | | | | | | | | | | | |
Gross profit |
— | 111,703 | 20,204 | — | 131,907 | |||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
19,316 | 10,903 | 10,475 | — | 40,694 | |||||||||||
Advertising costs |
— | 21,549 | 6,238 | — | 27,787 | |||||||||||
Research and development costs |
— | 2,463 | 11 | — | 2,474 | |||||||||||
Amortization of acquired intangible assets |
— | 30,181 | 6,607 | — | 36,788 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total operating expenses |
19,316 | 65,096 | 23,331 | — | 107,743 | |||||||||||
| | | | | | | | | | | | | | | | | |
Operating (loss) profit |
(19,316 | ) | 46,607 | (3,127 | ) | — | 24,164 | |||||||||
Non-operating expenses (income): |
||||||||||||||||
Interest expense |
48,015 | 1 | 8 | — | 48,024 | |||||||||||
Other (income) expense |
(72 | ) | 82 | 275 | — | 285 | ||||||||||
| | | | | | | | | | | | | | | | | |
(Loss) earnings before income taxes |
(67,259 | ) | 46,524 | (3,410 | ) | — | (24,145 | ) | ||||||||
(Benefit) provision for income taxes |
(19,194 | ) | 8,045 | 374 | — | (10,775 | ) | |||||||||
Equity earnings (loss) of subsidiaries, net of taxes |
34,695 | (3,784 | ) | — | (30,911 | ) | — | |||||||||
| | | | | | | | | | | | | | | | | |
Net (loss) earnings |
$ | (13,370 | ) | $ | 34,695 | $ | (3,784 | ) | $ | (30,911 | ) | $ | (13,370 | ) | ||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income: |
||||||||||||||||
Foreign currency translation gain (loss) |
(9,389 | ) | (9,389 | ) | (9,389 | ) | 18,778 | (9,389 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Comprehensive (loss) income |
$ | (22,759 | ) | $ | 25,306 | $ | (13,173 | ) | $ | (12,133 | ) | $ | (22,759 | ) | ||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
92
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Statement of Comprehensive (Loss) Income
Year Ended December 31, 2012
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | 154 | $ | 255,078 | $ | 79,693 | $ | (28,457 | ) | $ | 306,468 | |||||
Cost of products sold |
— | 137,302 | 58,725 | (28,457 | ) | 167,570 | ||||||||||
| | | | | | | | | | | | | | | | | |
Gross profit |
154 | 117,776 | 20,968 | — | 138,898 | |||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
23,788 | 13,434 | 11,084 | — | 48,306 | |||||||||||
Advertising costs |
— | 24,296 | 6,776 | — | 31,072 | |||||||||||
Research and development costs |
— | 2,211 | — | — | 2,211 | |||||||||||
Amortization of acquired intangible assets |
— | 30,181 | 6,520 | — | 36,701 | |||||||||||
Goodwill impairment |
— | — | 24,117 | — | 24,117 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total operating expenses |
23,788 | 70,122 | 48,497 | — | 142,407 | |||||||||||
| | | | | | | | | | | | | | | | | |
Operating (loss) profit |
(23,634 | ) | 47,654 | (27,529 | ) | — | (3,509 | ) | ||||||||
Non-operating expenses (income): |
||||||||||||||||
Interest expense |
48,887 | — | — | — | 48,887 | |||||||||||
Other (income) expense |
61 | (48 | ) | 432 | — | 445 | ||||||||||
| | | | | | | | | | | | | | | | | |
(Loss) earnings before income taxes |
(72,582 | ) | 47,702 | (27,961 | ) | — | (52,841 | ) | ||||||||
(Benefit) provision for income taxes |
(2,751 | ) | (5,312 | ) | 1,023 | — | (7,040 | ) | ||||||||
Equity earnings (loss) of subsidiaries, net of taxes |
24,030 | (28,984 | ) | — | 4,954 | — | ||||||||||
| | | | | | | | | | | | | | | | | |
Net (loss) earnings |
$ | (45,801 | ) | $ | 24,030 | $ | (28,984 | ) | $ | 4,954 | $ | (45,801 | ) | |||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income: |
||||||||||||||||
Foreign currency translation gain (loss) |
3,807 | 3,807 | 3,807 | (7,614 | ) | 3,807 | ||||||||||
| | | | | | | | | | | | | | | | | |
Comprehensive (loss) income |
$ | (41,994 | ) | $ | 27,837 | $ | (25,117 | ) | $ | (2,660 | ) | $ | (41,994 | ) | ||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
93
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Statement of Comprehensive (Loss) Income
Year Ended December 31, 2011
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | — | $ | 233,176 | $ | 77,870 | $ | (29,729 | ) | $ | 281,317 | |||||
Cost of products sold |
— | 123,721 | 59,122 | (29,729 | ) | 153,114 | ||||||||||
Cost of products sold—acquisition related |
— | 4,439 | — | — | 4,439 | |||||||||||
| | | | | | | | | | | | | | | | | |
Gross profit |
— | 105,016 | 18,748 | — | 123,764 | |||||||||||
Operating expenses: |
||||||||||||||||
Selling and administrative expenses |
17,475 | 11,766 | 10,999 | — | 40,240 | |||||||||||
Advertising costs |
— | 17,941 | 6,758 | — | 24,699 | |||||||||||
Research and development costs |
— | 2,307 | — | — | 2,307 | |||||||||||
Amortization of acquired intangible assets |
— | 30,181 | 6,520 | — | 36,701 | |||||||||||
Acquisition related charges |
1,020 | — | — | — | 1,020 | |||||||||||
| | | | | | | | | | | | | | | | | |
Total operating expenses |
18,495 | 62,195 | 24,277 | — | 104,967 | |||||||||||
| | | | | | | | | | | | | | | | | |
Operating (loss) profit |
(18,495 | ) | 42,821 | (5,529 | ) | — | 18,797 | |||||||||
Non-operating expenses (income): |
||||||||||||||||
Interest expense |
48,090 | — | — | — | 48,090 | |||||||||||
Other (income) expense |
(64 | ) | (95 | ) | 239 | — | 80 | |||||||||
| | | | | | | | | | | | | | | | | |
(Loss) earnings before income taxes |
(66,521 | ) | 42,916 | (5,768 | ) | — | (29,373 | ) | ||||||||
(Benefit) provision for income taxes |
(35,194 | ) | 24,099 | (610 | ) | — | (11,705 | ) | ||||||||
Equity earnings (loss) of subsidiaries, net of taxes |
13,659 | (5,158 | ) | — | (8,501 | ) | — | |||||||||
| | | | | | | | | | | | | | | | | |
Net (loss) earnings |
$ | (17,668 | ) | $ | 13,659 | $ | (5,158 | ) | $ | (8,501 | ) | $ | (17,668 | ) | ||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income: |
||||||||||||||||
Foreign currency translation loss |
(2,007 | ) | (2,007 | ) | (2,007 | ) | 4,014 | (2,007 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Comprehensive (loss) income |
$ | (19,675 | ) | $ | 11,652 | $ | (7,165 | ) | $ | (4,487 | ) | $ | (19,675 | ) | ||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
94
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2013
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||
Net earnings (loss) |
$ | (13,370 | ) | $ | 34,695 | $ | (3,784 | ) | $ | (30,911 | ) | $ | (13,370 | ) | ||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
6,066 | 34,194 | 7,586 | — | 47,846 | |||||||||||
Share based compensation |
290 | — | — | — | 290 | |||||||||||
Deferred income taxes |
765 | (15,589 | ) | 41 | — | (14,783 | ) | |||||||||
Equity (loss) earnings of subsidiaries, net of taxes |
(34,695 | ) | 3,784 | — | 30,911 | — | ||||||||||
Other |
— | 75 | (12 | ) | — | 63 | ||||||||||
Cash effect of changes, net of acquisition effects, in: |
||||||||||||||||
Receivables |
27 | 4,750 | 4,178 | — | 8,955 | |||||||||||
Inventory |
— | 7,165 | 2,111 | — | 9,276 | |||||||||||
Due from Clorox |
69 | — | (115 | ) | — | (46 | ) | |||||||||
Other current assets |
(5,782 | ) | 6,709 | (146 | ) | — | 781 | |||||||||
Prepaid taxes |
1,215 | — | — | — | 1,215 | |||||||||||
Accounts payable and accrued liabilities |
(3,052 | ) | (2,717 | ) | (4,853 | ) | — | (10,622 | ) | |||||||
Intercompany |
66,019 | (70,338 | ) | 2,981 | — | (1,338 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Net cash provided by operating activities |
17,552 | 2,728 | 7,987 | — | 28,267 | |||||||||||
| | | | | | | | | | | | | | | | | |
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(1,136 | ) | (2,728 | ) | (441 | ) | — | (4,305 | ) | |||||||
Acquisition, net |
— | — | (3,084 | ) | — | (3,084 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Net cash used in investing activities |
(1,136 | ) | (2,728 | ) | (3,525 | ) | — | (7,389 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Cash flows from financing activities: |
||||||||||||||||
Borrowings under revolver |
23,000 | — | — | — | 23,000 | |||||||||||
Payments on revolver |
(23,000 | ) | — | — | — | (23,000 | ) | |||||||||
Principal payments on notes payable and other |
(3,000 | ) | — | (611 | ) | — | (3,611 | ) | ||||||||
Advance from Parent |
(50 | ) | — | — | — | (50 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Net cash used in financing activities |
(3,050 | ) | — | (611 | ) | — | (3,661 | ) | ||||||||
| | | | | | | | | | | | | | | | | |
Effect of exchange rate on cash |
— | — | (170 | ) | — | (170 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Net increase in cash |
13,366 | — | 3,681 | — | 17,047 | |||||||||||
Cash at beginning of period |
1,477 | — | 2,729 | — | 4,206 | |||||||||||
| | | | | | | | | | | | | | | | | |
Cash at end of period |
$ | 14,843 | $ | — | $ | 6,410 | $ | — | $ | 21,253 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
95
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2012
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||
Net earnings (loss) |
$ | (45,801 | ) | $ | 24,030 | $ | (28,984 | ) | $ | 4,954 | $ | (45,801 | ) | |||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
5,651 | 33,958 | 7,204 | — | 46,813 | |||||||||||
Goodwill impairment |
— | — | 24,117 | — | 24,117 | |||||||||||
Share based compensation |
266 | — | — | — | 266 | |||||||||||
Deferred income taxes |
— | (11,360 | ) | 748 | — | (10,612 | ) | |||||||||
Equity (loss) earnings of subsidiaries, net of taxes |
(24,030 | ) | 28,984 | — | (4,954 | ) | — | |||||||||
Other |
— | 157 | — | — | 157 | |||||||||||
Cash effect of changes, net of acquisition effects, in: |
||||||||||||||||
Receivables |
661 | (7,214 | ) | (8,749 | ) | — | (15,302 | ) | ||||||||
Inventory |
— | (2,354 | ) | (2,840 | ) | — | (5,194 | ) | ||||||||
Due from Clorox |
(244 | ) | 11,455 | 653 | — | 11,864 | ||||||||||
Other current assets |
(40,890 | ) | 38,822 | 1,315 | — | (753 | ) | |||||||||
Accounts payable and accrued liabilities |
(2,885 | ) | 6,567 | 6,827 | — | 10,509 | ||||||||||
Book overdraft |
(1,987 | ) | — | — | — | (1,987 | ) | |||||||||
Income taxes payable |
31,173 | (35,531 | ) | (78 | ) | (4,436 | ) | |||||||||
Intercompany |
83,755 | (81,930 | ) | (820 | ) | (402 | ) | 603 | ||||||||
| | | | | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities |
5,669 | 5,584 | (607 | ) | (402 | ) | 10,244 | |||||||||
| | | | | | | | | | | | | | | | | |
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(1,453 | ) | (4,976 | ) | (1,269 | ) | — | (7,698 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Net cash used in investing activities |
(1,453 | ) | (4,976 | ) | (1,269 | ) | — | (7,698 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Cash flows from financing activities: |
||||||||||||||||
Borrowings under revolver |
64,001 | — | — | — | 64,001 | |||||||||||
Payments on revolver |
(64,001 | ) | — | — | — | (64,001 | ) | |||||||||
Principal payments on notes payable |
(3,000 | ) | — | — | — | (3,000 | ) | |||||||||
Debt financing costs |
(350 | ) | — | — | — | (350 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Net cash used in financing activities |
(3,350 | ) | — | — | — | (3,350 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Effect of exchange rate on cash |
611 | (608 | ) | (330 | ) | 402 | 75 | |||||||||
| | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash |
1,477 | — | (2,206 | ) | — | (729 | ) | |||||||||
Cash at beginning of period |
— | — | 4,935 | — | 4,935 | |||||||||||
| | | | | | | | | | | | | | | | | |
Cash at end of period |
$ | 1,477 | $ | — | $ | 2,729 | $ | — | $ | 4,206 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
96
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18—Financial Information for the Company and Its Subsidiaries (Continued)
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2011
| |
Issuer | Combined Guarantor Subsidiaries |
Combined Non- Guarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cash flows from operating activities: |
||||||||||||||||
Net earnings (loss) |
$ | (17,668 | ) | $ | 13,659 | $ | (5,158 | ) | $ | (8,501 | ) | $ | (17,668 | ) | ||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
4,316 | 33,319 | 7,627 | — | 45,262 | |||||||||||
Share based compensation |
266 | — | — | — | 266 | |||||||||||
Deferred income taxes |
(1,716 | ) | (12,410 | ) | — | — | (14,126 | ) | ||||||||
Equity (loss) earnings of subsidiaries, net of taxes |
(13,659 | ) | 5,158 | — | 8,501 | — | ||||||||||
Other |
— | 80 | 295 | 375 | ||||||||||||
Cash effect of changes, net of acquisition effects, in: |
||||||||||||||||
Receivables, net |
(615 | ) | (15,881 | ) | (2,438 | ) | — | (18,934 | ) | |||||||
Inventory |
— | (932 | ) | 1,904 | — | 972 | ||||||||||
Due from Clorox |
(820 | ) | (7,807 | ) | (1,426 | ) | — | (10,053 | ) | |||||||
Other current assets |
1,040 | (541 | ) | (975 | ) | — | (476 | ) | ||||||||
Book overdraft |
1,987 | — | — | — | 1,987 | |||||||||||
Accounts payable and accrued liabilities |
8,855 | (6,044 | ) | (512 | ) | — | 2,299 | |||||||||
Intercompany receivable / payable |
34,712 | (40,710 | ) | 5,612 | 386 | — | ||||||||||
Income taxes payable |
(35,142 | ) | 35,448 | — | — | 306 | ||||||||||
| | | | | | | | | | | | | | | | | |
Net cash (used in) provided by operating activities |
(18,444 | ) | 3,339 | 4,929 | 386 | (9,790 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Cash flows from investing activities: |
||||||||||||||||
Capital expenditures |
(8,647 | ) | (3,339 | ) | (1,025 | ) | — | (13,011 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Net cash used in investing activities |
(8,647 | ) | (3,339 | ) | (1,025 | ) | — | (13,011 | ) | |||||||
| | | | | | | | | | | | | | | | | |
Cash flows from financing activities: |
||||||||||||||||
Borrowings under revolver |
29,500 | — | — | — | 29,500 | |||||||||||
Payments on revolver |
(29,500 | ) | — | — | — | (29,500 | ) | |||||||||
Principal payments on notes payable |
(3,000 | ) | — | — | — | (3,000 | ) | |||||||||
Advance from Parent |
795 | — | — | — | 795 | |||||||||||
Debt financing costs |
(670 | ) | — | — | — | (670 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Net cash used in financing activities |
(2,875 | ) | — | — | — | (2,875 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
Effect of exchange rate on cash |
— | — | (704 | ) | (386 | ) | (1,090 | ) | ||||||||
| | | | | | | | | | | | | | | | | |
Net (decrease) increase in cash |
(29,966 | ) | — | 3,200 | — | (26,766 | ) | |||||||||
Cash at beginning of period |
29,966 | — | 1,735 | — | 31,701 | |||||||||||
| | | | | | | | | | | | | | | | | |
Cash at end of period |
$ | — | $ | — | $ | 4,935 | $ | — | $ | 4,935 | ||||||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
97
Armored AutoGroup Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 19—Quarterly Financial Information (Unaudited)
The following table presents selected unaudited financial information for the eight quarters in the two year period ended December 31, 2013. The Company's business is moderately seasonal. Sales are typically higher in the first half of the calendar year as the Company's customers purchase stock for the spring and summer seasons when weather is warmer in the northern hemisphere than in the fall and winter months. This pattern is largely reflective of our customers' seasonal purchasing patterns, as well as the timing of our promotional activities. Weather can also influence consumer behavior, especially for appearance products. Our appearance products sell best during warm, dry weather, and sell less strongly if weather is cold and wet. For these reasons, among others, the Company's results for any quarter are not necessarily indicative of future quarterly results and, accordingly, period-to-period comparisons should not be relied upon as an indication of future performance (in thousands).
| |
March 31, 2013 |
June 30, 2013 |
September 30, 2013 |
December 31, 2013 |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | 74,413 | $ | 80,075 | $ | 71,007 | $ | 64,461 | |||||
Gross profit |
33,928 | 37,736 | 32,524 | 27,719 | |||||||||
Income from operations |
10,939 | 4,093 | 6,102 | 3,030 | |||||||||
Net loss |
(506 | ) | (5,286 | ) | (2,275 | ) | (5,303 | ) | |||||
| |
March 31, 2012 |
June 30, 2012 |
September 30, 2012 |
December 31, 2012 |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales |
$ | 86,396 | $ | 82,695 | $ | 68,348 | $ | 69,029 | |||||
Gross profit |
43,306 | 38,565 | 28,620 | 28,407 | |||||||||
Income (loss) from operations(1) |
15,206 | 3,683 | 27 | (22,425 | ) | ||||||||
Net earnings (loss) |
1,106 | (4,103 | ) | (9,773 | ) | (33,031 | ) | ||||||
Note 20—Subsequent Events
On March 17, 2014, the Company paid $10.0 million to acquire a non-controlling equity interest in IDQ Acquisition Corp. ("IDQ") and also paid $1.2 million in transaction fees and closing costs. The transaction fees and closing costs included $0.3 million paid to a board member for services rendered in connection with the transaction. On the same date, Parent acquired a controlling equity interest in IDQ. In connection with the investment the Company entered into a Shared Services and Supply Agreement (the "Shared Services Agreement") with IDQ and Parent pursuant to which certain products and services will be provided on an arm's-length basis by one party to another, as agreed by the Company and IDQ, with the purpose of utilizing the assets and operations of each company to increase sales and lower the combined costs for the mutual benefit of both IDQ and us. In anticipation of the IDQ investment, on March 11, 2014, the Company entered into an amendment of the Credit Facility revising a defined term, Consolidated EBITDA. Consolidated EBITDA is used in the calculation certain financial condition covenants under the Credit Facility. The revision to the definition of Consolidated EBITDA excludes from Consolidated EBITDA fees and expenses incurred for the Company's investment in IDQ Acquisition Corp., the Company's implementation of a management services agreement with IDQ Acquisition Corp. and the Company's pursuit of cost savings, expense reductions and other operating improvements and synergies related to IDQ.
98
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management team, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2013, including controls and procedures to timely alert management to material information relating to the Company and its subsidiaries required to be included in the reports the Company files or submits under the Exchange Act. Based on such evaluation, our chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective.
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (1992 Framework). Based on this assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 31, 2013.
On May 30, 2013, the Board of Directors of Armored AutoGroup Inc. (the "Company") promoted Guy J. Andrysick from Executive Vice President, Sales & Marketing, to Executive Vice President and Chief Operating Officer. In this new role, Mr. Andrysick oversees Company research and development, operations, and sales and marketing. In connection with his new responsibilities, Mr. Andrysick's annual salary was increased to $408,750 and his option grant was increased by 350,000 options.
Pursuant to the Advisory Services and Monitoring Agreement, Avista Capital Holdings is entitled to an annual fee of $1.0 million as consideration for ongoing advisory services. For additional information concerning compensation of Avista Capital Holdings, see Item 13. "Certain Relationships and Related-Party Transactions, and Director Independence" and "Advisory services and monitoring agreement."
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Item 10. Directors, Executive Officers and Corporate Governance
MANAGEMENT
The following table sets forth the names, ages and positions of the executive officers and directors of the Company as of immediately following the closing of the IDQ Acquisition. Armored AutoGroup Parent Inc. ("Parent") is our parent company, and our Board of Directors (the "Board of Directors") mirrors the board of directors of Parent.
Name
|
Age | Position | |||
|---|---|---|---|---|---|
David P. Lundstedt |
61 | Chairman, President and Chief Executive Officer | |||
J. Andrew Bolt |
56 | Executive Vice President and Chief Financial Officer | |||
Guy J. Andrysick |
52 | Executive Vice President and Chief Operating Officer | |||
David F. Burgstahler |
45 | Director | |||
David Durkin |
45 | Director | |||
Jackson Phillips |
33 | Director | |||
Allen Yurko |
62 | Director | |||
Michael Klein |
56 | Director | |||
Christian Michalik |
45 | Director | |||
David P. Lundstedt is the Chairman and a member of our Board of Directors and President and Chief Executive Officer, a position he has held since November 2010. Prior to joining us, Mr. Lundstedt was president of Sun Products (a merger of Huish detergents and the Unilever North American laundry business) from September 2008 to January 2010. From February 2008 to September 2008, he served as President and Chief Executive Officer of Huish Detergents. Mr. Lundstedt has had a career extending over 30 years in the automotive aftermarket industry, including serving as President of the Consumer Products division of Honeywell International from 1997 to 2007 and as President and CEO of Prestone Products Corporation from 1994 to 1997. He serves on the board of directors of AireDock Systems. Mr. Lundstedt graduated with a Bachelor degree in Business and Marketing from the University of Illinois. Mr. Lundstedt was chosen as Chairman of Parent and our Board of Directors because of his extensive experience in the consumer products industry in senior positions. His prior leadership roles at consumer products companies provides him with key experience in the consumer products industry and contributes to his ability to make strategic decisions with respect to our business.
J. Andrew Bolt is Executive Vice President and Chief Financial Officer, a position he has held since August 2011. From November 2000 to December 2010, Mr. Bolt served as Executive Vice President, Chief Financial Officer and Director of American Safety Razor Company, a privately-held global wet shaving razor and blade manufacturer based in Cedar Knolls, NJ. American Safety Razor filed for Chapter 11 bankruptcy protection in July 2010 and was purchased by Energizer Holdings Inc. in November 2010. Mr. Bolt also held chief financial officer and other senior financial positions with Maple Leaf Foods USA Inc. and Maple Leaf Bakery Inc., US subsidiaries of a publicly- traded Canadian food company, Bidermann Industries, Inc., a privately- held apparel business in New York, NY and with Federal Resources Corporation, a publicly traded manufacturing, retail consumer and natural resources business in New York, NY. He holds a B.S. in Business Administration (Accounting) from Auburn University and M.A. in Accounting from The University of Alabama.
Guy J. Andrysick is Executive Vice President and Chief Operating Officer, a position he has held since May 2013. Prior to this and since joining us in January 2011 he held the position of Executive Vice President of Sales & Marketing. Prior to joining us, Mr. Andrysick was Senior Vice President for Honeywell's Consumer Products Group, a division of Honeywell International Inc. Mr. Andrysick
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joined the division of AlliedSignal that ultimately became Honeywell's Consumer Products Group in 1997. At Honeywell, Mr. Andrysick managed approximately 150 employees and was responsible for the marketing and sales of its automotive aftermarket products brands including Prestone ®, Fram ® and Autolite ®. He holds a B.S. in Business Administration from Wake Forest University.
David F. Burgstahler is a Director and the Chairman of our Compensation Committee. He was a founding partner of Avista in 2005 and, since 2009, has been President of Avista. Prior to forming Avista, he was a partner of DLJ Merchant Banking ("DLJMB"). He was at DLJ Investment Banking from 1995 to 1997 and at DLJMB from 1997 through 2005. Prior to that, he worked at Andersen Consulting (now known as Accenture) and McDonnell Douglas (now known as Boeing). He currently serves as a Director of AngioDynamics (Nasdaq: ANGO), ConvaTec, INC Research Holdings, Inc., Lantheus Medical Imaging, Strategic Partners, Inc., Vertical/Trigen Holdings, LLC and Visant Corporation. He previously served as a Director of a number of public and private companies, including Warner Chilcott plc (Nasdaq: WCRX) and BioReliance Holdings, Inc. He holds a Bachelor of Science in Aerospace Engineering from the University of Kansas and an M.B.A. from Harvard Business School. Mr. Burgstahler was chosen as a Director of Parent because of his strong finance and management background, with over 18 years in banking and private equity finance. He has extensive experience serving as a director for a diverse group of private and public companies.
David Durkin is a Director and the Chairman of our Audit Committee. He was one of the founding partners of Avista in 2005. Prior to forming Avista, Mr. Durkin was a partner of DLJMB. Mr. Durkin was at DLJ Investment Banking from 1996 to 2000 and DLJMB from 2000 to 2005. Prior to joining DLJ Investment Banking, Mr. Durkin worked as a public accountant for Arthur Andersen where he achieved the designation of CPA. Mr. Durkin currently serves as a Director of IWCO, Strategic Partners and Top-Co. He previously served as a Director of Anthony International, Arcade Marketing, Frontier Drilling ASA, Merrill Corporation, Prometheus Laboratories and Seabulk International. Mr. Durkin received a B.A. in Economics from Stanford University and an M.B.A. from The Wharton School. Mr. Durkin was chosen as a Director of Parent because of his strong finance, accounting and management background, with over 16 years in investment banking and private equity, and his experience serving as director of public and private companies.
Jackson Phillips is a Director and member of our Audit Committee. He is a Principal of Avista and was a founding member of Avista in 2005. Prior to forming Avista, Mr. Phillips was an investment professional with DLJ Merchant Banking during 2005. He also worked in the investment banking division of JP Morgan from 2002 to 2004. Mr. Phillips currently serves as a director for Zest Anchors and previously served as a director of Anthony International. Mr. Phillips holds a B.S. in Business Administration from the University of North Carolina at Chapel Hill and an M.B.A. from The Wharton School. Mr. Phillips was chosen as a director of the Company because of his strong finance and management background, with over 10 years in investment banking and private equity.
Allen Yurko is a Director and member of our Compensation Committee. He joined Avista in July 2010, where he is an Industrials Industry Executive, focused on investing in growth oriented industrial and business services companies. Prior to joining Avista, Mr. Yurko was an Industrial Partner at DLJMB from May 2007 to June 2010. From February 2002 to May 2007, he worked at Compass Partners, where he served as an Operating Partner and Director. Mr. Yurko was also the Chairman of three successful Compass Partners buy-outs; SSD Drives plc, FlaktWoods Ag, and Eco Group SpA. Mr. Yurko's public company career spans nearly 25 years, including early management positions with Eaton Corporation and Joy Manufacturing Company in the United States. His prior experience includes serving as Chief Executive Officer of both UK Industrials Group Siebe plc (London) and Invensys plc. He has served as a Director of 22 other public and private companies in 7 different countries and is currently on the Board of Directors of Guala Closures SpA and is Chairman of the Board of Top-Co Inc. and Telular Inc. Mr. Yurko holds a Bachelors of Business from Lehigh University
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and an M.B.A. from Baldwin- Wallace College. Mr. Yurko was chosen as a Director of Parent because of his extensive experience as an operator of a variety of industrial businesses, many of which had consumer facing components. He also has valuable financial experience after having served as the Chief Financial Officer and in other finance roles at several companies.
On March 17, 2014, Michael Klein was appointed as a member of our Board of Directors. Mr. Klein will become our Chief Executive Officer effective March 24, 2014. Mr. Klein previously was President, Chief Executive Officer and a Director of IDQ Holdings, Inc. Mr. Klein joined IDQ Holdings, Inc. in 2007 and led its merger with EF Products and the subsequent facility move to Garland, Texas. Mr. Klein formerly served as Chief Executive Officer of Murray's Discount Auto Stores, a 100+ store chain based out of Belleville, Michigan and now part of O'Reilly Auto Parts. Mr. Klein worked for Murray's Discount Auto Stores from 1978 to early 2005 in various capacities, including Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, President and Chairman of the Board. Prior to joining Murray's Discount Auto Stores, Mr. Klein was a Certified Public Accountant and Certified Financial Planner with the Michigan accounting firm of Gordon & Company. Mr. Klein graduated (with High Distinction) in 1979 from Wayne State University in Detroit and holds a B.S. in Business Administration.
On March 17, 2014, Cristian Michalik was appointed as a member of our Board of Directors. Mr. Michalik is a Managing Director of Kinderhook Industries and has been a director of IDQ Holdings Inc. since 2012. From 1999 through 2003, Mr. Michalik was a partner at Soros Private Equity Partners, a multi-billion dollar leveraged buyout fund sponsored by George Soros. From 1996 to 1999, Mr. Michalik was an investment manager with Capital Resource Partners, a middle market growth mezzanine investment firm based in Boston, MA. Prior to Capital Resource Partners, Mr. Michalik was an associate at Colony Capital, a real estate investment firm in Los Angeles. Mr. Michalik began his career as an M&A analyst at Salomon Brothers, Inc. Mr. Michalik graduated from Yale University and received his MBA with Distinction from Harvard Business School. Mr. Michalik serves on the Board of Directors of Wellcare Health Plans, Inc., Longevity Alliance and several other privately-held companies. He is also the Chairman of Clinical Research Advantage, Global Health and E4 Health. He has relevant investment experience in healthcare services, business services and light manufacturing. Mr. Michalik was chosen as a Director because of his extensive background in mergers and banking, and his experience serving as director of several other public and private companies.
Board of Directors
The Board of Directors is responsible for the management of our business. In connection with the closing of the IDQ Acquisition, the size of the Board of Directors was increased to seven members. The composition of our Board of Directors mirrors that of Parent's board of directors. Pursuant to the Amended and Restated Stockholders Agreement (the "Stockholders Agreement"), dated as of March 17, 2014 by and among Parent, Avista Capital Partners II, L.P., Avista Capital Partners (Offshore) II, L.P., Avista Capital Partners (Offshore) II-A, LLP and IDQ's former stockholders, described in Part III. Item 13—Certain Relationships and Related Transactions, and Director Independence Avista has the right to appoint five members of the Parent's board of directors. Pursuant to the Stockholders Agreement, KI-IDQ 2012 Holdings, LLC has the right to appoint one member of the Parent's board of directors so long as it (or its permitted transferees) continues to own 50% of the shares of Parent's capital stock it received in the IDQ Acquisition. Our then current Chief Executive Officer shall also serve as a member of the Board of Directors. Messrs. Burgstahler, Durkin, Phillips and Yurko were appointed by Avista pursuant to the Stockholders Agreement and, once Mr. Lundstedt ceases to serve as our CEO, Mr. Lundstedt will be appointed by Avista pursuant to the Stockholders Agreement. KI-IDQ 2012 Holdings, LLC appointed Mr. Michalik to serve on the Parent's board of directors pursuant to the Stockholders Agreement.
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Although not formally considered by the Board of Directors because our securities are not registered or traded on any national securities exchange, we believe that Mr. Michalik would be considered independent for the Board of Directors purposes based upon the listing standards of the New York Stock Exchange.
Board Committees
The Audit Committee is composed of Messrs. Durkin and Phillips. In light of our status as a closely held company and the absence of a public trading market for our common stock, Mr. Durkin has been designated by the Board of Directors the Company's "audit committee financial expert." The Compensation Committee is composed of Messrs. Burgstahler and Yurko.
Code of Ethics
We have adopted a code of conduct and ethics for all of our employees, including our principal executive, principal financial and accounting officer, and our controller, or persons performing similar functions, and each of the non-employee directors on our Board of Directors.
Item 11. EXECUTIVE COMPENSATION
The following discussion and tabular disclosure describes the material elements of compensation for our most highly compensated executive officers as of December 31, 2013 (collectively our named executive officers). Our named executive officers for 2013 were:
Employment Agreements and Arrangements
The only named executive officer for which we have an employment agreement is Mr. Lundstedt.
The term of the employment agreement was the two years following the Acquisition, with automatic extensions for one-year periods unless either Mr. Lundstedt or we elect not to renew. Pursuant to the employment agreement, so long as Mr. Lundstedt continues to serve as our Chief Executive Officer and Chairman of our Board of Directors, he will receive $650,000 in annual base salary, subject to any increases in base salary as may be determined from time to time at the sole discretion of the Compensation Committee of our Board of Directors. In addition, Mr. Lundstedt shall be eligible to receive an annual bonus award of at least 75% of his base salary based upon the achievement of certain performance targets. Mr. Lundstedt is also eligible to participate in our health, life and disability insurance, and retirement and fringe employee benefit plans on the same basis as those benefits are generally made available to our other senior executives.
If we terminate Mr. Lundstedt with cause, Mr. Lundstedt resigns without good reason or Mr. Lundstedt elects not to renew the employment agreement, then he will be entitled to receive his base salary through the date of termination and reimbursement for any unreimbursed business expenses properly incurred by Mr. Lundstedt prior to termination, so long as these claims are submitted within 30 days of termination. In the event of Mr. Lundstedt's resignation without good reason, he will also be entitled to such vested or accrued employee benefits as to which he is entitled under our employee benefit plans.
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If Mr. Lundstedt's employment terminates as a result of his death or if we terminate Mr. Lundstedt due to his physical or mental illness, injury or infirmity which is reasonably likely to prevent or prevents him from performing his essential job functions for 90 consecutive calendar days or an aggregate of 120 calendar days out of any consecutive twelve month period, then Mr. Lundstedt or his estate will be entitled to receive: (a) his base salary through the date of termination; (b) reimbursement for any unreimbursed business expenses properly incurred; (c) any vested or accrued employee benefits as to which he is entitled under our employee benefit plans; (d) the portion of his target annual bonus that has been earned but not paid for any fiscal year that ended prior to the date of termination; and (e) the pro-rata portion of his annual bonus for the fiscal year in which his employment was terminated based on actual results for such fiscal year payable at the same time bonuses are paid to our other senior executives.
If we terminate Mr. Lundstedt without cause, Mr. Lundstedt resigns with good reason or we elect not to renew the employment agreement, then he will be entitled to receive: (a) his base salary through the date of termination; (b) reimbursement for any unreimbursed business expenses properly incurred; (c) any vested or accrued employee benefits as to which he is entitled under our employee benefit plans; (d) the portion of his target annual bonus that has been earned but not paid for any fiscal year that ended prior to the date of termination; (e) the pro-rata portion of his annual bonus for the fiscal year in which his employment was terminated based on actual results for such fiscal year payable at the same time bonuses are paid to our other senior executives; (f) subject to Mr. Lundstedt's continued compliance with the non-competition, non-solicitation and confidentiality clauses within his employment agreement, continued payment of his base salary in accordance with our normal payroll practices for a period equal to twelve months following the date of termination; and (g) for a period equal to twelve months following the date of termination, continued life insurance and group medical coverage for Mr. Lundstedt and his eligible dependents upon the same terms as provided to our other senior executive officers and at the same coverage levels, except that such coverage shall cease upon Mr. Lundstedt becoming employed by another employer and eligible for life insurance and/or medical coverage with such other employer. Mr. Lundstedt shall only be entitled to receive the benefits described above in clause (d), (e), (f) and (g) to the extent that he executes an effective general release of claims against us.
In conjunction the IDQ Investment and the IDQ Acquisition, we entered into a Shared Services and Supply Agreement (the "Shared Services Agreement") with Parent, IDQ Acquisition Corp ("IDQ") and its subsidiaries. Pursuant to the Shared Services Agreement, among other things, AAG will be responsible for a portion of the compensation costs, severance and benefits costs and expenses (attributable to AAG as determined by Parent) associated with Mr. Klein's and Mr. Rooney's employment agreements.
Mr. Klein's employment agreement provides for an initial term of one year following the IDQ Acquisition, with automatic one day extensions such that the remaining term is always not less than one year. Pursuant to the employment agreement, so long as Mr. Klein continues to serve as our Chief Executive Officer, he will receive $650,000 in annual base salary, subject to any increases in base salary as may be determined from time to time in the sole discretion of the Compensation Committee of our Board of Directors. In addition, Mr. Klein shall be eligible to receive an annual bonus award with the target amount of such bonus equal to 100% of his base salary, subject to the achievement of specified performance targets. Mr. Klein is also eligible to participate in our health, life and disability insurance, and retirement and fringe employee benefit plans on the same basis as those benefits are generally made available to our other employees.
If (i) Parent terminates Mr. Klein for cause, (ii) Mr. Klein resigns without good reason, (iii) Mr. Klein's employment terminates as a result of his death or (iv) Parent terminates Mr. Klein for his inability to perform the material duties of his employment for a continuous period of 90 days or an
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aggregate period of 150 days during any consecutive 365 day period due to his incapacity due to physical or mental injury, infirmity or incapacity, then he will be entitled to receive: (a) his base salary through the date of termination; (b) accrued but unused vacation time as of the date of such termination; and (c) reimbursement for any unreimbursed business expenses properly incurred by Mr. Klein prior to termination.
If (i) Parent terminates Mr. Klein without cause or (ii) Mr. Klein resigns with good reason, then he will be entitled to receive: (a) cash severance equal to one year of base salary, commencing on the first payroll period on or following the 60th day after the date of termination, (b) a pro-rated bonus, (c) accrued but unused vacation time as of the date of such termination, (d) any properly incurred but unreimbursed business expenses through the date of such termination, (e) if Mr. Klein so timely elects, continued health benefits (to the extent permitted under applicable law and the applicable plan) through the first anniversary of the date of termination at Parent's expense, subject to continued copayment of premiums at the same level and cost to Mr. Klein as if Mr. Klein was an employee of the Company.
If Parent terminates Mr. Klein because Parent has failed to meet at least 90% of the budgeted EBITDA over a consecutive 18-month period, then Mr. Klein will be entitled to receive: (a) cash severance payments equal to six months of his base salary, commencing on or following the 60th day after the date of termination, (b) accrued but unused vacation time as of the date of such termination, and (c) any properly incurred but unreimbursed business expenses through the date of such termination.
Mr. Klein shall only be entitled to receive the benefits described in the above (except for terminations for cause or death or disability) to the extent that he executes an effective general release of claims against us.
Mr. Klein's employment agreement further contains the following restrictive covenants: (a) confidentiality covenant; (b) non-solicitation covenant for the employment period and 36 months following termination with respect to customers or suppliers of Parent and its current and future subsidiaries (the "Parent Group") who have been customers or suppliers of the Parent Group within 24 months prior to Mr. Klein's termination; (c) non-solicitation covenant for the employment period and 36 months following termination with respect to employees of the Parent Group who have been employed by the Parent Group within 12 months prior to any solicitation; (d) 36-month post-termination non-competition covenant covering current and potential business of the Parent Group; (e) non-disparagement covenant; and (f) employee inventions covenant.
In connection with the IDQ Acquisition, in his capacity as a former stockholder of IDQ, Michael Klein received consideration equal to (i) approximately $2.4 million in cash, (ii) 803,731 shares of Parent's common stock and (iii) 188 shares of Parent's Series A Preferred Stock.
Gerard Rooney was appointed as Executive Vice President, Operations effective March 24, 2014. Prior to that, Mr. Rooney was Chief Financial Officer of IDQ Holdings, Inc., which he joined in March 2002 as Chief Financial Officer. Mr. Rooney served as President of Interdynamics, Inc. before the merger of IDQ with EF Products in 2007 and was instrumental in IDQ's growth and development of key strategic initiatives. Prior to joining IDQ, Mr. Rooney was a Divisional Chief Financial Officer at Pennzoil-Quaker State Corporation, where, in addition to his duties as Chief Financial Officer, he also managed the integration of Medo Industries following its acquisition by Pennzoil-Quaker State. Prior to Pennzoil-Quaker State, Mr. Rooney was an investment fund controller at Stratum Group LP, a New York based financial services firm, was Financial Controller at Lotepro Corporation, a subsidiary of the German-based Linde AG, served in several senior financial positions with Amerada Hess Corporation,
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and was an auditor at KPMG Peat Marwick. Mr. Rooney is a Certified Public Accountant and holds his B.B.A. in Accounting from Pace University.
Mr. Rooney entered into an employment agreement with IDQ Acquisition Corp. on May 10, 2010. Pursuant to the Shared Services Agreement, AAG will be responsible for its pro rata portion of the compensation costs associated with Mr. Rooney's employment agreement.
Mr. Rooney's employment agreement provides for an initial term of one year, with automatic one day extensions such that the remaining term is always not less than one year. Pursuant to the employment agreement, so long as Mr. Rooney continues to serve as our Vice President of Operations, he will receive an annual base salary, currently $303,400, subject to any increases in base salary as may be determined from time to time in the sole discretion of the Compensation Committee of our Board of Directors. In addition, Mr. Rooney shall be eligible to receive an annual bonus award with the target amount of such bonus equal to 50% of his base salary, subject to the achievement of specified performance targets. Mr. Rooney is also entitled to certain other benefits under his existing employment agreement.
If (i) IDQ terminates Mr. Rooney for cause, (ii) Mr. Rooney resigns without good reason, (iii) Mr. Rooney's employment terminates as a result of his death or (iv) Parent terminates Mr. Rooney for his inability to perform the material duties of his employment for a continuous period of 90 days or an aggregate period of 150 days during any consecutive 365 day period due to his incapacity due to physical or mental injury, infirmity or incapacity, then he will be entitled to receive: (a) his base salary through the date of termination; (b) accrued but unused vacation time as of the date of such termination; and (c) reimbursement for any unreimbursed business expenses properly incurred by Mr. Rooney prior to termination.
If (i) IDQ terminates Mr. Rooney without cause or (ii) Mr. Rooney resigns with good reason, then he will be entitled to receive: (a) cash severance equal to the base salary that would otherwise be paid to Mr. Rooney for the remainder of the term (not to exceed one year base salary) had Mr. Rooney not otherwise terminated employment, commencing on the first payroll period on or following the 60th day after the date of termination, (b) a pro-rated bonus, (c) accrued but unused vacation time as of the date of such termination, (d) any properly incurred but unreimbursed business expenses through the date of such termination, (e) reimbursement of his COBRA premiums through the first anniversary of the date of termination.
If IDQ terminates Mr. Rooney because IDQ has failed to meet at least 90% of the budgeted EBITDA over a consecutive 18-month period, then Mr. Rooney will be entitled to receive: (a) cash severance payments equal to six months of his base salary, commencing on or following the 60th day after the date of termination, (b) accrued but unused vacation time as of the date of such termination, (c) reimbursement of his COBRA premiums through the first anniversary of the date of termination and (d) any properly incurred but unreimbursed business expenses through the date of such termination.
Mr. Rooney shall only be entitled to receive the benefits described in the above (except for terminations for cause or death or disability) to the extent that he executes an effective general release of claims against us.
Mr. Rooney's employment agreement further contains the following restrictive covenants: (a) confidentiality covenant; (b) non-solicitation covenant for the employment period and 36 months following termination with respect to customers or suppliers of IDQ or any of its subsidiaries or affiliates (the "Company Group") who have been customers or suppliers of the Company Group within 24 months prior to Mr. Rooney's termination; (c) non-solicitation covenant for the employment period and 36 months following termination with respect to employees of the Company Group who have been
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employed by the Company Group within 12 months prior to any solicitation; (d) 36-month post-termination non-competition covenant covering current and potential business of the Company Group; (e) non-disparagement covenant; and (f) employee inventions covenant.
In connection with the IDQ Acquisition, in his capacity as a former stockholder of IDQ, Gerard Rooney received consideration equal to (i) approximately $1.7 million in cash, (ii) 551,077 shares of Parent's common stock and (iii) 129 shares of Parent's Series A Preferred Stock.
Elements of Compensation
The Compensation Committee is generally charged with the oversight of our executive compensation program. The Compensation Committee is composed of Messrs. Burgstahler and Yurko. Our compensation program is heavily weighted towards performance based compensation, reflecting our philosophy of increasing our long-term value and supporting strategic imperatives. Total compensation and other benefits consist of the following elements:
We do not offer a defined benefit pension plan. The Compensation Committee supports a competitive employee benefit package, but does not support executive perquisites or other supplemental programs targeted to executives.
Base Salary
Base salaries are intended to provide reasonable and competitive fixed compensation for regular job duties and are established by the Chief Executive Officer in consultation with the Compensation Committee for key executive hires. The level of compensation for any individual is influenced by what similarly situated officers of similarly sized consumer products companies are paid and also recognizes the level of responsibility associated with the position the executive is assuming, the experience level of the employee and other subjective factors.
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Annual Cash Incentive Compensation
On March 27, 2012, the Compensation Committee approved an Incentive Bonus Plan for our employees. The purpose of the Incentive Bonus Plan is to annually recognize and reward employees for their contribution to the performance and overall increased profitability and growth of the company. It provides rewards and recognition based on achievement of the Company's designated annual financial targets. An employee's capacity for their position to measurably impact the success of the organization in their job position is a criterion for the level of participation in the plan. Bonus levels are set as a percentage of base salary and are established based upon the scope of an individual's job (the "Target"). The Chief Executive Officer makes the final determination of participant eligibility.
The primary measurement used to determine bonus awards is consolidated earnings before interest, tax, depreciation and amortization ("EBITDA"). All participants will have a minimum of 50% of their bonus based on EBITDA. Based on position responsibilities, individual plan design may also contain additional target metrics. EBITDA may be adjusted by the Board of Directors to exclude the impact of non-recurring items.
Each year, the Compensation Committee will approve a Base Business Plan and a Stretch Business Plan for EBITDA. The Chief Executive Officer will approve the Base Business Plan and Stretch Business Plan targets for any other target metrics. All performance targets will be established no later than ninety days following the commencement of the applicable fiscal year. Financial performance metrics (EBITDA and other financial metrics, if applicable) will be weighted based on job responsibility and scope. Annually, the Chief Executive Officer will approve the weighting of these metrics for all program participants.
The Company will use the approved Base Business Plan and Stretch Business Plan targets to determine the incremental amount of EBITDA dollar growth required for an additional one percent increase in bonus payout above the Base Business Plan EBITDA. Other financial metrics used for bonus calculation will work in a similar fashion.
The Compensation Committee must approve the proposed bonus payout subsequent to the finalization of year end results. Bonus awards will be paid within a reasonable period of time following such approval. Payment of any bonus amount related to performance in excess of the Stretch Business Plan or 200% of a target bonus in a given year will be deferred until the next year. The deferred bonus will be deemed earned in the subsequent year if the Company achieves at least 90% of the actual Base Business Plan EBITDA from the prior year. If the deferred bonus is earned, it will be paid in conjunction with the subsequent year bonus or as approved by the Compensation Committee. If the subsequent year of EBITDA is less than 90% of the prior year's actual EBITDA, the deferred portion of the prior year's bonus is forfeited. Deferred bonuses will earn interest at the Company's cash balance floating interest rate.
Long-Term Equity Incentive Awards
In connection with the Acquisition, the Board of Directors approved and adopted the 2010 Equity Incentive Plan (the "2010 Equity Plan"), which allows grants of options, stock appreciation rights, restricted stock, dividend equivalents or other stock-based awards of Parent. As determined by our Compensation Committee, non-employee directors, officers and employees of, and consultants to us and our subsidiaries will be eligible for grants under the 2010 Equity Plan. The purpose of the 2010 Equity Plan is to:
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Although we look at competitive long-term equity incentive award values when assessing our compensation programs, we do not make annual executive option grants because, following the Acquisition, we issued large upfront stock option grants that vest over time and with the achievement of certain performance goals in lieu of annual grants. The Compensation Committee believes these stock option grants establish performance objectives and incentives and help align our executives' interests with the interests of the stockholders in fostering long-term value. They also motivate sustained increases in our financial performance and help ensure that the investors have received an appropriate return on their invested capital before executive officers receive significant value from these options.
The maximum number of Parent shares available for issuance under the 2010 Equity Plan is 26,500,000 which may be either authorized and unissued shares or shares held in or acquired for our treasury. In general, if awards under the 2010 Equity Plan for any reason are cancelled, forfeited, expired or terminated, shares covered by such awards will be available for the grant of awards under the 2010 Equity Plan.
The Compensation Committee has full authority to administer and interpret the 2010 Equity Plan, including the power to determine the form, amount and other terms and conditions of awards. Awards granted under the 2010 Equity Plan will be evidenced by award agreements (which need not be identical) that provide additional terms, conditions, restrictions and/or limitations covering the grant of the award. Except as otherwise provided in the applicable award agreement, a participant has no rights as a stockholder with respect to shares covered by any award until the participant becomes the record holder of such shares. The Compensation Committee, in its sole discretion, may provide in an award agreement that such award is subject to cancellation, in whole or in part, due to violation of covenants relating to non-competition, non-solicitation, non-disclosure and certain other activities that conflict with, or are adverse to, our interests. Notwithstanding any other provision of the 2010 Equity Plan, the Board of Directors may at any time amend any or all of the provisions of the 2010 Equity Plan, or suspend or terminate it entirely, retroactively or otherwise, subject to certain limitations. Awards granted under the 2010 Equity Plan are generally non-transferable (other than by will or the laws of descent and distribution) except that the Compensation Committee may provide for the transferability awards to certain family members and related trusts, partnerships and limited liability companies.
In 2013, the Compensation Committee approved grants of options to Messr. Andrysick under the 2010 Equity Plan. The options have an exercise price not less than fair value on the date of grant. Since our common stock is not currently traded on a national securities exchange, fair value is determined reasonably and in good faith by the Board of Directors.
Generally, the options have a ten-year term and are subject to vesting that is either based on the passage of time (the "Time Vesting Options") or performance targets based on returns achieved by our equity investors (the "Performance Vesting Options"). The combination of Time Vesting Options and Performance Vesting Options is designed to compensate our executive officers, including our named executive officers, for their long-term commitment to us. They are also designed to motivate sustained increases in our financial performance and help ensure that the investors have received an appropriate return on their invested capital before executive officers receive significant value from these options.
The Time Vesting Options are granted to aid in retention. Consistent with this goal, the Time Vesting Options granted to Mr. Lundstedt vests ratably on the grant date over the following five years and are subject to forfeiture or acceleration upon the occurrence of certain events. The Performance
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Vesting Options are intended to motivate the realization of financial returns in line with our equity investors' expectations. As such, our Performance Vesting Options vest upon the achievement of certain financial return targets for our equity investors.
For additional information concerning the options awarded in 2013, see "—Summary Compensation Table" and "—Outstanding Equity Awards at 2013 Fiscal Year-End."
Other Benefits
Retirement Plans
In order to attract, retain and pay market levels of compensation, we aim to provide benefits to our named executive officers that are consistent with market practices. We offer a 401(k) qualified defined contribution retirement plan for U.S.-based employees, including named executive officers, with a dollar-for-dollar employer match, up to $1,000 per year on any pre-tax or Roth 401(k) contributions. In addition, we may make additional discretionary payments annually to eligible employees. Retirement benefits outside the U.S. offer an employer contribution, with contributions varying by country.
Ownership Guidelines
In the event of exercise of an option grant, the resulting shares of Parent that are issued are subject to the provisions of the Stockholders Agreement which, among other things, restricts the transferability of such shares in order to ensure alignment with our equity investors. We do not maintain formal ownership guidelines.
Severance and Change in Control Benefits
As noted above, Mr. Lundstedt has entered into an employment agreement which details, among other things his rights upon a termination of employment in exchange for non-competition, non-solicitation and confidentiality covenants. See "—Potential Payment Upon Termination or Change in Control."
We believe that reasonable severance benefits are appropriate in order to be competitive in our executive retention efforts. These benefits reflect the fact that it may be difficult for such executive to find comparable employment within a short period of time. We also believe formalized severance arrangements are at times a competitive requirement to attract the required talent for the role.
Tax and Accounting Implications
We were not subject to Section 162(m) of the Internal Revenue Code, as amended in 2010. The Compensation Committee will consider the impact of Section 162(m) in the design of its compensation strategies annually. Under Section 162(m), compensation paid to executive officers in excess of $1.0 million cannot be taken by us as a tax deduction unless the compensation qualifies as performance based compensation. We have determined, however, that we will not necessarily seek to limit executive compensation to amounts deductible under Section 162(m) if such limitation is not in the best interests of our stockholders. While considering the tax implications of its compensation decisions, the Compensation Committee believes its primary focus should be to attract, retain and motivate executives and to align the executives' interests with those of our stockholders.
The Compensation Committee operates its compensation programs with the good faith intention of complying with Section 409A of the Internal Revenue Code. We account for stock based payments with respect to our long-term equity incentive award programs in accordance with the requirements of Accounting Standards Codification 718.
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Summary Compensation Table
The following table sets forth certain information with respect to compensation for the years ended December 31, 2013 and 2012 earned by or paid to our named executive officers.
Name and Principal Position
|
Year | Salary ($) |
Bonus ($) |
Option Awards ($) |
Non-Equity Incentive Plan Compensation ($) |
All Other Compensation ($) |
Total ($) |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
David P. Lundstedt |
2013 | $ | 650,000 | $ | 71,204 | $ | — | $ | — | $ | 28,056 | (1) | $ | 749,260 | ||||||||
Chairman, President and |
2012 | 650,000 | — | — | — | 27,556 | (1) | 677,556 | ||||||||||||||
Chief Executive Officer |
||||||||||||||||||||||
J. Andrew Bolt |
2013 |
331,500 |
34,835 |
— |
— |
26,876 |
(2) |
393,211 |
||||||||||||||
Executive Vice President, |
2012 | 326,500 | — | — | — | 81,626 | (2) | 408,126 | ||||||||||||||
Chief Financial Officer |
||||||||||||||||||||||
Guy J. Andrysick |
2013 |
389,519 |
44,463 |
31,872 |
— |
27,009 |
(3) |
492,863 |
||||||||||||||
Executive Vice President, |
2012 | 356,394 | — | — | — | 26,448 | (3) | 382,842 | ||||||||||||||
Chief Operating Officer |
||||||||||||||||||||||
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Outstanding Equity Awards at 2013 Fiscal Year-End
The following table includes certain information with respect to options held by the named executive officers as of December 31, 2013.
| |
Option Awards | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Plan Category
|
Number of Securities Underlying Unexercised Options (#) Exercisable |
Number of Securities Underlying Unexercised Options (#) Unexercisable |
Option Exercise Price ($) |
Option Expiration Date |
|||||||
David P. Lundstedt: |
|||||||||||
Stock Options |
1,060,000 | 4,240,000 | $ | 1.00 | 11/4/2020 | ||||||
J. Andrew Bolt: |
|||||||||||
Stock Options |
282,667 | 1,837,333 | 1.00 | 11/14/2021 | |||||||
Guy J. Andrysick: |
|||||||||||
Stock Options |
353,333 | 2,646,667 | 1.00 | 1/31/2021 and 5/20/2023 | |||||||
Option Exercises and Stock Vested in 2013
The named executive officers did not exercise any options during 2013. We do not offer any stock awards, other than stock options, from which vesting would occur. During the year ended December 31, 2013, 1,060,000, 282,667 and 353,333 options were granted to Messrs. Lundstedt, Bolt and Andrysick vested, respectively.
2013 Pension Benefits
We do not offer our executives or others a pension plan. Retirement benefits are limited in the U.S. to participation in our 401(k) plan with a dollar-for-dollar (100%) employer match up to $1,000 per year on any pre-tax or Roth 401(k) contributions. In addition, we may make additional payments to eligible employees under a profit sharing program. Retirement benefits outside of the U.S. offer an employer contribution, varying by country.
Potential Payment Upon Termination or Change in Control
The information below describes and quantifies certain compensation that would become payable under certain named executive officer's employment agreements if, as of December 31, 2013, his employment had terminated or there was a change in control. Due to the number of factors that affect the nature and amount of any benefits provided upon the events discussed below, any actual amounts paid or distributed may be different. Factors that could affect these amounts include the timing during the year of any such event.
| |
Termination with Cause or quit without Good Reason |
Termination without Cause or quit with Good Reason |
Change in Control |
Death or Disability |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
David P. Lundstedt |
|||||||||||||
Cash Severance Payments(1) |
$ | — | $ | 650,000 | $ | — | $ | — | |||||
Employee benefits(2) |
— | — | — | — | |||||||||
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2010 Equity Plan
The Armored AutoGroup Parent Inc. 2010 Incentive Equity Plan and each individual Stock Option Agreement provides for accelerated vesting of both Time Vesting Options and Performance Vesting Options granted under the 2010 Equity Plan upon a change of control and, as to Performance Vesting Options, if net cumulative cash proceeds received by our investors exceed certain multiples of their initial investment. If such a change in control occurred on December 31, 2013, each named executive officer's unvested Time Vesting Options and Performance Vesting Options would immediately vest and become exercisable. The aggregate dollar value of unvested stock options held by such named executive officers on December 31, 2013 is as follows:
Name
|
Option Aggregate Dollar Value(1) |
|||
|---|---|---|---|---|
David P. Lundstedt |
$ | — | ||
J. Andrew Bolt |
— | |||
Guy J. Andrysick |
— | |||
Director Compensation
Director compensation with regard to 2013 is as follows:
Our directors are reimbursed for any expenses incurred in connection with their service.
We pay Avista a management fee of $1.0 million plus out-of-pocket expenses annually pursuant to the Advisory Services and Management Agreement, dated as of November 5, 2010. See Part III. Item 13. Certain Relationships and Related Transactions, and Director Independence.
Compensation Committee Interlocks and Insider Participation
During 2013, the members of our compensation committee were Messrs. Burgstahler and Yurko. Mr. Burgstahler is the President of Avista. Mr. Yurko is an Industry Executive of Avista. Avista provides us with advisory services pursuant to an advisory services and monitoring agreement and has entered into other transactions with us. See Part III. Item 13. Certain Relationships and Related Transactions, and Director Independence.
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Compensation Committee Report
Our compensation committee has reviewed and discussed the "Compensation Discussion and Analysis" section, as set forth above, by our management. Based upon this review and discussion, the compensation committee recommended to the Board of Directors that the "Compensation Discussion and Analysis" section set forth above be included in this Annual Report on Form 10-K.
Respectfully, submitted by the Compensation Committee of the Board of Directors.
David
Burgstahler
Allen Yurko
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLER MATTERS
Principal Stockholders
As of December 31, 2013, Parent indirectly owns all of our issued and outstanding capital stock through its direct subsidiary and our direct parent, Intermediate. Avista Capital Partners II, L.P., Avista Capital Partners (Offshore) II, L.P., Avista Capital Partners (Offshore) II-A, LLP and ACP Viking Co-Invest LLC (together, the "Avista Entities") collectively own approximately 99.3% of Parent's issued and outstanding capital stock. Avista Capital Partners II GP, LLC ultimately exercises voting and dispositive power over the shares held by the Avista Entities. Voting and disposition decisions at Avista Capital Partners II GP, LLC with respect to such shares are made by an investment committee, the members of which are Thompson Dean, Steven Webster, David Burgstahler and David Durkin In connection with the Acquisition, certain members of management and the Board of Directors purchased shares of Holdings' common stock equaling approximately 0.7% of Parent's issued and outstanding capital stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table gives information as of December 31, 2013 about the common stock that may be issued under all of our existing equity compensation plans.
Plan Category
|
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights |
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) |
|||||||
|---|---|---|---|---|---|---|---|---|---|---|
Equity compensation plans approved by security holders |
20,506,250 | (1) | $ | 1.01 | 5,993,750 | |||||
Equity compensation plans not approved by security holders |
— | — | — | |||||||
| | | | | | | | | | | |
Total |
20,506,250 | 5,993,750 | ||||||||
| | | | | | | | | | | |
| | | | | | | | | | | |
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Our board of directors is primarily responsible for developing and implementing processes and controls to obtain information from our directors, executive officers and significant shareholders regarding related person transactions and then determining, based on the facts and circumstances, whether a related person has a direct or indirect material interest in these transactions. Our audit committee is responsible for review, approval and ratification of "related person transactions" between us and any related person. Under SEC rules, a related person is an officer, director, nominee for director or beneficial holder of more than 5% of any class of our voting securities since the beginning of the last fiscal year or an immediate family member of any of the foregoing. In the course of its review and approval or ratification of a related person transaction, the audit committee considers:
Any member of the audit committee who is a related person with respect to a transaction under review will not be able to participate in the deliberations or vote on the approval or ratification of the transaction. However, such a director may be counted in determining the presence of a quorum at a meeting of the committee that considers the transaction.
Other than agreements and other transactions entered into in connection with the Acquisition or the IDQ Investment and IDQ Acquisition as described below, since December 31, 2011, there has not been, and there is not currently proposed, any transaction or series of similar transactions to which we were or will be a party in which the amount involved and in which any related person had or will have a direct or indirect material interest.
Shareholders agreement
In connection with the Acquisition, Parent entered into a Stockholders Agreement with the Avista Entities and David Lundstedt, Allen Yurko and Charles McIlvaine, as Management Stockholders, dated November 5, 2010 (the "Stockholders Agreement"), which agreement was amended and restated on March 17, 2014 in connection with the closing of the IDQ Acquisition. The Stockholders Agreement governs the parties' respective rights, duties and obligations with respect to the ownership of Parent's securities including actions that require the approval of the Avista Entities, restrictions on the transferability of Parent's securities, tag-along and drag-along rights and obligations, pre-emptive rights, repurchase provisions, registrations rights or international rights. Each stockholder party thereto must vote their shares and take such actions to ensure that the composition of the Board of Directors is consistent with the terms of the Stockholders Agreement.
Advisory services and monitoring agreement
In connection with the closing of the Acquisition, we entered into an advisory services and monitoring agreement with Avista Capital Holdings, L.P. ("Avista Capital Holdings"), dated as of November 5, 2010 (the "Advisory Services and Monitoring Agreement"), pursuant to which we paid Avista Capital Holdings a one-time closing fee equal to $13.5 million for the consulting and advisory and monitoring services to us, our subsidiaries and our parent companies, and reimbursed Avista for all of its fees and expenses incurred in connection with the Acquisition. In addition, the agreement
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provides for the payment of an annual fee equal to $1.0 million as consideration for ongoing advisory services. In the year ended December 31, 2013 we paid approximately $1.1 million under the Advisory Services and Monitoring Agreement. To the extent of any future transaction entered into by us or our affiliates, Avista Capital Holdings may be entitled to receive an additional fee that is reasonable and customary for the services it provides in connection with such future transaction. Avista received a $2.0 million transaction fee from Parent pursuant to the Advisory Services and Monitoring Agreement in connection with the closing of its IDQ Acquisition ($0.2 million of which was paid to Kinderhook Industries). In addition, we will pay directly, or reimburse Avista Capital Holdings for, its out-of-pocket expenses in connection with its performance of services under the Advisory Services and Monitoring Agreement.
Shared Services Agreement
In connection with the IDQ Acquisition, we entered into the Shared Services Agreement with IDQ and its subsidiaries and Parent pursuant to which certain products and services to be agreed upon by the parties from time to time will be provided on an arm's-length basis by one party to another. Under the Shared Services Agreement, we are responsible for our pro-rata portion of the compensation costs due to certain of our executives under their employment agreements or otherwise. Transactions under the Shared Services Agreement are required to be, in aggregate, fair and reasonable to us.
Consulting Agreements
Mr. Klein is the sole member of Las Colinas Investments, LLC, which is entitled to receive $125,280 per annum from IDQ Operating, Inc. pursuant to, and subject to the terms and conditions of, the consulting Agreement, dated as of January 28, 2013, as amended, subject to an aggregate cap of $360,000 following April 1, 2014. Mr. Rooney is the sole member of Windy Hill Investments LLC, which is entitled to receive $83,250 per annum from IDQ Operating, Inc. pursuant to, and subject to the terms and conditions of, the consulting Agreement, dated as of January 28, 2013, as amended, subject to an aggregate cap of $240,000 following April 1, 2014. Pursuant to the Shared Services Agreement, AAG will be responsible for a portion of the costs and expenses (attributable to AAG as determined by Parent) associated with such consulting agreements.
Consideration Received in the IDQ Acquisition
In connection with the IDQ Acquisition, in their capacities as former stockholders of IDQ, Michael Klein and Gerard Rooney received consideration equal to (i) approximately $2.4 million and $1.7 million in cash, respectively, (ii) 803,731 and 551,077 shares of Parent's common stock, respectively and (iii) 188 and 129 shares of Parent's Series A Preferred Stock, respectively.
Transaction Advisory Fee
In consideration for services rendered in connection with the IDQ investment, Mr. Yurko received a transaction fee equal to $250,000.
Director Independence
The Board of Directors is responsible for the management of our business. In connection with the closing of the IDQ Acquisition, the size of the Board of Directors was increased to seven members. The composition of our Board of Directors mirrors that of Parent's board of directors. Pursuant to the Amended and Restated Stockholders Agreement (the "Stockholders Agreement"), dated as of March 17, 2014, by and among Parent, Avista Capital Partners II, L.P., Avista Capital Partners (Offshore) II, L.P., Avista Capital Partners (Offshore) II-A, LLP and IDQ's former stockholders, described in Part III. Item 13—Certain Relationships and Related Transactions, and Director
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Independence, Avista has the right to appoint five members of Parent's board of directors. Pursuant to the Stockholders Agreement, KI-IDQ 2012 Holdings, LLC has the right to appoint one member of Parent's board of directors so long as it (or its permitted transferees) continues to own 50% of the shares of Parent's capital stock it received in the IDQ Acquisition. Our then current Chief Executive Officer shall also serve as a member of the Board of Directors. Messrs. Burgstahler, Durkin, Phillips and Yurko were appointed by Avista pursuant to the Stockholders Agreement and, once Mr. Lundstedt ceases to serve as our CEO, Mr. Lundstedt will be appointed by Avista pursuant to the Stockholders Agreement. KI-IDQ 2012 Holdings, LLC appointed Mr. Michalik to serve on Parent's board of directors pursuant to the Stockholders Agreement.
Although not formally considered by the Board of Directors because our securities are not registered or traded on any national securities exchange, we believe that Mr. Michalik would be considered independent for the Board of Directors purposes based upon the listing standards of the New York Stock Exchange.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees billed by Ernst & Young LLP during the fiscal years ended December 31, 2013 and 2012.
| |
2013 | 2012 | |||||
|---|---|---|---|---|---|---|---|
Fees Billed: |
|||||||
Audit Fees |
$ | 849,692 | $ | 838,000 | |||
Audit-Related Fees |
16,684 | — | |||||
Tax Fees |
895,916 | 1,273,000 | |||||
All Other Fees |
1,980 | 1,000 | |||||
| | | | | | | | |
Total |
$ | 1,764,272 | $ | 2,112,000 | |||
| | | | | | | | |
| | | | | | | | |
Audit Fees include fees for professional services rendered for the consolidated audit and quarterly reviews of the Company's financial statements, assistance and review of the Company's Registration Statement, consent in connection with the Registration Statement, international statutory audits, accounting consultations billed as audit services and other accounting and financial reporting consultation and research work necessary to comply with the standards of the Public Company Accounting Oversight Board.
Audit-Related Fees consisted principally of assurance and related services that are reasonably related to the performance of the audit or review of financial statements including accounting consultation in connection with the Acquisition and an employee benefit plan audit in the United Kingdom.
Tax Fees consisted principally of professional services related to U.S. domestic and international tax compliance, tax planning and tax advice. Tax compliance generally involves preparation of original and amended tax returns, claims for refund and tax payment-planning services. Tax planning and tax advice encompass a diverse range of services, including assistance with tax audits and appeals, customs related matters, and requests for rulings or technical advice from taxing authorities.
All Other Fees consisted of amounts billed to the Company for the use of an online accounting research tool.
The charter of the Audit Committee provides that the Committee is responsible for the pre-approval of all audit and permitted non-audit services to be performed for the Company by the independent registered public accounting firm. The Audit Committee has adopted a policy for the pre-approval of services provided by the independent registered public accounting firm.
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Each year management requests Audit Committee pre-approval of the annual audits, quarterly reviews and any other engagements of the independent registered public accounting firm known at that time. In connection with these requests, the Committee may consider information about each engagement, including the budgeted fees; the reasons management is requesting the services to be provided by the independent registered public accounting firm; and any potential impact on the independence of the firm. As additional proposed audit and non-audit engagements of the independent registered public accounting firm are identified, or if pre-approved services exceed the pre-approved budgeted amount for those services, the Audit Committee will consider similar information in connection with the pre-approval of such engagements or services. If Audit Committee pre-approvals are required between regularly scheduled committee meetings, the Audit Committee has delegated to the Chairman of the Audit Committee, or an alternate member of the Audit Committee, the authority to grant pre-approvals. Pre-approvals by the Chairman or the alternate member are reviewed with the Audit Committee at its next regularly scheduled meeting.
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The following is a list of exhibits filed as part of this Annual Report on Form 10-K.
| EXHIBIT NO. |
DESCRIPTION | ||
|---|---|---|---|
| 2.1 | Purchase and Sale Agreement, dated September 21, 2010, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.) and The Clorox Company (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 2.2 | Amendment No. 1 to Purchase and Sale Agreement, dated November 5, 2010, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.) and The Clorox Company (incorporated by reference to Exhibit 2.2 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 3.1 | Amended and Restated Certificate of Incorporation of Armored AutoGroup Inc. (formerly Viking Acquisition Inc.) (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 3.2 | * | Amended and Restated Bylaws of Armored AutoGroup Inc. (formerly Viking Acquisition Inc.). | |
| 4.1 | Indenture, dated November 5, 2010, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.) and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 4.2 | Supplemental Indenture, dated November 5, 2010, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.), the Guarantors party thereto and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 4.3 | Registration Rights Agreement, dated November 5, 2010, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.) and J.P. Morgan Securities LLC, for itself and on behalf of the Initial Purchasers listed on Schedule 1 thereto (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 4.4 | Joinder to Registration Rights Agreement, dated November 5, 2010, by STP Products Manufacturing Company and The Armor All / STP Products Company (incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 4.5 | * | Amended and Restated Stockholders Agreement, dated March 17, 2014, by and among Armored AutoGroup Parent Inc. (former Viking Parent Inc.), Avista Capital Partners II, L.P., Avista Capital Partners (Offshore) II, L.P., Avista Capital Partners (Offshore) II-A, L.P., KI-IDQ 2012 Holdings, LLC and the other parties thereto. | |
| 10.1 | † | Employment Agreement, dated November 5, 2010, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.) and David P. Lundstedt (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | |
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| EXHIBIT NO. |
DESCRIPTION | ||
|---|---|---|---|
| 10.2 | † | Consulting Letter Agreement dated November 5, 2010, by Armored AutoGroup Parent Inc. (formerly Viking Parent Inc.) and accepted by Allen Yurko (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | |
| 10.3 | † | Form of Nonqualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | |
| 10.4 | Armored AutoGroup Parent Inc. (formerly Viking Parent Inc.) 2010 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 10.5 | Amended and Restated Credit Agreement, dated March 16, 2011, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.), as borrower, Armored AutoGroup Intermediate Inc. (formerly Viking Intermediate Inc.), the several lenders from time to time parties thereto, Natixis, New York Branch, as Syndication Agent, Royal Bank of Canada, as Documentation Agent, and J.P. Morgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 10.6 | First Amendment, dated as of September 28, 2012, to the Amended and Restated Credit Agreement, dated as of March 16, 2011, among Armored AutoGroup Intermediate Inc., Armored AutoGroup Inc., the several lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as administrative agent and the other agents parties thereto (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form S-4, File No. 333-180736, filed on October 1, 2012). | ||
| 10.7 | Guarantee and Collateral Agreement, dated November 5, 2010, by and among Armored AutoGroup Inc. (formerly Viking Acquisition Inc.), Armored AutoGroup Intermediate Inc. (formerly Viking Intermediate Inc.) and certain of its subsidiaries party thereto, in favor of J.P. Morgan Chase Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | ||
| 10.8 | † | Employment Separation Agreement and Release, dated December 31, 2011, by and among Armored AutoGroup Inc. and Derek Gordon (incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-4, File No. 333-180736, filed on April 13, 2012). | |
| 10.9 | Shared Services and Supply Agreement, dated March 17, 2014, by and among Armored AutoGroup Parent Inc., Armored AutoGroup Inc., IDQ Acquisition Corp., IDQ Holdings, Inc. and IDQ Operating, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K, filed on March 17, 2014). | ||
| 12.1 | * | Computation of Ratio of Earnings to Fixed Charges | |
| 21.1 | * | Subsidiaries of the registrant | |
| 31.1 | * | Certificate by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | * | Certificate by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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| EXHIBIT NO. |
DESCRIPTION | ||
|---|---|---|---|
| 32.1 | * | Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | * | Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | The following financial statements from Armored AutoGroup's Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 19, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Comprehensive Loss; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Stockholders' Equity and (iv) the Notes to Consolidated Financial Statements. | ||
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or because the required information is shown in the financial statements or notes thereto.
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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.
| ARMORED AUTOGROUP INC. | ||||
Dated: March 19, 2014 |
/s/ DAVID P. LUNDSTEDT |
|||
| Name: | David P. Lundstedt | |||
| Title: | Chairman, President and Chief Executive Officer | |||
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 in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
|---|---|---|---|---|
| /s/ DAVID P. LUNDSTEDT David P. Lundstedt |
Chairman, President and Chief Executive Officer | March 19, 2014 | ||
/s/ J. ANDREW BOLT J. Andrew Bolt |
Executive Vice President, Chief Financial Officer and Principal Accounting Officer |
March 19, 2014 |
||
/s/ DAVID F. BURGHSTAHLER David F. Burgstahler |
Director |
March 19, 2014 |
||
/s/ DAVID DURKIN David Durkin |
Director |
March 19, 2014 |
||
/s/ ALLEN YURKO Allen Yurko |
Director |
March 19, 2014 |
||
/s/ JACKSON PHILLIPS Jackson Phillips |
Director |
March 19, 2014 |
122
Exhibit 3.2
BY-LAWS
OF
ARMORED AUTOGROUP INC.
A Delaware Corporation
ARTICLE I
OFFICES
Registered Office. The registered office of the corporation in the State of Delaware shall be located at 2711 Centerville Road, Suite 400, Wilmington Delaware 19808, in the County of New Castle. The name of the corporation’s registered agent at such address shall be Corporation Service Company. The registered office and/or registered agent of the corporation may be changed from time to time by action of the board of directors.
Other Offices. The corporation may also have offices at such other places, both within and without the State of Delaware, as the board of directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Place and Time of Meetings. An annual meeting of the stockholders shall be held each year for the purpose of electing directors and conducting such other proper business as may come before the meeting. The date, time and place of the annual meeting may be determined by resolution of the board of directors or as set by the chief executive officer of the corporation.
Special Meetings. Special meetings of stockholders may be called for any purpose (including, without limitation, the filling of board vacancies and newly created directorships), and may be held at such time and place, within or without the State of Delaware, as shall be stated in a notice of meeting or in a duly executed waiver of notice thereof. Such meetings may be called at any time by two or more members of the board of directors or the chief executive officer and shall be called by the chief executive officer upon the written request of holders of shares entitled to cast not less than fifty percent (50%) of the outstanding shares of any series or class of the corporation’s Capital Stock.
Place of Meetings. The board of directors may designate any place, either within or without the State of Delaware, as the place of meeting for any annual meeting or for any special meeting called by the board of directors. If no designation is made, or if a special meeting be otherwise called, the place of meeting shall be the principal executive office of the corporation.
Notice. Whenever stockholders are required or permitted to take action at a meeting, written or printed notice stating the place, date, time, and, in the case of special meetings, the purpose or purposes, of such meeting, shall be given to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. All such notices shall be delivered, either personally or by mail, by or at the direction of the board of directors, the chief executive officer or the secretary, and if mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the stockholder at his, her or its address as the same appears on the records of the corporation. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
Stockholders List. The officer having charge of the stock ledger of the corporation shall make, at least 10 days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.
Quorum. Except as otherwise provided by applicable law or by the Certificate of Incorporation, a majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time in accordance with Section 7 of this Article, until a quorum shall be present or represented.
Adjourned Meetings. When a meeting is adjourned to another time and place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Vote Required. When a quorum is present, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the question is one upon which by express provisions of an applicable law or of the certificate of incorporation a different vote is required, in which case such express provision shall govern and control the decision of such question. Where a separate vote by class is required, the affirmative vote of the majority of shares of such class present in person or represented by proxy at the meeting shall be the act of such class.
Voting Rights. Except as otherwise provided by the General Corporation Law of the State of Delaware or by the certificate of incorporation of the corporation or any amendments thereto and subject to Section 3 of Article VI hereof, every stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of common stock held by such stockholder.
Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him, her or it by proxy. Every proxy must be signed by the stockholder granting the proxy or by his, her or its attorney-in-fact. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally.
Action by Written Consent. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken and bearing the dates of signature of the stockholders who signed the consent or consents, shall be signed by the holders of outstanding stock having not less than a majority of the shares entitled to vote, or, if greater, not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in the state of Delaware, or the corporation’s principal place of business, or an officer or agent of the corporation having custody of the book or books in which proceedings of meetings of the stockholders are recorded. Delivery made to the corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested provided, however, that no consent or consents delivered by certified or registered mail shall be deemed delivered until such consent or consents are actually received at the registered office. All consents properly delivered in accordance with this section shall be deemed to be recorded when so delivered. No written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered to the corporation as required by this section, written consents signed by the holders of a sufficient number of shares to take such corporate action are so recorded. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Any action taken pursuant to such written consent or consents of the stockholders shall have the same force and effect as if taken by the stockholders at a meeting thereof.
ARTICLE III
DIRECTORS
General Powers. The business and affairs of the corporation shall be managed by or under the direction of the board of directors.
Number, Election and Term of Office. The number of directors which shall constitute the board shall be one or more and can be increased by a resolution of the board of directors. The directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote in the election of directors. The directors shall be elected in this manner at the annual meeting of the stockholders, except as provided in Section 4 of this Article III. Each director elected shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided.
Removal and Resignation. Any director or the entire board of directors may be removed at any time, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of any class or series are entitled to elect one or more directors by the provisions of the corporation’s certificate of incorporation, the provisions of this section shall apply, in respect to the removal without cause or a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. Any director may resign at any time upon written notice to the corporation.
Vacancies. Except as otherwise provided by the Certificate of Incorporation of the corporation or any amendments thereto, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority vote of the holders of the corporation’s outstanding stock entitled to vote thereon or by a majority of the members of the board of directors. Each director so chosen shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as herein provided.
Annual Meetings. The annual meeting of each newly elected board of directors shall be held without other notice than this by-law immediately after, and at the same place as, the annual meeting of stockholders.
Other Meetings and Notice. Regular meetings, other than the annual meeting, of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by resolution of the board. Special meetings of the board of directors may be called by or at the request of the chief executive officer or president on at least 24 hours notice to each director, either personally, by telephone, by mail, or by telegraph; in like manner and on like notice the chief executive officer must call a special meeting on the written request of at least a majority of the directors.
Quorum, Required Vote and Adjournment. A majority of the total number of directors then in office (without regard to any then vacancies on the board) shall constitute a quorum for the transaction of business. The vote of a majority of directors present at a meeting at which a quorum is present shall be the act of the board of directors. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Committees. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation, which to the extent provided in such resolution or these by-laws
shall have and may exercise the powers of the board of directors in the management and affairs of the corporation except as otherwise limited by law. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required.
Committee Rules. Each committee of the board of directors may fix its own rules of procedure and shall hold its meetings as provided by such rules, except as may otherwise be provided by a resolution of the board of directors designating such committee. Unless otherwise provided in such a resolution, the presence of at least a majority of the members of the committee shall be necessary to constitute a quorum. In the event that a member and that member’s alternate, if alternates are designated by the board of directors as provided in Section 8 of this Article III, of such committee is or are absent or disqualified, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in place of any such absent or disqualified member.
Communications Equipment. Members of the board of directors or any committee thereof may participate in and act at any meeting of such board or committee through the use of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in the meeting pursuant to this section shall constitute presence in person at the meeting.
Waiver of Notice and Presumption of Assent. Any member of the board of directors or any committee thereof who is present at a meeting shall be conclusively presumed to have waived notice of such meeting except when such member attends for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Such member shall be conclusively presumed to have assented to any action taken unless his or her dissent shall be entered in the minutes of the meeting or unless his or her written dissent to such action shall be filed with the person acting as the secretary of the meeting before the adjournment thereof or shall be forwarded by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to any member who voted in favor of such action.
Action by Written Consent. Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all the then members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee.
ARTICLE IV
OFFICERS
Number. The officers of the corporation shall be elected by the board of directors and may consist of a chairman, a chief executive officer, two or more president, one or more vice president, a secretary, a treasurer, and such other officers and assistant officers as may be deemed necessary or desirable by the board of directors. Any number of offices may be held by the same person. In its discretion, the board of directors may choose not to fill any office for any period as it may deem advisable.
Election and Term of Office. The officers of the corporation shall be elected annually by the board of directors at its first meeting held after each annual meeting of stockholders or as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the board of directors. Each officer shall hold office until a successor is duly elected and qualified or until his or her earlier death, resignation or removal as hereinafter provided.
Removal. Any officer or agent elected by the board of directors may be removed by the board of directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.
Vacancies. Any vacancy occurring in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term by the board of directors then in office.
Compensation. Compensation of all officers shall be fixed by the board of directors, and no officer shall be prevented from receiving such compensation by virtue of his or her also being a director of the corporation.
The Chairman of the Board. The Chairman of the Board, if one shall have been elected, shall be a member of the board, may be an officer of the Corporation, and, if present, shall preside at each meeting of the board of directors or shareholders. He shall advise the chief executive officer, and in the chief executive officer’s absence, other officers of the Corporation, and shall perform such other duties as may from time to time be assigned to him by the board of directors.
The Chief Executive Officer. In the absence of the Chairman of the Board or if a Chairman of the Board shall have not been elected, the chief executive officer shall preside at all meetings of the stockholders and board of directors at which he or she is present; subject to the powers of the board of directors, shall have general charge of the business, affairs and property of the corporation, and control over its officers, agents and employees; and shall see that all orders and resolutions of the board of directors are carried into effect. The chief executive officer shall have such other powers and perform such other duties as may be prescribed by the board of directors or as may be provided in these by-laws.
President; Vice Presidents. The president shall, in the absence or disability of the chief executive officer, act with all of the powers and be subject to all of the restrictions of the chief
executive officer. The president shall also perform such other duties and have such other powers as the board of directors, the chief executive officer or these by-laws may, from time to time, prescribe. The vice-president, if any, or if there shall be more than one, the vice-presidents in the order determined by the board of directors shall, in the absence or disability of the president, act with all of the powers and be subject to all the restrictions of the president. The vice-presidents shall also perform such other duties and have such other powers as the board of directors, the president or these by-laws may, from time to time, prescribe.
The Secretary and Assistant Secretaries. The secretary shall attend all meetings of the board of directors, all meetings of the committees thereof and all meetings of the stockholders and record all the proceedings of the meetings in a book or books to be kept for that purpose. Under the chief executive officer’s supervision, the secretary shall give, or cause to be given, all notices required to be given by these by-laws or by law; shall have such powers and perform such duties as the board of directors, the chief executive officer or these by-laws may, from time to time, prescribe; and shall have custody of the corporate seal of the corporation. The secretary, or an assistant secretary, shall have authority to affix the corporate seal to any instrument requiring it and when so affixed, it may be attested by his or her signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his or her signature. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors, shall, in the absence or disability of the secretary, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors, the chief executive officer, or secretary may, from time to time, prescribe.
The Treasurer and Assistant Treasurer. The treasurer shall have the custody of the corporate funds and securities; shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation; shall deposit all monies and other valuable effects in the name and to the credit of the corporation as may be ordered by the board of directors; shall cause the funds of the corporation to be disbursed when such disbursements have been duly authorized, taking proper vouchers for such disbursements; and shall render to the chief executive officer and the board of directors, at its regular meeting or when the board of directors so requires, an account of the corporation; shall have such powers and perform such duties as the board of directors, the chief executive officer or these by-laws may, from time to time, prescribe. If required by the board of directors, the treasurer shall give the corporation a bond (which shall be rendered every six years) in such sums and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of the office of treasurer and for the restoration to the corporation, in case of death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and other property of whatever kind in the possession or under the control of the treasurer belonging to the corporation. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors, shall in the absence or disability of the treasurer, perform the duties and exercise the powers of the treasurer. The assistant treasurers shall perform such other duties and have such other powers as the board of directors, the chief executive officer, the president or treasurer may, from time to time, prescribe.
Other Officers, Assistant Officers and Agents. Officers, assistant officers and agents, if any, which officers may include officers of any division of the Corporation, other than those whose duties are provided for in these by-laws, shall have such authority and perform such duties as may from time to time be prescribed by resolution of the board of directors.
Absence or Disability of Officers. In the case of the absence or disability of any officer of the corporation and of any person hereby authorized to act in such officer’s place during such officer’s absence or disability, the board of directors may by resolution delegate the powers and duties of such officer to any other officer or to any director, or to any other person whom it may select.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Nature of Indemnity. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or a person of whom he is the legal representative, is or was a director or officer, of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary, or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee, fiduciary or agent or in any other capacity while serving as a director, officer, employee, fiduciary or agent, shall be indemnified and held harmless by the corporation to the fullest extent which it is empowered to do so by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment) against all expense, liability and loss (including attorneys’ fees actually and reasonably incurred by such person in connection with such proceeding and such indemnification shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 2 hereof, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the board of directors of the corporation. The right to indemnification conferred in this Article V shall be a contract right and, subject to Sections 2 and 5 hereof, shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition. The corporation may, by action of its board of directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers.
Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the corporation under Section 1 of this Article V or advance of expenses under Section 5 of this Article V shall be made promptly, and in any event within 30 days, upon the written request of the director or officer. If a determination by the corporation that the director or officer is entitled to indemnification pursuant to this Article V is required, and the corporation fails to respond within sixty days to a written request for indemnity, the corporation shall be
deemed to have approved the request. If the corporation denies a written request for indemnification or advancing of expenses, in whole or in part, or if payment in full pursuant to such request is not made within 30 days, the right to indemnification or advances as granted by this Article V shall be enforceable by the director or officer in any court of competent jurisdiction. Such person’s costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the corporation to indemnify the claimant for the amount claimed, but the burden of such defense shall be on the corporation. Neither the failure of the corporation (including its board of directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.
Nonexclusivity of Article V. The rights to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise.
Insurance. The corporation may purchase and maintain insurance on its own behalf and on behalf of any person who is or was a director, officer, employee, fiduciary, or agent of the corporation or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, whether or not the corporation would have the power to indemnify such person against such liability under this Article V.
Expenses. Expenses incurred by any person described in Section 1 of this Article V in defending a proceeding shall be paid by the corporation in advance of such proceeding’s final disposition unless otherwise determined by the board of directors in the specific case upon receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate.
Employees and Agents. Persons who are not covered by the foregoing provisions of this Article V and who are or were employees or agents of the corporation, or who are or were serving at the request of the corporation as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified to the extent authorized at any time or from time to time by the board of directors.
Contract Rights. The provisions of this Article V shall be deemed to be a contract right between the corporation and each director or officer who serves in any such capacity at any time while this Article V and the relevant provisions of the General Corporation Law of the State of Delaware or other applicable law are in effect, and any repeal or modification of this Article V or any such law shall not affect any rights or obligations then existing with respect to any state of facts or proceeding then existing.
Merger or Consolidation. For purposes of this Article V, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.
ARTICLE VI
CERTIFICATES OF STOCK
Form. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by the chairman of the board, the chief executive officer, the the president or a vice-president and the secretary or an assistant secretary of the corporation, certifying the number of shares owned by such holder in the corporation. If such a certificate is countersigned (1) by a transfer agent or an assistant transfer agent other than the corporation or its employee or (2) by a registrar, other than the corporation or its employee, the signature of any such chairman of the board, chief executive officer, president, vice-president, secretary, or assistant secretary may be facsimiles. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the corporation whether because of death, resignation or otherwise before such certificate or certificates have been delivered by the corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the corporation. All certificates for shares shall be consecutively numbered or otherwise identified. The name of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the books of the corporation. Shares of stock of the corporation shall only be transferred on the books of the corporation by the holder of record thereof or by such holder’s attorney duly authorized in writing, upon surrender to the corporation of the certificate or certificates for such shares endorsed by the appropriate person or persons, with such evidence of the authenticity of such endorsement, transfer, authorization, and other matters as the corporation may reasonably require, and accompanied by all necessary stock transfer stamps. In
that event, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate or certificates, and record the transaction on its books. The board of directors may appoint a bank or trust company organized under the laws of the United States or any state thereof to act as its transfer agent or registrar, or both in connection with the transfer of any class or series of securities of the corporation.
Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates previously issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his or her legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against the corporation on account of the loss, theft or destruction of any such certificate or the issuance of such new certificate.
Fixing a Record Date for Stockholder Meetings. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the close of business on the next day preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting.
Fixing a Record Date for Action by Written Consent. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by statute, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by statute, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action.
Fixing a Record Date for Other Purposes. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment or any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purposes of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto.
Subscriptions for Stock. Unless otherwise provided for in the subscription agreement, subscriptions for shares shall be paid in full at such time, or in such installments and at such times, as shall be determined by the board of directors. Any call made by the board of directors for payment on subscriptions shall be uniform as to all shares of the same class or as to all shares of the same series. In case of default in the payment of any installment or call when such payment is due, the corporation may proceed to collect the amount due in the same manner as any debt due the corporation.
ARTICLE VII
GENERAL PROVISIONS
Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or any other purpose and the directors may modify or abolish any such reserve in the manner in which it was created.
Checks, Drafts or Orders. All checks, drafts, or other orders for the payment of money by or to the corporation and all notes and other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation, and in such manner, as shall be determined by resolution of the board of directors or a duly authorized committee thereof.
Contracts. The board of directors may authorize any officer or officers, or any agent or agents, of the corporation to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.
Loans. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.
Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the board of directors.
Corporate Seal. The board of directors may provide a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the corporation and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
Voting Securities Owned By Corporation. Voting securities in any other corporation held by the corporation shall be voted by the chief executive officer, unless the board of directors specifically confers authority to vote with respect thereto, which authority may be general or confined to specific instances, upon some other person or officer. Any person authorized to vote securities shall have the power to appoint proxies, with general power of substitution.
Inspection of Books and Records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation’s stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose shall mean any purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in the State of Delaware or at its principal place of business.
Section Headings. Section headings in these by-laws are for convenience of reference only and shall not be given any substantive effect in limiting or otherwise construing any provision herein.
Inconsistent Provisions. In the event that any provision of these by-laws is or becomes inconsistent with any provision of the certificate of incorporation, the General Corporation Law of the State of Delaware or any other applicable law, the provision of these by-laws shall not be given any effect to the extent of such inconsistency but shall otherwise be given full force and effect.
ARTICLE VIII
AMENDMENTS
These by-laws may be amended, altered, or repealed and new by-laws adopted at any meeting of the board of directors by a majority vote. The fact that the power to adopt, amend,
alter, or repeal the by-laws has been conferred upon the board of directors shall not divest the stockholders of the same powers.
Exhibit 4.5
EXECUTION COPY
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
DATED AS OF
MARCH 17, 2014
AMONG
ARMORED AUTOGROUP PARENT INC.
AVISTA CAPITAL PARTNERS II, L.P.
AVISTA CAPITAL PARTNERS (OFFSHORE) II, L.P.
AVISTA CAPITAL PARTNERS (OFFSHORE) II-A, L.P.
ACP VIKING CO-INVEST, LLC
KI-IDQ 2012 HOLDINGS, LLC
AND
THE MANAGEMENT STOCKHOLDERS IDENTIFIED HEREIN
TABLE OF CONTENTS
|
ARTICLE I DEFINITIONS |
2 | |
|
Section 1.01 |
Definitions |
2 |
|
|
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ARTICLE II CORPORATE GOVERNANCE |
14 | |
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Section 2.01 |
Composition of the Board |
14 |
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Section 2.02 |
Removal |
15 |
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Section 2.03 |
Vacancies |
15 |
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Section 2.04 |
By-law Provisions |
15 |
|
Section 2.05 |
Committees |
16 |
|
Section 2.06 |
Subsidiaries |
16 |
|
Section 2.07 |
Matters Requiring Stockholder Consent |
16 |
|
Section 2.08 |
Budget |
18 |
|
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ARTICLE III [RESERVED] |
18 | |
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ARTICLE IV RESTRICTIONS ON TRANSFER |
18 | |
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Section 4.01 |
General Restrictions on Transfer |
18 |
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Section 4.02 |
Restrictions on Transfer by Management Stockholders |
19 |
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Section 4.03 |
Legends |
20 |
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Section 4.04 |
Permitted Transferees |
21 |
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ARTICLE V TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS; PREEMPTIVE RIGHTS |
22 | |
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Section 5.01 |
Tag-Along Rights |
22 |
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Section 5.02 |
Drag-Along Rights |
24 |
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Section 5.03 |
Additional Provisions Related to Tag-Along Sales and Drag-Along Sales |
27 |
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Section 5.04 |
Preemptive Rights |
29 |
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|
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ARTICLE VI REPURCHASE RIGHTS |
32 | |
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Section 6.01 |
Repurchase Rights upon Termination |
32 |
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Section 6.02 |
Termination Pricing and Payment Terms |
33 |
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Section 6.03 |
Termination of Repurchase Right |
35 |
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ARTICLE VII REGISTRATION RIGHTS |
36 | |
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Section 7.01 |
Demand Registration |
36 |
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Section 7.02 |
Piggyback Registration |
38 |
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Section 7.03 |
Shelf Registration |
40 |
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Section 7.04 |
Lock-Up Agreements |
41 |
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Section 7.05 |
Registration Procedures |
42 |
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Section 7.06 |
Indemnification by the Company |
46 |
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Section 7.07 |
Indemnification by the Participating Stockholders |
47 |
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Section 7.08 |
Conduct of Indemnification Proceedings |
47 |
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Section 7.09 |
Contribution |
48 |
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Section 7.10 |
Cooperation by the Company |
49 |
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Section 7.11 |
Restriction on Company Grants of Subsequent Registration Rights |
49 |
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Section 7.12 |
Assignment of Registration Rights |
50 |
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ARTICLE VIII CERTAIN COVENANTS AND AGREEMENTS |
50 | |
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Section 8.01 |
Information Rights |
50 |
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Section 8.02 |
Access |
51 |
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Section 8.03 |
Confidentiality |
52 |
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Section 8.04 |
Management Stockholders Non-Compete |
53 |
|
Section 8.05 |
Directors’ and Officers’ Insurance |
54 |
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Section 8.06 |
No Exclusive Duty to Company |
54 |
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Section 8.07 |
Conflicting Agreements |
56 |
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ARTICLE IX MISCELLANEOUS |
56 | |
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Section 9.01 |
Binding Effect; Assignability; Benefit |
56 |
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Section 9.02 |
Notices |
56 |
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Section 9.03 |
Waiver; Amendment; Termination |
57 |
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Section 9.04 |
Non-Recourse |
58 |
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Section 9.05 |
Governing Law; Venue |
58 |
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Section 9.06 |
WAIVER OF JURY TRIAL |
58 |
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Section 9.07 |
Specific Enforcement; Cumulative Remedies |
59 |
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Section 9.08 |
Entire Agreement |
59 |
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Section 9.09 |
Severability |
59 |
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Section 9.10 |
Aggregation of Shares |
59 |
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Section 9.11 |
Counterparts; Effectiveness |
60 |
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EXHIBIT A JOINDER AGREEMENT |
1 | |
|
EXHIBIT B BY-LAWS OF THE COMPANY |
2 | |
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THIS AMENDED AND RESTATED STOCKHOLDERS AGREEMENT (this “Agreement”), dated as of March 17, 2014, amends and restates in its entirety the Stockholders Agreement dated as of November 5, 2010 (the “Original Stockholders Agreement”) among Armored AutoGroup Parent Inc. (formerly known as Viking Parent Inc.), together with its successors (the “Company”), Avista Capital Partners II, L.P., a Delaware limited partnership (“Avista”), Avista Capital Partners (Offshore) II, L.P., a Bermuda exempted limited partnership (“Avista Offshore”), Avista Capital Partners (Offshore) II-A, L.P., a Bermuda exempted limited partnership (together with Avista and Avista Offshore, the “Avista Funds”), ACP Viking Co-Invest, LLC, a Delaware limited liability company (the “Avista Syndication Vehicle”), KI-IDQ 2012 Holdings, LLC, a Delaware limited liability company (“Kinderhook”), the individuals listed on the signature pages and/or Annex A hereto as Management Stockholders and the Persons who from time to time become stockholders of the Company in accordance with this Agreement and execute and deliver a Joinder Agreement, substantially as set forth on Exhibit A attached hereto (a “Joinder Agreement”) (each of the foregoing a “Stockholder” and collectively, the “Stockholders”).
WHEREAS, pursuant to Section 9.03(a) of the Original Stockholders Agreement, Avista and the Company may amend the Original Stockholders Agreement;
WHEREAS, this Agreement is entered into in connection with the consummation of the acquisition by the Company (the “Acquisition”), directly or indirectly through its subsidiaries of IDQ Acquisition Corp., a Delaware corporation (“IDQ Acquisition”), pursuant to the Stock Purchase Agreement (the “Stock Purchase Agreement”), dated as of the date hereof, among Armored AutoGroup Inc., a Delaware corporation and indirect wholly-owned Subsidiary of the Company (“AAG OpCo”), AAG IDQ Acquisition Corporation, a Delaware corporation and direct wholly-owned Subsidiary of the Company, IDQ Acquisition, Kinderhook in its capacity as the Stockholder Representative and the stockholders party thereto;
WHEREAS, in connection with the Acquisition, the Avista Funds have subscribed for 62,000 shares of Series A Preferred Stock (as defined below) for $1,000 per share (the “Avista Preferred Shares”); and
WHEREAS, each of Avista and the Company believes that it is in the best interests of the Company and the Stockholders to amend and restate the Original Stockholders Agreement in its entirety.
NOW, THEREFORE, in consideration of the covenants and agreements contained herein, the parties hereto hereby amend and restate the Original Stockholders Agreement and agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Definitions.
(a) The following terms, as used herein, have the following meanings:
“Affiliate” means, with respect to any Person, any other Person who, directly or indirectly, controls such first Person or is controlled by said Person or is under common control with said Person, where “control” means the power and ability to direct, directly or indirectly, or share equally in or cause the direction of, the management and/or policies of a Person, whether through ownership of voting shares or other equivalent interests of the controlled Person, by contract (including proxy) or otherwise.
“Aggregate Ownership” means, with respect to any Stockholder and any class of Equity Security, the total number of Equity Securities of such class owned by such Stockholder and its Permitted Transferees and, with respect to the Avista Funds, including the Avista Syndication Vehicle.
“Avista Permitted Transferee” means, with respect to any Avista Fund or its Permitted Transferee, an investment fund that is a parallel fund or an alternative investment vehicle of the Avista Funds with the same general partner as the Avista Funds or a direct or indirect wholly-owned Subsidiary of the Avista Funds or such parallel fund or alternate investment vehicle; provided, however, that no “portfolio company” (as such term is customarily used among institutional investors) of the Avista Funds or any entity controlled by any portfolio company of the Avista Funds shall constitute an Avista Permitted Transferee.
“Board” means the Board of Directors of the Company.
“Business” means, with respect to the Company and its Subsidiaries, the business of developing, formulating, supplying, manufacturing, packaging, marketing, selling and distributing automotive aftermarket products for use with motor vehicles and other uses related thereto.
“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York City, New York are authorized or required by applicable law to close.
“By-laws” means the amended and restated by-laws of the Company, a copy of which is attached as Exhibit B hereto, as the same may be amended from time to time as permitted hereunder.
“Call Period” means, with respect to the application of the provisions of Article VI to a Terminated Management Stockholder:
(a) With respect to a Purchased Share, the period from the Termination Date with respect to such Terminated Management Stockholder to the date that is sixty (60) days after the later of (A) such Termination Date, or (B) the date on which the basis for such termination or resignation is finally determined, to the extent the same is disputed;
(b) With respect to any Equity Security purchased pursuant to the exercise of an Incentive Security:
(i) if the date of purchase of such Equity Security pursuant to the exercise of such Incentive Security (the “Exercise Date”) occurred before the Termination Date with respect to such Terminated Management Stockholder, the period from such Termination Date to the later of (A) the date that is sixty (60) days after the later of (I) such Termination Date, or (II) the date on which the basis for such termination or resignation is finally determined, to the extent the same is disputed and (B) the date that is one hundred and eighty (180) days after the Exercise Date; and
(ii) if the Exercise Date occurs after the Termination Date with respect to such Terminated Management Stockholder, the period from the Exercise Date to the later of (A) the date that is one-hundred and eighty (180) days after the Exercise Date, or (B) the date that is sixty (60) days after the date on which the basis for such termination or resignation is finally determined, to the extent the same is disputed.
“Cause” means, with respect to any Management Stockholder, “Cause” (or terms of similar effect) as defined in an employment agreement, if any, between the Company or any of its Subsidiaries and such Management Stockholder, or, if not so defined, in any award agreement pertaining to the granting of any Incentive Security, if any, by and between the Company or any of its Subsidiaries and such Management Stockholder or, if not so defined:
(a) the Management Stockholder’s breach of any fiduciary duty or legal or contractual obligation to the Company or any of its Affiliates, or to the Company’s direct or indirect equity holders;
(b) the Management Stockholder’s failure to follow the reasonable instructions of the Board or such Management Stockholder’s direct supervisor, which breach, if curable, is not cured within ten (10) Business Days after notice to such Management Stockholder or, if cured, recurs within one-hundred and eighty (180) days;
(c) the Management Stockholder’s gross negligence, willful misconduct, fraud, insubordination, acts of dishonesty or conflict of interest relating to the Company or any of its Affiliates; or
(d) the Management Stockholder’s commission of any misdemeanor relating to the affairs of the Company or any of its Affiliates or any felony.
“Change of Control” means (a) any transaction or series of related transactions, whether or not the Company is a party thereto, in which, after giving effect to such transaction or transactions, the Equity Securities representing in excess of fifty percent (50%) of the voting power of the Company are owned directly, or indirectly through one or more entities, by any “person” or “group” (as such terms are used in Section 13(d) of the Exchange Act) of Persons, other than the Avista Funds, the Avista Syndication Vehicle and their Permitted Transferees, or (b) a sale, lease or other disposition of all or substantially all of the assets of the Company and its Subsidiaries on a consolidated basis (including securities of the Company’s directly or indirectly owned Subsidiaries) to one or more purchasers other than the Stockholders or their Affiliates.
“Common Stock” means the shares of common stock, par value $0.01 of the Company.
“Company Competitor” means (a) any Person that is reasonably determined by a majority of the disinterested members of the Board to be a competitor of the Company or any of its Subsidiaries in any material respect and (b) any Affiliate of any such Person specified in clause (a). For purposes hereof, without limiting the foregoing, any Person with, or whose Affiliate has, substantial operations in the Business shall be presumed to be a Company Competitor unless the Board otherwise determines; provided, however, that for purposes of this Agreement, no private equity fund or the Avista Funds or, in each case, their respective Affiliates, shall be deemed a Company Competitor solely due to its direct or indirect investment in a portfolio company of such Person where such portfolio company would be deemed a Company Competitor.
“Drag-Along Portion” means, with respect to any Other Stockholder and any class of Equity Securities, the product of (i) the Aggregate Ownership of such class of Equity Securities by such Other Stockholder, multiplied by (ii) a fraction, the numerator of which is the number of such class of Equity Securities proposed to be sold by the Drag-Along Seller in the applicable Drag-Along Sale under Section 5.02, and the denominator of which is Drag-Along Seller’s Aggregate Ownership of the class of Equity Securities to be sold in such Drag-Along Sale.
“Drag-Along Sale” means any transaction in which the Avista Entities propose to Transfer (i) at least 50% of the then issued and outstanding shares of Common Stock or (ii) shares of any class or classes of Equity Securities representing at least 50% of the voting power of all Equity Securities, to a Third Party.
“Drag-Along Transferee” means any Third Party in a proposed Drag-Along Sale.
“Equity Securities” means, without duplication, (i) the Common Stock, (ii) the Preferred Stock, (iii) any other equity security of the Company and (iv) any other securities convertible into or exchangeable or exercisable for, or options, warrants or other rights to acquire the foregoing. Schedule A hereto sets forth the names of and the number of Equity Securities owned by each Stockholder as of the date hereof, and the
Company shall update Schedule A from time to time to reflect any issuances or Transfers of Equity Securities.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“Fair Market Value” means, with respect to any of the Equity Securities as of any date of determination:
(a) in the event that such Equity Securities are listed on an established U.S. national securities exchange or any established over-the-counter trading system, the average of the closing prices of such Equity Securities on such exchange if listed or, if not so listed, the average bid and asked price of such Equity Securities reported on any established over-the-counter trading system on which prices for such Equity Securities are quoted, in each case, for a period of twenty (20) trading days prior to such date of determination; or
(b) in the event that such Equity Securities are not listed on an established U.S. national securities exchange or any established over-the-counter trading system, the fair market value of such Equity Securities as determined by the Board in good faith.
“Family Member” means, with respect to any Person who is an individual, any spouse or lineal descendants, including adoptive relationships.
“FINRA” means the Financial Industry Regulatory Authority, Inc.
“FMV Calculation Date” means, with respect to the application of the provisions of Article VI to a Terminated Management Stockholder:
(a) With respect to a Purchased Share, the Termination Date with respect to such Terminated Management Stockholder; and
(b) With respect to any Equity Security purchased pursuant to the exercise of an Incentive Security:
(i) if the Exercise Date occurred more than one-hundred and eighty (180) days before the Termination Date with respect to such Terminated Management Stockholder, such Termination Date; or
(ii) if the Exercise Date occurred less than one-hundred and eighty (180) days before the Termination Date with respect to such Terminated Management Stockholder or occurs after such Termination Date, the Call Notice Date with respect to such Equity Security.
“GAAP” means United States generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements
of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession that are in effect from time to time.
“Good Reason” means, with respect to any Management Stockholder, “Good Reason” (or terms of similar impact) as defined in an employment agreement, if any between the Company or any of its Subsidiaries and such Management Stockholder, or, if not so defined, in any award agreement pertaining to the granting of any Incentive Security, if any, by and between the Company or any of its Subsidiaries and such Management Stockholder or, if not so defined:
(a) the failure of the Company to pay or cause to be paid such Management Stockholder’s base salary or annual bonus, when due; or
(b) any act taken by the Company that results in any material and sustained diminution in such Management Stockholder’s authority or responsibilities from those that are consistent with his or her title;
provided, that any event described in clauses (a) or (b) above shall constitute Good Reason only if the Company fails to cure such event within thirty (30) days of receipt from Management Stockholder of written notice of the event which such Management Stockholder believes constitutes Good Reason; provided, further, that “Good Reason” shall cease to exist for an event on the thirtieth (30th) day following the later of its occurrence or such person’s knowledge thereof, unless such person has given the Company written notice thereof prior to such date.
“Governmental Authority” means any federal, state, local or foreign governmental authority, department, commission, board, bureau, agency, court, instrumentality or judicial or regulatory body or entity.
“Incentive Plan” means the Company’s 2010 Equity Incentive Plan, as the same may be amended, modified or supplemented, and any other incentive plan adopted by the Board from time to time.
“Incentive Securities” means Equity Securities purchased or acquired by, or issued to, a Management Stockholder or its Permitted Transferees pursuant to the exercise of options or other rights to acquire Equity Securities, or any other equity or equity-linked security issued by the Company, pursuant to the Incentive Plan, in each case other than Equity Securities issued pursuant to a Subscription Agreement.
“Initial Shares” means, with respect to any Stockholder or group of Stockholders, the number of Equity Securities owned by such Stockholder or such group of Stockholders, as of the earliest date it or they executed this Agreement, the Original Stockholders Agreement or any Joinder Agreement, which number is listed opposite their respective names on Schedule B attached hereto; provided, that the number of Initial Shares owned by each Stockholder shall be reduced (and Schedule B shall be modified accordingly), in the event of any redemption, repurchase or exchange of Equity Securities
by the Company in accordance with this Agreement that affects all holders of such Equity Securities equally or proportionately, by the number of Equity Securities so redeemed, repurchased or exchanged.
“IPO” means the initial Public Offering registered on Form S-1 (or any successor form under the Securities Act).
“Kinderhook Fund” means Kinderhook Capital Fund III, L.P., a Delaware limited partnership.
“Kinderhook Permitted Transferee” means, (i) with respect to Kinderhook Fund or its Permitted Transferee, an investment fund that is a parallel fund or an alternative investment vehicle of Kinderhook Fund with the same general partner as Kinderhook Fund or a company or other entity of which Kinderhook Fund or any such parallel fund or alternate investment vehicle owns at least a majority of the outstanding voting equity securities of such entity; provided, however, that no “portfolio company” (as such term is customarily used among institutional investors) of Kinderhook Fund or any entity controlled by any portfolio company of Kinderhook Fund shall constitute a Kinderhook Permitted Transferee and (ii) with respect to Kinderhook, means its owners as of the date hereof (which include Kinderhook Fund and certain Management Stockholders); provided, that for purposes of the definition of “Aggregate Ownership” and for purposes of Sections 2.01(a)(iii), 8.01 and 9.10, no Management Stockholder shall be deemed a Kinderhook Permitted Transferee; provided, further, that if Kinderhook distributes all of the Preferred Stock and Common Stock to its owners, then, for purposes of this Agreement, all references to “Kinderhook” shall be deemed to be references to “Kinderhook Fund” and the Preferred Stock and Common Stock so distributed to any Management Stockholders will be deemed to be owned by such Management Stockholders pursuant to this Agreement solely in their capacity as a “Management Stockholder” and subject to the provisions applicable to “Management Stockholders” hereunder.
“Management Permitted Transferee” means, with respect to any Management Stockholder, (i) any executor, administrator or testamentary trustee of such Stockholder’s estate if such Stockholder dies, (ii) any Person receiving Equity Securities of such Stockholder by will, intestacy laws or the laws of descent or survivorship, or (iii) any trustee of a trust (including an inter vivos trust) of which there are no principal beneficiaries other than such Stockholder or one or more Family Members of such Stockholder.
“Management Stockholders” means, collectively, those certain employees and consultants of the Company or its Subsidiaries who are, from time to time, party to this Agreement and their Permitted Transferees.
“Monitoring Agreement” means (i) the Advisory Services and Monitoring Agreement by and between Armored AutoGroup Inc. (formerly known as Viking Acquisition Inc.) and Avista Capital Holdings L.P., dated as of November 5, 2010, as the same may be amended, supplemented or modified from time to time and (ii)
the Management Agreement by and between Kinderhook Industries III, L.P. and IDQ Holdings, Inc., dated as of December 27, 2012 (as amended).
“Non-Competition Period” shall mean, with respect to each Management Stockholder who is an employee of the Company or any of its Subsidiaries, the period commencing on the last day of such Management Stockholder’s employment by the Company or any of its Subsidiaries and ending on the first anniversary of the last day of such Management Stockholder’s employment by the Company or any of its Subsidiaries.
“Original Issue Price” means an amount per share equal to the value of the consideration originally paid for each share of Equity Securities when such Equity Securities were issued (as adjusted for stock splits, reverse stock splits, stock dividends, combinations or the like).
“Permitted Transferee” means, as applicable, an Avista Permitted Transferee, Kinderhook Permitted Transferee or a Management Permitted Transferee; provided, however, that in all cases such transferee shall execute a Joinder Agreement; provided, further, however, that in no event shall (A) the Company or any of its Subsidiaries, or (B) any Company Competitor (whether or not an Affiliate of the transferring Stockholder), constitute a “Permitted Transferee”.
“Person” means an individual, corporation, limited liability company, partnership, association, trust or other entity or organization, including a Governmental Authority.
“Preferred Stock” means the shares of preferred stock of any series designated by the Board, par value $0.01 of the Company.
“Public Offering” means an underwritten public offering of Common Stock pursuant to an effective registration statement under the Securities Act, other than pursuant to a registration statement on Form S-4 or Form S-8 or any similar or successor form.
“Purchased Shares” means Equity Securities acquired pursuant to a Subscription Agreement and any other Equity Securities purchased by a Management Stockholder on or after the date hereof, excluding (a) any Equity Securities purchased pursuant to the exercise of an Incentive Security and (b) any Equity Securities purchased by a Management Stockholder after an IPO in any open market transaction.
“Registrable Securities” means shares of Common Stock, including those shares of Common Stock issuable upon exercise, conversion or exchange of any option, warrant or other security of the Company or any of its Subsidiaries and any securities of the Company which may be issued or distributed with respect to, or in exchange or substitution for, or conversion of, such Common Stock and such other securities pursuant to a stock dividend, stock split or other distribution, merger, consolidation, recapitalization or reclassification or otherwise or subsequently acquired by the Stockholders; provided, that Registrable Securities shall not include any shares (i) the
sale of which has been registered pursuant to the Securities Act and which shares have been sold pursuant to such registration, (ii) which have been sold pursuant to Rule 144 or Rule 145, (iii) which have been registered for resale pursuant to an effective registration statement on a Form S-8 (or any successor or similar form); and provided, further, that, for the avoidance of doubt, all Registrable Securities held by Management Stockholders shall remain subject to Section 4.02 and Article VI of this Agreement.
“Registration Expenses” means any and all expenses incident to the performance of or compliance with any registration or marketing of securities, including all (i) registration and filing fees, and all other fees and expenses payable in connection with the listing of securities on any securities exchange or automated interdealer quotation system, (ii) fees and expenses of compliance with any securities or “blue sky” laws (including reasonable fees and disbursements of counsel in connection with “blue sky” qualifications of the securities registered), (iii) expenses in connection with the preparation, printing, mailing and delivery of any registration statements, prospectuses and other documents in connection therewith and any amendments or supplements thereto, (iv) security engraving and printing expenses, (v) internal expenses of the Company (including all salaries and expenses of its officers and employees performing legal or accounting duties), (vi) fees and disbursements of counsel for the Company and customary fees and expenses for independent certified public accountants retained by the Company (including the expenses relating to any comfort letters or costs associated with the delivery by independent certified public accountants of any comfort letters to be provided pursuant to Section 7.05(h) hereof), (vii) fees and expenses of any special experts retained by the Company in connection with such registration, (viii) reasonable fees and out-of-pocket expenses of any counsel to the Avista Funds (including the Avista Syndication Vehicle), (ix) fees and expenses in connection with any review of the underwriting arrangements or other terms of the offering, and all fees and expenses of any “qualified independent underwriter” or other independent appraiser participating in any offering, including the fees and expenses of any counsel thereto, (x) fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding any underwriting fees, discounts and commissions attributable to the sale of Registrable Securities, (xi) costs of printing and producing any agreements among underwriters, underwriting agreements, any “blue sky” or legal investment memoranda and any selling agreements and other documents in connection with the offering, sale or delivery of the Registrable Securities, (xii) transfer agents’ and registrars’ fees and expenses and the fees and expenses of any other agent or trustee appointed in connection with such offering, (xiii) expenses relating to any analyst or investor presentations or any “road shows” undertaken in connection with the registration, marketing or selling of the Registrable Securities, (xiv) fees and expenses payable in connection with any ratings of the Registrable Securities, including expenses relating to any presentations to rating agencies, and (xv) all other costs and expenses incurred by the Company or its officers in connection with their compliance with Article VII hereof.
“Rule 144” means Rule 144 (or any successor provision) under the Securities Act.
“Rule 145” means Rule 145 (or any successor provision) under the Securities Act.
“SEC” means the Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Series A Preferred Stock” means the shares of Preferred Stock designated by the Board as Series A Preferred Stock, par value $0.01 per share, of the Company.
“Subscription Agreement” means any subscription, contribution or similar agreement entered into between the Company and any Management Stockholders in connection with the purchase of any Equity Securities by such Management Stockholders, including the Contribution Agreement (as defined in the Purchase Agreement).
“Subsidiary” means, with respect to any specified Person, any other Person in which such specified Person, directly or indirectly through one or more Affiliates or otherwise, beneficially owns at least fifty percent (50%) of the ownership interest (determined by equity or economic interests) in, and the voting control of, such other Person.
“Syndication Vehicle Agreement” means the limited liability company agreement of ACP Viking Co-Invest, LLC dated as of the November 5, 2010, as the same may be amended, supplemented or modified from time to time.
“Tag-Along Pro Rata Share” means, with respect to each Tag-Along Seller, or Tagging Person, as the case may be, a number of shares of Offered Securities equal to the aggregate number of shares that the prospective purchaser in a Tag-Along Sale is willing to purchase, multiplied by a fraction, the numerator of which is the Aggregate Ownership of such Tag-Along Seller or Tagging Person with respect to the class or classes of Offered Securities, as the case may be, and the denominator of which is equal to the Aggregate Ownership of the Tag-Along Seller and all Tagging Persons with respect to the class or classes of Offered Securities.
“Tag-Along Seller” means (i) the Avista Funds and their Permitted Transferees or (ii) any other Stockholder that owns, beneficially or of record, more than 10% of any class of Equity Securities outstanding at the time of a proposal of a Tag-Along Sale.
“Third Party” means a prospective purchaser (other than a Permitted Transferee of the prospective selling Stockholder) of Equity Securities in a bona fide arm’s-length transaction.
“Transfer” means, with respect to any Equity Securities, (i) when used as a verb, to sell, assign, dispose of, exchange, pledge, encumber, hypothecate or otherwise transfer such Equity Securities or any participation or interest therein, whether directly or indirectly, or agree or commit to do any of the foregoing, and (ii) when used as a noun, a direct or indirect sale, assignment, disposition, exchange, pledge, encumbrance, hypothecation, or other transfer of such Equity Securities or any participation or interest therein or any agreement or commitment to do any of the foregoing.
(b) Each of the following terms is defined in the Section set forth opposite such term:
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TERM |
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SECTION |
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AAG Opco |
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Recitals |
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Acquisition |
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Recitals |
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Agreement |
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Preamble |
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Avista |
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Preamble |
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Avista Designees |
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2.01(a)(i) |
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Avista Entities |
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5.04(a) |
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Avista Funds |
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Preamble |
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Avista Offshore |
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Preamble |
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Avista Preferred Shares |
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Recitals |
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Avista Syndication Vehicle |
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Preamble |
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CEO Director |
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2.01(a)(ii) |
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Call Notice Date |
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6.01(b) |
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Company |
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Preamble |
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Confidential Information |
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8.03(a) |
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Confidentiality Affiliates |
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8.03(a) |
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Damages |
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7.06 |
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Demand Maximum Offering Size |
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7.01(d) |
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Demand Registration |
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7.01(a) |
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Determination Time |
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4.02(b) |
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Drag-Along Sale Notice |
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5.02(c) |
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Drag-Along Sale Notice Period |
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5.02(c) |
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Drag-Along Sale Price |
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5.02(c) |
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Drag-Along Sale Period |
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5.02(d) |
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Drag-Along Seller |
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5.02(a) |
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Employer |
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6.01(a) |
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Excess Shares |
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5.04(c) |
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Fully Participating Stockholder |
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5.04(c) |
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IDQ Acquisition |
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Recitals |
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Indemnified Party |
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7.08 |
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Indemnifying Party |
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7.08 |
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Inspectors |
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7.05(g) |
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Issuance Notice |
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5.04(a) |
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Joinder Agreement |
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Preamble |
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Kinderhook |
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Preamble |
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TERM |
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SECTION |
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Kinderhook Designee |
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2.01(a)(iii) |
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Lock-Up Period |
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4.01(b) |
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Offered Securities |
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5.01(a) |
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Other Stockholders |
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5.02(a) |
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Participating Stockholders |
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5.04(a) |
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Piggyback Maximum Offering Size |
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7.02(b) |
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Piggyback Registration |
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7.02(a) |
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Records |
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7.05(g) |
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Registering Stockholders |
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7.01(a)(ii) |
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Relative Ownership Percentage |
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4.02(b) |
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Replacement Nominee |
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2.03(a) |
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Repurchase Closing |
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6.02(b) |
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Requesting Stockholders |
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7.01(a) |
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Shelf Registration |
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7.03(a) |
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Shelf Request |
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7.03(a) |
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Stockholder |
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Preamble |
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Stockholders |
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Preamble |
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Stock Purchase Agreement |
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Recitals |
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Tag-Along Notice |
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5.01(a) |
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Tag-Along Notice Period |
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5.01(c) |
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Tag-Along Offer |
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5.01(a) |
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Tag-Along Offerees |
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5.01(a) |
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Tag-Along Response Notice |
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5.01(c) |
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Tag-Along Right |
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5.01(c) |
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Tag-Along Sale |
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5.01(a) |
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Tag-Along Sale Percentage |
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5.01(b) |
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Tagging Persons |
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5.01(c) |
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Terminated Management Stockholder |
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6.01(a) |
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Termination Date |
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6.01(a) |
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Termination Event |
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6.01(a) |
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Termination Price |
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6.01(a) |
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Termination Securities |
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6.01(a) |
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Underwritten Shelf Take-down |
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7.03(b) |
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Unrestricted Securities |
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4.02(b)(i) |
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Unwinding Event |
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4.04(b) |
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Withdrawing Holders |
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7.04(b) |
(c) Other Definitional and Interpretive Matters. Unless otherwise expressly provided, for purposes of this Agreement, the following rules of interpretation shall apply:
(i) Calculation of Time. When calculating the period before which, within which or after which any act is to be done or step taken pursuant to this Agreement, the date that is the reference date in calculating such period shall be excluded. If the last day of such period is
a non-Business Day, the period in question shall end on the next succeeding Business Day.
(ii) Dollars. Any reference in this Agreement to “$” means U.S. dollars.
(iii) Annexes/Exhibits/Schedules. The Annexes, Exhibits and Schedules to this Agreement are hereby incorporated and made a part hereof and are an integral part of this Agreement. Any capitalized terms used in any Annex, Exhibit or Schedule but not otherwise defined therein shall be defined as set forth in this Agreement.
(iv) Gender and Number. Any reference in this Agreement to gender shall include all genders, and words imparting the singular number only shall include the plural and vice versa.
(v) Headings. The provision of a Table of Contents, the division of this Agreement into Articles, Sections and other subdivisions and the insertion of headings are for convenience of reference only and shall not affect or be utilized in construing or interpreting this Agreement. All references in this Agreement to any “Article” or “Section” are to the corresponding Article or Section of this Agreement unless otherwise specified.
(vi) Herein. The words such as “herein,” “hereinafter,” “hereof,” and “hereunder” refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires.
(vii) Other. The words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.” The phrases “provided to,” “furnished to,” and phrases of similar import when used herein, unless the context otherwise requires, shall mean that a true, correct and complete copy of the information or material referred to has been provided to the party to whom such information or material is to be provided. The word “extent” in the phrase “to the extent” means the degree to which a subject or other thing extends, and such phrase does not mean simply “if.”
ARTICLE II
CORPORATE GOVERNANCE
Section 2.01 Composition of the Board.
(a) The Board shall consist of such number of directors as may be determined by the Avista Funds from time to time. From and after the date hereof, the Board shall consist of seven (7) members designated as follows:
(i) Avista, for and on behalf of the Avista Funds, shall have the right to appoint five (5) directors (the “Avista Designees”), who as of the date hereof are David Burgstahler, David Durkin, Allen Yurko, David Lundstedt and Jackson Phillips,
(ii) the then-current Chief Executive Officer of the Company (the “CEO Director”), who as of the date hereof is Michael Klein, shall serve as a director, and
(iii) Kinderhook, shall have the right to appoint one director (the “Kinderhook Designee”), who as of the date hereof is Christian Michalik, so long as Kinderhook, together with its Permitted Transferees, collectively own at least 50% of Kinderhook’s Initial Shares of Common Stock.
(b) A quorum of the Board shall consist of a majority of the members of the Board and the presence of at least one (1) Avista Designee; provided, however, that if quorum is not present at the originally scheduled meeting of the Board, then such meeting shall be adjourned and a notice to the members of the Board shall be given in accordance with the By-laws.
(c) Each Stockholder shall, at any time it is then entitled to vote for the election of directors to the Board, vote all of its Equity Securities that are entitled to vote or execute proxies or written consents, as the case may be, and take all other necessary action (including causing the Company to call a special meeting of Stockholders) in order to ensure that the composition of the Board is as set forth in Section 2.01, Section 2.02 and Section 2.03. Each Management Stockholder hereby grants to Avista, so long as Avista is able to designate one (1) or more Avista Designees pursuant to this Section 2.01 an irrevocable proxy coupled with an interest to vote, including in any action by written consent, such Management Stockholder’s Equity Securities in accordance with such Management Stockholder’s agreements contained in this Section 2.01(c).
(d) The Company shall cause each Avista Designee to be nominated to serve as a director on the Board, and to take all other necessary actions (including calling a special meeting of the Board and/or Stockholders) to ensure that the composition of the Board is as set forth in Sections 2.01, 2.02, and 2.03.
(e) The Company shall cause the Kinderhook Designee to be nominated to serve as a director on the Board, and to take all other necessary actions (including calling a special meeting of the Board and/or Stockholders) to ensure that the composition of the Board is as set forth in Sections 2.01, 2.02, and 2.03.
(f) Subject to Section 2.07, the Stockholders shall negotiate in good faith such changes to the composition of the members of the Board as may be necessary for the appointment of independent directors to the extent required in order to comply with applicable securities laws or exchange rules; provided, that no such change will result in Kinderhook ceasing to have a right to appoint the Kinderhook Designee as a member of the Board in accordance with Section 2.01(a)(iii).
Section 2.02 Removal. No Stockholder shall, at any time it is then entitled to vote for the removal of directors from the Board, vote any of its Equity Securities in favor of the removal of any Avista Designee or Kinderhook Designee, unless the designating party shall have, pursuant to this Section 2.02, requested such removal in writing; provided, however, that if Avista or Kinderhook shall, pursuant to this Section 2.02 or otherwise, request in writing the removal, with or without cause, of any such Avista Designee or Kinderhook Designee, respectively, so designated by it, each Stockholder shall vote all of its Equity Securities that are entitled to vote or execute proxies or written consents, as the case may be, in favor of such removal.
Section 2.03 Vacancies.
(a) In the event that a vacancy is created on the Board at any time by the death, disability, retirement, resignation or removal of any Avista Designee or Kinderhook Designee, only Avista or Kinderhook, respectively, may designate another individual (the “Replacement Nominee”) to fill such vacancy and serve as a director on the Board and each Stockholder then entitled to vote for the election of directors to the Board shall vote all of its Equity Securities that are entitled to vote or execute proxies or written consents, as the case may be, in order to ensure that the Replacement Nominee is elected to the Board.
(b) If the CEO Director is no longer Chief Executive Officer of the Company, then the CEO Director shall be deemed to have resigned from the Board immediately upon ceasing to be Chief Executive Officer and the vacancy created thereby shall be filled with the new Chief Executive Officer or as otherwise determined by the Board.
Section 2.04 By-law Provisions. Each Stockholder shall vote all of its Equity Securities that are entitled to vote or execute proxies or written consents, as the case may be, and take all other actions necessary, to ensure that the By-laws (i) facilitate, and do not at any time conflict with, any provision of this Agreement and (ii) permit each Stockholder to receive the benefits to which such Stockholder is entitled under this Agreement. Each Management Stockholder hereby grants to Avista an irrevocable proxy coupled with an interest to vote, including in any action by written consent, such
Management Stockholder’s Equity Securities in accordance with such Stockholder’s agreements contained in this Section 2.04.
Section 2.05 Committees. Any executive committee, compensation committee, audit committee, investment committee, nominating committee or other significant committee of the Board (including any committee performing the functions usually reserved for the committees described above) will consist of such persons as the Board shall direct.
Section 2.06 Subsidiaries. The board of directors (and any committees thereof) of all Subsidiaries of the Company will consist of such persons as the Company shall direct (with the approval of the Board); provided, that if a designee or representative of the Avista Funds or their Affiliates is appointed to such board of directors (or any committee thereof), then Avista shall have the right to appoint members to such board of directors (or committees) in the same proportions as set forth in Section 2.01 (and the Company shall cause each such Subsidiary of the Company to take the appropriate action to complete such appointment).
Section 2.07 Matters Requiring Stockholder Consent. The Company shall not (and shall not permit any of its Subsidiaries to) take any of the actions listed below without the consent of the Avista Funds, so long as the Aggregate Ownership of the Avista Entities is at least 15% of any class of Equity Securities then outstanding:
(a) except in connection with the consummation of a Drag-Along Sale, amend (including by way of merger or otherwise) or waive any provisions of the by-laws, certificate of incorporation or other organizational or constitutive documents of the Company or any of its Subsidiaries;
(b) increase or decrease the number of directors (which as of the date hereof is seven (7) members) constituting the Board;
(c) declare or pay any cash or other dividend or make any other distribution on the share capital of the Company or on the share capital of any Subsidiary other than dividends or other distributions by a direct or indirect wholly-owned Subsidiary of the Company to its equity holders;
(d) authorize, create, reclassify or issue (whether by dividend, distribution or otherwise) any Equity Securities, including in connection with an IPO, but excluding (i) issuances pursuant to the Incentive Plan or any employment agreement approved by the Board or (ii) issuances of equity securities of a Subsidiary to the Company or to a wholly owned Subsidiary of the Company;
(e) purchase, repurchase or redeem (through an exchange or otherwise) any Equity Securities other than pursuant to the Incentive Plan or any employment agreement approved by the Board;
(f) enter into any merger, share exchange, reorganization or consolidation or similar transaction, or otherwise sell all or substantially all of the assets of the Company other than in connection with the consummation of a Drag-Along Sale;
(g) enter into or effect any transaction or series of related transactions, involving the purchase, rent, license, exchange or other acquisition by the Company or any of its Subsidiaries of any assets (including any securities of any other Person) for consideration having a fair market value (as reasonably determined by the Board) in excess of thirty million dollars ($30,000,000);
(h) enter into or effect any transaction or series of related transactions, involving the sale, lease, license, exchange or other disposal by the Company or any of its Subsidiaries of any assets (including any securities of the Company or any of its Subsidiaries) for consideration having a fair market value (as reasonably determined by the Board) in excess of twenty million dollars ($20,000,000), other than in connection with the consummation of a Drag-Along Sale;
(i) other than the incurrence of trade payables in the ordinary course of business, incur any indebtedness, assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other Person (provided that the Company or any of its direct or indirect Subsidiaries may provide cross-guarantees for any indebtedness that has been approved under this Section 2.07), or enter into any agreement under which it may incur indebtedness in the future, in an aggregate amount in excess of twenty-five million dollars ($25,000,000), (ii) make any loan, advance or capital contribution to any Person (other than to any of the Company’s direct or indirect wholly-owned Subsidiaries) in an aggregate amount in excess of twenty-five million dollars ($25,000,000), (iii) make any voluntary prepayments of indebtedness of the Company or any of its Subsidiaries in an aggregate amount in excess of five million dollars ($5,000,000), or (iv) make an amendment to the maturity date, aggregate principal amount, amortization schedule or interest rate of existing indebtedness;
(j) enter into any material joint venture, partnership, business alliance or similar arrangement, that has, or would reasonably be expected to have, an aggregate value in excess of twenty million dollars ($20,000,000) in one transaction or series of transactions, or modify or amend any material joint venture, partnership, business alliance similar arrangement;
(k) undertake a voluntary liquidation or dissolution (other than in connection with the consummation of a Drag-Along Sale), file for bankruptcy protection, or take any other action evidencing or admitting insolvency;
(l) establish or amend any material term of any severance or management equity program or compensation and benefits for senior executives or any other equity compensation plans for employees;
(m) engage in any transactions with any officer, director, employee or Stockholder or any of their respective Affiliates or any other related persons, other than
with respect to (i) the Monitoring Agreement, (ii) the payment of customary directors’ fees and expenses, (iii) employment and compensation arrangements for non-executive employees, and (iv) transactions exclusively between or among the Company or any of its Subsidiaries and any portfolio company (as such term is customarily used among institutional investors) of, or entities otherwise Affiliated with, the Avista Funds in the ordinary course of business and on commercially reasonable, arms-length terms;
(n) settle, resolve or initiate any material litigation;
(o) appoint or remove the independent auditors of the Company or make material changes in accounting principles used by the Company and its Subsidiaries;
(p) hire or remove, with or without cause, the Chief Executive Officer or the Chief Financial Officer of the Company or any of its Subsidiaries, from time to time;
(q) make any material change in the business strategy or operations of the Company or any of its Subsidiaries;
(r) request, authorize receipt of or accept, with respect to any Stockholder, any capital contribution, whether of cash or of other property, to the capital of the Company made by such Stockholder; and
(s) make any agreement or arrangement to carry out any of the matters referred to above under this Section 2.07.
Section 2.08 Budget. On or prior to the date which is sixty (60) days prior to the end of each fiscal year, the Chief Executive Officer of the Company shall present to the Board for its review and approval, such approval to be by a majority of the members of the Board, a detailed operating budget (the “Budget”) for the following calendar year.
ARTICLE III
[RESERVED]
ARTICLE IV
RESTRICTIONS ON TRANSFER
Section 4.01 General Restrictions on Transfer.
(a) Each Stockholder understands and agrees that the Equity Securities held by it have not been registered under the Securities Act and are restricted securities under the Securities Act. No Stockholder shall Transfer any Equity Securities (or solicit any offers in respect of any Transfer of any Equity Securities), except in compliance with
the Securities Act, any other applicable securities or “blue sky” laws and any restrictions on Transfer contained in this Agreement or any other provisions set forth in any other agreements or instruments pursuant to which such Equity Securities were issued.
(b) Notwithstanding anything in this Agreement to the contrary, a Stockholder may not transfer any of its Equity Securities, except in accordance and compliance with this Article IV, including to a Permitted Transferee in accordance with Section 4.04, and Article V.
(c) Notwithstanding anything in this Agreement to the contrary, except in connection with the consummation of a Drag-Along Sale, no Stockholder shall Transfer any Equity Securities to a Company Competitor without the prior written consent of the Board.
(d) Notwithstanding anything in this Agreement to the contrary, any attempt to Transfer any Equity Securities not in compliance with this Agreement shall be null and void and have no force or effect, and the Company shall not, and shall cause any transfer agent not to, give any effect in the Company’s stock records to such attempted Transfer. The parties hereto acknowledge that the transfer restrictions contained herein are reasonable and in the best interests of the Company.
(e) The Transfer restrictions in this Agreement may not be avoided by the holding of equity securities directly or indirectly through a Person that can itself be sold to dispose of an interest in Equity Securities free of such restrictions.
Section 4.02 Restrictions on Transfer by Management Stockholders. Notwithstanding anything in this Agreement to the contrary:
(a) Prior to an IPO, no Management Stockholder may Transfer any of its Equity Securities, except (i) to a Permitted Transferee in accordance with Section 4.04, (ii) in a Tag-Along Sale or Drag-Along Sale pursuant to Sections 5.01 or 5.02, or (iii) with the prior written consent of the Avista Funds; provided that, in each case, such Transfer shall be in compliance with any agreement or instrument pursuant to which such Equity Securities have been issued.
(b) Following an IPO, until such time as the Avista Funds have Transferred at least 50% of the Common Stock owned by the Avista Funds immediately prior to the IPO, no Management Stockholder shall Transfer any Equity Securities, except (i) to Permitted Transferees pursuant to Section 4.04 or (ii) in the case of Common Stock, to the extent that such Transfer would result in the Relative Ownership Percentage (as defined below) of such Management Stockholder immediately following the effective time of such Transfer (the “Determination Time”) being less than the Relative Ownership Percentage of the Avista Funds immediately following the Determination Time. For purposes of this Section 4.02(b), “Relative Ownership Percentage” means:
(i) with respect to a Management Stockholder, a fraction (expressed as a percentage), (A) the numerator of which is the number of
Common Stock other than unvested Incentive Securities (“Unrestricted Securities”) owned by such Management Stockholder immediately following the Determination Time and (B) the denominator of which is the sum of (x) the number of Unrestricted Securities owned by such Management Stockholder immediately following the IPO and (y) the number of Equity Securities owned by such Management Stockholder that were not Unrestricted Securities immediately following the IPO but that have subsequently become Unrestricted Securities; and
(ii) with respect to the Avista Funds, a fraction (expressed as a percentage), (A) the numerator of which is the aggregate number of Common Stock owned by the Avista Funds and the Avista Syndication Vehicle immediately following the Determination Time and (B) the denominator of which is the aggregate number of Common Stock owned by the Avista Funds and the Avista Syndication Vehicle immediately following the IPO.
Section 4.03 Legends.
(a) At all times prior to the IPO, in addition to any other legend that may be required, each certificate for Equity Securities issued to any Stockholder shall bear a legend in substantially the following form:
“THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY FOREIGN OR STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED; OFFERED OR SOLD EXCEPT IN COMPLIANCE THEREWITH. THIS SECURITY IS ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCKHOLDERS AGREEMENT DATED AS OF NOVEMBER 5, 2010 (AS AMENDED FROM TIME TO TIME), A COPY OF WHICH MAY BE OBTAINED UPON REQUEST FROM THE COMPANY OR ANY SUCCESSOR THERETO.”
(b) If any Equity Securities shall become freely transferable under the Securities Act, upon the written request of the holder thereof, the Company shall issue to such holder a new certificate evidencing such Equity Securities without the first sentence of the legend required by Section 4.03(a) endorsed thereon. The Company may request that the holder provide an opinion of legal counsel reasonably acceptable to it stating that such Equity Securities are freely transferable under the Securities Act. If any Equity Securities cease to be subject to any and all restrictions on Transfer and all other obligations set forth in this Agreement, the Company, upon the written request of the holder thereof, shall issue to such holder a new certificate evidencing such Equity Securities without the second sentence of the legend required by Section 4.03(a) endorsed thereon.
Section 4.04 Permitted Transferees.
(a) Subject to Section 4.01, any Stockholder may at any time Transfer any or all of its Equity Securities to a Permitted Transferee without the consent of any Person and without compliance with Section 5.01, to the extent applicable, so long as such Permitted Transferee shall have agreed in writing to be bound by the terms of this Agreement by executing a Joinder Agreement. Such Stockholder must give prior written notice to the Company and the Avista Funds of any proposed Transfer to a Permitted Transferee, including the identity of such proposed Permitted Transferee and such other documentation reasonably requested by the Company, to ensure compliance with the terms of this Agreement.
(b) If, while a Permitted Transferee holds any Equity Securities, a Permitted Transferee ceases to qualify as a Permitted Transferee in relation to the initial transferring Stockholder from whom or which such Permitted Transferee or any previous Permitted Transferee of such initial transferring Stockholder received such shares (an “Unwinding Event”), then:
(i) the relevant initial transferor Stockholder shall forthwith notify the other Stockholders and the Company of the pending occurrence of such Unwinding Event; and
(ii) immediately following such Unwinding Event, without limiting any other rights or remedies, such initial transferor Stockholder shall take all actions necessary to effect a Transfer of all the Equity Securities held by the relevant Permitted Transferee either back to such Stockholder or, pursuant to this Section 4.04, to another Person that qualifies as a Permitted Transferee of such initial transferring Stockholder.
(c) The Avista Funds hereby agree that they shall cause (and shall cause their Affiliates to cause) each of the Avista Permitted Transferees to continue to be an Avista Permitted Transferee for so long as such Avista Permitted Transferee is a Stockholder. The Avista Funds agree that they shall cause (and shall cause their Affiliates to cause) each of their respective Avista Permitted Transferees to comply with this Agreement.
(d) Kinderhook hereby agrees that it shall cause (and shall cause its Affiliates to cause) each of the Kinderhook Permitted Transferees to continue to be a Kinderhook Permitted Transferee for so long as such Kinderhook Permitted Transferee is a Stockholder. Kinderhook agrees that it shall cause (and shall cause their Affiliates to cause) each of their respective Kinderhook Permitted Transferees to comply with this Agreement.
ARTICLE V
TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS; PREEMPTIVE RIGHTS
Section 5.01 Tag-Along Rights.
(a) At any time prior to an IPO, and subject to Section 5.03, if any Tag-Along Seller proposes to Transfer shares of any class of Equity Securities (“Offered Securities”) to any Third Party or Third Parties in a single transaction or in a series of related transactions (a “Tag-Along Sale”), the Tag-Along Seller shall first, by written notice to the Company, which shall provide each of the Stockholders that is not a Tag-Along Seller (the “Tag-Along Offerees”) with a copy of such notice (“Tag-Along Notice”), offer the Tag-Along Offerees (“Tag-Along Offer”) the opportunity to participate in such Transfer in accordance with this Section 5.01.
(b) The Tag-Along Notice shall identify (i) the class and number of shares of Offered Securities proposed to be sold by the Tag-Along Seller, (ii) the fraction expressed as a percentage, determined by dividing the number of shares of the specified class to be purchased from the Tag-Along Seller in such Tag-Along Sale by the number of shares of the specified class held by such Tag-Along Seller (the “Tag-Along Sale Percentage”) (it being understood that the Company shall reasonably cooperate with the Tag-Along Seller in respect of the determination of the Tag-Along Sale Percentage) and (iii) the consideration for which the Transfer is proposed to be made. Notwithstanding anything contained herein to the contrary, for purposes of this Section 5.01, Equity Securities of a Management Stockholder shall exclude any Incentive Securities, whether or not the options or other equity based awards for which such Incentive Securities would be issued are vested, unless the applicable options or other equity based awards are exercised prior to the end of the Tag-Along Notice Period (as defined below).
(c) From the date of its receipt of the Tag-Along Notice, each Tag-Along Offeree shall have the right (a “Tag-Along Right”), exercisable by written notice (“Tag-Along Response Notice”) given to the Tag-Along Seller within ten (10) days after receipt of the Tag-Along Notice (the “Tag-Along Notice Period”), to request that the Tag-Along Seller include in the proposed Transfer a number of shares of the specified class of Offered Securities held by such Tag-Along Offeree (such number of shares of the specified class shall not in any event exceed the Tag-Along Sale Percentage of the total number of shares of Offered Securities held by such Tag-Along Offeree). The Tag-Along Response Notice shall include wire transfer instructions for payment of the purchase price for the Offered Securities to be sold in such Tag-Along Sale. The Tag-Along Offerees that exercise their Tag-Along Rights hereunder (the “Tagging Persons”) shall deliver to the Tag-Along Seller, with the Tag-Along Response Notice, the certificate or certificates representing the Equity Securities of such Tagging Persons to be included in the Tag-Along Sale, together with a limited power-of-attorney from each Tagging Person authorizing the Tag-Along Seller to Transfer such Equity Securities on the terms set forth in the Tag-Along Notice and otherwise on terms and conditions applicable to the Tag-Along Seller or otherwise more advantageous to the Tagging Persons than set forth
in the Tag-Along Notice. Delivery of the Tag-Along Response Notice with such certificate or certificates and in the case of each Management Stockholder, a limited power-of-attorney shall constitute an irrevocable acceptance of the Tag-Along Offer by the Tagging Persons. In order to participate in a Tag-Along Sale, the Tagging Persons must agree to enter into and execute substantially identical agreements and documents as the Tag-Along Seller enters into and executes in connection with the Tag-Along Sale.
(d) If, at the end of a 120-day period after the date of receipt of the Tag-Along Notice (which 120-day period shall be extended if any of the transactions contemplated by the Tag-Along Offer are subject to regulatory approval until the expiration of five (5) Business Days after all such approvals have been received, but in no event later than one-hundred and eighty (180) days after the date of receipt of the written notice to the Company pursuant to Section 5.01(a)), the Tag-Along Seller has not completed the Transfer of all such Offered Securities on substantially the same terms and conditions set forth in the Tag-Along Notice (but as to price, the terms shall be exactly the same), the Tag-Along Seller shall (i) promptly return to the Tagging Persons the limited power-of-attorney (and all copies thereof) together with all certificates representing the Offered Securities that such Tagging Persons delivered for Transfer pursuant to this Section 5.01 and any other documents in the possession of the Tag-Along Seller executed by the Tagging Persons in connection with the proposed Tag-Along Sale, and (ii) not conduct any Transfer of such shares of the specified class of Offered Securities without again complying with this Section 5.01.
(e) Concurrently with the consummation of the Tag-Along Sale, the Tag-Along Seller shall (i) notify the Tagging Persons thereof, (ii) remit or cause to be remitted to the Tagging Persons the total consideration to be paid at the closing of the Tag-Along Sale for the Equity Securities of the Tagging Persons Transferred pursuant thereto, with the cash portion of the purchase price paid by wire transfer of immediately available funds in accordance with the wire transfer instructions in the Tag-Along Response Notice, and (iii) promptly after the consummation of such Tag-Along Sale, furnish such other evidence of the completion and the date of completion of such Transfer and the material terms thereof as may be reasonably requested by the Tagging Persons.
(f) If at the termination of the Tag-Along Notice Period, any Tag-Along Offeree has not elected to participate in the Tag-Along Sale, such Tag-Along Offeree shall be deemed to have waived its rights under Section 5.01(a) with respect to, and only with respect to, the Transfer of its Equity Securities pursuant to such Tag-Along Sale.
(g) If (i) any Tag-Along Offeree declines to exercise its Tag-Along Rights or (ii) any Tagging Person elects to exercise its Tag-Along Rights with respect to less than such Tagging Person’s Tag-Along Sale Percentage, the Tag-Along Seller shall be entitled to Transfer, pursuant to the Tag-Along Offer, a number of Offered Securities held by it equal to the number of Offered Securities constituting the Tag-Along Sale Percentage of such Tag-Along Offeree or the portion of such Tagging Person’s Tag-
Along Sale Percentage with respect to which Tag-Along Rights were not exercised, as the case may be.
(h) Notwithstanding anything contained in this Section 5.01, there shall be no liability on the part of the Tag-Along Seller to the Tagging Persons (other than the obligation to return any certificates evidencing the Offered Securities and other applicable documents received by the Tag-Along Seller) if the Transfer of Offered Securities pursuant to Section 5.01 is not consummated for whatever reason. The determination of whether to effect a Transfer of Offered Securities pursuant to this Section 5.01 by the Tag-Along Seller is in the sole and absolute discretion of the Tag-Along Seller.
(i) The Tag-Along Seller shall Transfer, on behalf of itself and the Tagging Persons, the Equity Securities subject to the Tag-Along Offer and elected by the Tagging Person to be Transferred on the terms and conditions set forth in the Tag-Along Notice within one-hundred and twenty (120) days (or such longer period as extended under Section 5.01(d)) after the date of receipt of the Tag-Along Notice.
(j) The provisions of this Section 5.01 shall not apply to any proposed Transfer of any Equity Securities by the Tag-Along Seller (i) pursuant to Section 5.02 if the Drag-Along Seller exercises its Drag-Along Rights, (ii) to any Permitted Transferee or (iii) pursuant to Section 5.04(f).
Section 5.02 Drag-Along Rights.
(a) Subject to Section 5.03, if at any time, prior to an IPO, the Avista Entities (the “Drag-Along Seller”) propose to Transfer Equity Securities in a transaction or series of transactions that qualifies as a Drag-Along Sale, the Drag-Along Seller may at its option require each other Stockholder that is not the Drag-Along Seller (the “Other Stockholders”) to participate in such Drag-Along Sale. Each Other Stockholder hereby agrees (i) if such Drag-Along Sale is structured as a Transfer of Equity Securities, whether by stock sale, merger, consolidation, recapitalization, reclassification or similar transaction, to Transfer the Drag-Along Portion of the applicable class or classes of Equity Securities then held by such Other Stockholder on the same terms and conditions as are applicable to the Drag-Along Seller, including the same per share consideration with respect to a specific class of Equity Securities; provided, that the terms of such Drag Along Sale may provide different per share consideration for different classes of Equity Securities to the extent consistent with the Company’s certificate of incorporation, and (ii) in the case of each Management Stockholder, subject to and at the closing of the Drag-Along Sale, to exercise, immediately prior to the Drag-Along Sale such number of options or other equity based awards for Incentive Securities held by such Management Stockholder as is required (taking into account all options, shares and other Equity Securities held by such Management Stockholder) in order that a sufficient number of Equity Securities are available to Transfer the relevant Drag-Along Portion of Equity Securities of such Management Stockholder, in each case for the same consideration per share of the relevant class of Equity Securities (subject to any exercise price and any required withholding or other taxes) and otherwise on the same terms and conditions as
the Drag-Along Seller; provided that, with respect to any such options or other equity based awards having an exercise price per share that is greater than the per share price at which the Equity Securities are to be Transferred to the Drag-Along Transferee, such Management Stockholder shall, to the extent required by the Drag-Along Seller to exercise such options or other equity based awards in place of such exercise, submit to irrevocable cancellation thereof (subject to Section 5.02(e)) without any liability for payment of any exercise price with respect thereto. If the Drag-Along Sale is not consummated with respect to any Equity Securities acquired upon exercise of such options or other equity based awards, such options or other equity based awards shall be deemed not to have been exercised or canceled, as applicable. All Other Stockholders shall reasonably cooperate in, and shall take all actions requested by the Drag-Along Seller that are reasonably necessary or desirable to consummate the Drag-Along Sale, including (i) voting their respective Equity Securities (or executing and delivering any written consents in lieu thereof) in favor of the Drag-Along Sale (to the extent a vote is required) and all actions deemed reasonably necessary by the Drag-Along Seller in connection with the Drag-Along Sale, including voting to approve a Drag-Along Sale if such Drag-Along Sale is structured as a merger or a sale of all or substantially all of the assets of the Company, and against any action or proposal that may prevent, hinder or impede the consummation of the Drag-Along Sale, (ii) waiving any dissenters’ or appraisal rights to which they may be entitled in connection with the Drag-Along Sale, (iii) subject to Section 5.03, entering into agreements with the Drag-Along Transferee on terms substantially identical to those (if any) entered into between the Drag-Along Transferee and the Drag-Along Seller, and (iv) take all actions necessary to cause the Board to approve the Drag-Along Sale, including, if applicable, removing and replacing any Avista Designees pursuant to Section 2.02. For purposes of clarity, the Drag-Along Seller may cause a Drag-Along Sale pursuant to this Section 5.02(a) in a Transfer for less than all of the outstanding Equity Securities of any class.
(b) Each Other Stockholder, other than Kinderhook, hereby grants to the Drag-Along Seller, an irrevocable proxy coupled with an interest to vote, including in any action by written consent, such Other Stockholder’s Equity Securities in accordance with such Other Stockholder’s agreements in this Section 5.02 and a power of attorney to execute and deliver in the name and on behalf of such Other Stockholder all such agreements, instruments and other documentation (including any written consents of stockholders) as is required to Transfer the applicable Equity Securities held by such Other Stockholder to the Drag-Along Transferee.
(c) The Drag-Along Seller shall provide written notice of such Drag-Along Sale to the Other Stockholders (a “Drag-Along Sale Notice”) not later than ten (10) days prior to the proposed Drag-Along Sale. The Drag-Along Sale Notice shall identify the Drag-Along Transferee, the number and class of Equity Securities subject to the Drag-Along Sale and the type and amount (or value) of consideration for which a Transfer is proposed to be made (the “Drag-Along Sale Price”). The number of Equity Securities to be sold by each Other Stockholder shall be such other Stockholder’s Drag-Along Portion of the applicable class of Equity Securities. Each Other Stockholder shall be required to participate in the Drag-Along Sale on the terms and conditions set forth in
the Drag-Along Sale Notice and to tender its applicable Equity Securities. The price payable in such Transfer shall be the Drag-Along Sale Price. Not later than five (5) days after receipt of the Drag-Along Sale Notice (the “Drag-Along Sale Notice Period”), each of the Other Stockholders shall deliver to a representative of the Drag-Along Seller designated in the Drag-Along Sale Notice the certificate or certificates and other applicable instruments representing the Equity Securities of such Other Stockholder to be included in the Drag-Along Sale, together with wire transfer instructions for payment of the cash portion of the consideration to be received in such Drag-Along Sale, or, if such delivery is not permitted by applicable law, an unconditional agreement to deliver such Equity Securities pursuant to this Section 5.02(c) at the closing for such Drag-Along Sale against delivery to such Other Stockholder of the consideration therefor. If an Other Stockholder should fail to deliver such certificates to the Drag-Along Seller and the Drag-Along Sale is consummated, the Company shall cause the books and records of the Company to reflect that such Equity Securities are bound by the provisions of this Section 5.02(c) and that such Equity Securities shall be Transferred to the Drag-Along Transferee immediately upon surrender for Transfer by the holder thereof.
(d) The Drag-Along Seller shall have a period of one-hundred and twenty (120) days from the date of receipt of the Drag-Along Sale Notice to consummate the Drag-Along Sale for the consideration set forth in such Drag-Along Sale Notice; provided, that if such Drag-Along Sale is subject to regulatory approval, such 120-day period shall be extended until the expiration of five (5) Business Days after all such approvals have been received, but in no event later than one-hundred and eighty (180) days after the date of receipt of the Drag-Along Sale Notice (the “Drag-Along Sale Period”). If the Drag-Along Sale shall not have been consummated during such period, the Drag-Along Seller shall promptly return to each of the Other Stockholders, the power of attorney and all certificates and other applicable instruments representing Equity Securities that such Other Stockholders delivered for Transfer pursuant hereto, together with any other documents in the possession of the Drag-Along Seller executed by the Other Stockholders in connection with such proposed Transfer, and all the restrictions on Transfer contained in this Agreement or otherwise applicable at such time with respect to such Equity Securities owned by the Other Stockholders shall again be in effect.
(e) Concurrently with the consummation of the Drag-Along Sale, the Drag-Along Seller shall give notice thereof to the Other Stockholders, shall remit or cause to be remitted to each of the Other Stockholders that has surrendered its certificates and other applicable instruments the total consideration to be paid at the closing of the Drag-Along Sale (the cash portion of which is to be paid by wire transfer of immediately available funds in accordance with such Other Stockholder’s wire transfer instructions) for the Equity Securities Transferred by such Other Stockholder pursuant hereto, and shall furnish such other evidence of the completion and time of completion of such Transfer and the material terms thereof as may be reasonably requested by such Other Stockholders.
(f) Notwithstanding anything contained in this Section 5.02, there shall be no liability on the part of the Drag-Along Seller to the Other Stockholders (other
than the obligation to return the limited power-of-attorney and the certificates and other applicable instruments representing Equity Securities received by the Drag-Along Seller) if the Transfer of Equity Securities pursuant to this Section 5.02 is not consummated for whatever reason, regardless of whether the Drag-Along Seller has delivered a Drag-Along Sale Notice. The decision to effect a Transfer of Equity Securities pursuant to this Section 5.02 by the Drag-Along Seller is in the sole and absolute discretion of the Drag-Along Seller.
(g) Notwithstanding anything to the contrary herein, no Other Stockholder may transfer any of its Equity Securities (whether to a Permitted Transferee or otherwise, except in connection with the Drag-Along Sale) during the period beginning on the date of receipt of the Drag-Along Sale Notice and ending at such earlier time as the Drag-Along Sale (x) is consummated, (y) is abandoned or terminated (with notice of such abandonment or termination having been provided by the Drag-Along Seller) or (z) fails to be consummated within the timeframe set forth in Section 5.02(d).
Section 5.03 Additional Provisions Related to Tag-Along Sales and Drag-Along Sales. Notwithstanding anything contained in Section 5.01 or Section 5.02 to the contrary, in connection with a Tag-Along Sale under Section 5.01 or a Drag-Along Sale under Section 5.02:
(a) upon the consummation of such Tag-Along Sale or Drag-Along Sale, all Stockholders of the same class of Equity Securities participating therein will receive the same form and amount of consideration per share (it being understood that any payments made pursuant to the Monitoring Agreement shall not, in the case of a Tag-Along or Drag-Along Sale, be deemed to constitute consideration for Equity Securities), or, if any Stockholder of a specified class of Equity Securities is given an option as to the form and amount of consideration to be received (other than stock rollover offered exclusively to Management Stockholders), all Stockholders of such specified class of Equity Securities participating therein will be given the same option;
(b) each Stockholder shall (i) make such representations, warranties and covenants and enter into such definitive agreements as are customary for transactions of the nature of the proposed Transfer; provided, that no Stockholder (other than Management Stockholders) shall be obliged to agree not to compete with, or solicit customers or employees of, any Person; provided, further, that no Management Stockholder who is a party to the Stock Purchase Agreement shall be obligated to agree in connection with such Tag-Along Sale or Drag-Along Sale not to compete with, or solicit customers or employees of, any Person to the extent such agreement restricts such Management Stockholder for a longer period of time than, or otherwise is more restrictive in the aggregate than, any non-competition and/or non-solicitation restrictions contained in the Stock Purchase Agreement (it being acknowledged and agreed that nothing in this proviso shall limit any non-competition and/or non-solicitation restrictions to which any Management Stockholder is subject), (ii) benefit from and be subject to all of the same provisions of the definitive agreements as are applicable to the Tag-Along Seller or Drag-Along Seller, as the case may be, (iii) be required to bear its proportionate
share of any escrows, holdbacks or adjustments in respect of the purchase price or indemnification obligations; provided, that no Stockholder shall be obligated (A) to indemnify, other than severally indemnify, any Person in connection with such Tag-Along Sale or Drag-Along Sale, as the case may be, or (B) to incur liability to any Person in connection with such Tag-Along Sale or Drag-Along Sale, as the case may be, including under any indemnity, in excess of the lesser of (1) its pro rata share of any liability of the Stockholders based on the proceeds to be realized by such Stockholder in such sale and (2) the proceeds realized by such Stockholder in such sale other than, in each case, for fraud by such Stockholder, and (iv) reasonably cooperate in obtaining all governmental and third-party consents and approvals reasonably necessary or desirable to consummate such Tag-Along Sale or Drag-Along Sale;
(c) in the event the consideration to be paid in exchange for Equity Securities in a Tag-Along Sale or Drag-Along Sale includes any securities, and the receipt thereof by a Stockholder would require under applicable law (i) the registration or qualification of such securities or of any Person as a broker or dealer or agent with respect to such securities where such registration or qualification is not otherwise required for the Tag-Along Sale or Drag-Along Sale, or (ii) the provision to any Tag-Along Seller or Drag-Along Seller of any specified information regarding such securities or the issuer thereof that is not otherwise required to be provided for the Tag-Along Sale or Drag-Along Sale, then such proposed Tag-Along Sale or Drag-Along Sale shall not be consummated unless the Tag-Along Seller or Drag-Along Seller (in its sole discretion) causes to be paid to such Stockholder in lieu thereof, against surrender of the Equity Securities which would have otherwise been Transferred by such Stockholder to the prospective purchaser in the proposed Tag-Along Sale or Drag-Along Sale, an amount in cash equal to the fair market value (as reasonably determined by the Board) of such Equity Securities as of the date such securities would have been issued in exchange for such Equity Securities;
(d) in connection with a Drag-Along Sale, if requested by the Drag-Along Seller, the Company will promptly engage, on customary terms (including customary indemnification from the Company), a nationally recognized investment banking firm selected by the Drag-Along Seller to provide financial advisory services to the Company, the Drag-Along Seller and the Other Stockholders, and the Company shall pay the fees and expenses of such investment banking firm; provided that such firm would not be affiliated with the Drag-Along Seller;
(e) in connection with a Drag-Along Sale, the Company will, if applicable, enter into a definitive agreement with the proposed transferee(s) providing for such Transfer and make and agree to representations, warranties, covenants and indemnities and other similar agreements that are reasonable and customary for negotiated transactions of the type contemplated by such Transfer;
(f) the Company agrees to reasonably cooperate with any Stockholder and any proposed transferee (other than a Company Competitor in the case of a Tag-Along Sale), and their respective advisors, to facilitate and effect any Tag-Along Sale or
Drag-Along Sale and, upon the request of any Stockholder that proposes to make a Tag-Along Sale or Drag-Along Sale, subject to any proposed transferee (other than a Company Competitor in the case of a Tag-Along Sale) executing a reasonably satisfactory confidentiality agreement with the Company, the Company will, and will cause its and its Subsidiaries’ employees and personnel to, use its and their reasonable best efforts to facilitate and support any due diligence process being undertaken in connection with such proposed Tag-Along Sale or Drag-Along Sale;
(g) the Company and the Stockholders will reasonably cooperate in the obtaining of all governmental and third-party approvals and consents reasonably necessary or desirable to consummate such Transfer; and
(h) all reasonable costs and expenses incurred by (i) the Avista Entities and the Company in connection with any proposed Drag-Along Sale (whether or not consummated) including all attorneys fees and charges, all accounting fees and charges and all finders, brokerage or investment banking fees, charges or commissions, shall be borne by the Company, (ii) by the Tag-Along Seller in connection with any proposed Tag-Along Sale (whether or not consummated) including all attorneys fees and charges, all accounting fees and charges and all finders, brokerage or investment banking fees, charges or commissions, shall be borne by the Tag-Along Seller and the Tagging Persons on a pro rata basis (based on the number of Offered Securities Transferred or proposed to be Transferred) to the extent such expenses are not otherwise paid by the Company or any other Person, and (iii) all other costs and expenses incurred by the Stockholders, or the Company in connection with any proposed Tag-Along Sale (whether or not consummated), including all attorneys fees and charges, all accounting fees and charges and all finders, brokerage or investment banking fees, charges or commissions, shall be borne by the party incurring such costs and expenses.
Section 5.04 Preemptive Rights.
(a) Prior to the consummation of an IPO, the Company shall give each of the Stockholders (other than the Avista Entities) that holds Common Stock that is an “accredited investor” (as such term is defined in Rule 501(a) of the Securities Act) as of the time of any proposed issuance by the Company or any of its Subsidiaries of any equity or debt securities of the Company or its Subsidiaries, including any Equity Securities (such securities, collectively, “Preemptive Securities;” and such Stockholders, “Participating Stockholders”), to any of the Avista Funds any of their respective Affiliates or any Avista Permitted Transferee (collectively, the “Avista Entities”), written notice (an “Issuance Notice”) of such proposed issuance at least ten (10) days prior to the proposed issuance date. The Issuance Notice shall specify the number and type of Preemptive Securities and the price at which such Preemptive Securities are proposed to be issued to the Avista Entities and the other material terms and conditions of such issuance, including the proposed closing date. Subject to Section 5.04(g), each such Participating Stockholder shall be entitled to purchase, at the price and on the other terms and conditions specified in the Issuance Notice, all or a portion of its pro rata amount of such newly issued Preemptive Securities to the Avista Entities equal to (x) the number of
such Preemptive Securities proposed to be issued to the Avista Entities by the Company, multiplied by (y) a fraction, the numerator of which is the Aggregate Ownership of Common Stock of such Participating Stockholder and the denominator of which is equal to the Aggregate Ownership of the Common Stock of all Stockholders, provided that if the Avista Entities are purchasing a pro rata strip of Equity Securities and debt securities, each Participating Stockholder shall be required to purchase debt securities and Equity Securities in the same proportion.
(b) Each Participating Stockholder may exercise its rights under this Section 5.04 by delivering written notice of its election to purchase such Preemptive Securities to the Company within ten (10) days after receipt of the Issuance Notice or notice pursuant to Section 5.04(f). A delivery of such notice (which notice shall specify the number of shares of such Preemptive Securities requested to be purchased by the Participating Stockholder submitting such notice) by such Participating Stockholder shall constitute a binding agreement of such Participating Stockholder to purchase, at the price and on the terms and conditions specified in the Issuance Notice or notice pursuant to Section 5.04(f), the number of such Preemptive Securities specified in such Participating Stockholder’s notice. If, at the termination of such 10 day-period, any Participating Stockholder has not exercised its right to purchase any of its pro rata share of such Preemptive Securities, such Participating Stockholder shall be deemed to have waived all of its rights under this Section 5.04 with respect to, and only with respect to, the purchase of such Equity Securities specified in the Issuance Notice or notice pursuant to Section 5.04(f).
(c) If any of the Participating Stockholders fails to exercise its preemptive rights under this Section 5.04, or elects to exercise such rights with respect to less than such Participating Stockholder’s pro rata share (the difference between such Participating Stockholder’s pro rata share and the number of shares for which such Stockholder exercised its preemptive rights under this Section 5.04, the “Excess Securities”), any Participating Stockholder electing to exercise its rights with respect to its full pro rata share (a “Fully Participating Stockholder”) shall be entitled to purchase from the Company an additional number of shares of such Preemptive Securities equal to the product of (i) the Excess Securities and (ii) a fraction, the numerator of which is the Aggregate Ownership of Common Stock of such Fully Participating Stockholder, and the denominator of which is equal to the Aggregate Ownership of Common Stock of all Fully Participating Stockholders, in each case, as of immediately prior to the exercise of any preemptive rights pursuant to Section 5.04(b) with respect to such proposed issuance of such Equity Securities; provided, that, notwithstanding the foregoing, in the event that any Avista Entity fails to exercise its preemptive rights under this Section 5.04 or elects to exercise such rights with respect to less than such Avista Entity’s pro rata share, the right to purchase the Excess Securities attributable to such Avista Entity shall be allocated to any Person designated by the Avista Funds in their sole discretion.
(d) The Company shall have one-hundred and twenty (120) days after the date of the Issuance Notice to consummate the proposed issuance of any or all of such Preemptive Securities that the Participating Stockholders have elected not to purchase at
the same (or higher) price and upon such other terms and conditions that are not materially less favorable to the Company than those specified in the Issuance Notice; provided, that if such issuance is subject to regulatory approval, such 120-day period shall be extended until the expiration of five (5) Business Days after all such approvals have been received, but in no event later than one-hundred and eighty (180) days after the date of the Issuance Notice. At the consummation of such issuance, the Company shall issue certificates (if applicable), representing such Preemptive Securities to be purchased by each Participating Stockholder exercising preemptive rights pursuant to this Section 5.04 registered in the name of such Participating Stockholder, against payment by such Participating Stockholder of the purchase price for such Preemptive Securities. If the Company proposes to issue such Preemptive Securities after such 120-day period or during such 120-day period at a lower price or on such other terms materially less favorable to the Company, it shall again comply with the procedures set forth in this Section 5.04.
(e) The closing of any issuance of Preemptive Securities to the Participating Stockholders pursuant to this Section 5.04, shall take place at the time and in the manner provided in the Issuance Notice. The Company shall be under no obligation to consummate any proposed issuance of Preemptive Securities, nor shall there be any liability on the part of the Company to any Participating Stockholder, if the Company has not consummated any proposed issuance of such Preemptive Securities pursuant to this Section 5.04 for whatever reason, except willful misconduct or breach of this Agreement, regardless of whether it shall have delivered an Issuance Notice in respect of such proposed issuance.
(f) The Company may issue Preemptive Securities subject to the preemptive rights under this Section 5.04 to the Avista Entities without first offering such Equity Securities to each of the Participating Stockholders or complying with the procedures of this Section 5.04, so long as (i) each of the Participating Stockholders receives prompt written notice of the consummation of such issuance, (ii) either the Company or the Avista Entity purchasing such Equity Securities commits (at the time of such initial issuance) to make available for sale to such Participating Stockholders a number of shares of such Equity Securities equal to (x) the number of shares of such Equity Securities issued by the Company to the Avista Entities multiplied by (y) a fraction, the numerator of which is the Aggregate Ownership of Common Stock of such Participating Stockholder (excluding the number of Equity Securities, if applicable, issued by the Company with respect to this provision) and the denominator of which is equal to the Aggregate Ownership of Common Stock of all Participating Stockholders and the Avista Entities (excluding the number of Equity Securities, if applicable, issued by the Company with respect to this provision), within sixty (60) days after the close of such issuance on the same terms and conditions as such prior issuance, and (iii) the price per security of such Preemptive Security shall be identical to the price per share paid in such prior sale.
(g) The preemptive rights under this Section 5.04 shall not apply to (i) issuances or sales of Equity Securities upon exercise, conversion or exchange of Equity
Securities that were either outstanding as of the date of this Agreement or which, when issued, were issued to officers and/or directors of the Company or any of its Subsidiaries pursuant to employee benefit or similar plans or arrangements of the Company approved in accordance with Section 2.07(m), or (ii) Equity Securities distributed or set aside ratably to all holders of a specified class of Equity Securities on a per share equivalent basis. The issuance of the Avista Preferred Shares shall be subject to Section 5.04(f); provided, however, that only Stockholders (other than the Avista Funds) as of immediately prior to the consummation of the transactions contemplated by the Stock Purchase Agreement (including the transactions contemplated by the Contribution Agreement (as defined in the Stock Purchase Agreement)) shall be entitled to any rights under this Section 5.04 with respect to the issuance of the Avista Preferred Shares.
ARTICLE VI
REPURCHASE RIGHTS
Section 6.01 Repurchase Rights upon Termination.
(a) Except as expressly provided in any Subscription Agreement executed by any Management Stockholder, if any Management Stockholder who is an employee or consultant of the Company or any of its Subsidiaries (the entity employing such Management Stockholder, the “Employer”) ceases to be employed by, or provide services to, the Company or any of its Subsidiaries (a “Terminated Management Stockholder”) for any reason (the reason for the termination of such employment or consultancy, the “Termination Event” and the date of such termination, the “Termination Date”), the Company shall have the right (but not the obligation) to purchase, and if such right is exercised, such Terminated Management Stockholder shall sell, and shall cause any Permitted Transferees of such Terminated Management Stockholder (which for the purposes of this Article VI shall include any Persons who, as of November 5, 2010, would be deemed to be Permitted Transferees) to sell (and such Permitted Transferees shall sell), to the Company all or any portion (as determined by the Company) of the Equity Securities (the “Termination Securities”) owned by such Terminated Management Stockholder and such Permitted Transferees at the price per Termination Security set forth in Section 6.02 (the “Termination Price”); provided, that the parties acknowledge that with respect to certain Termination Securities in certain circumstances, on the Termination Date, such Termination Securities will be forfeited pursuant to the terms of the agreement governing the grant or purchase of such Termination Securities.
(b) With respect to each Termination Security, the Company shall notify a Terminated Management Stockholder in a binding written election, within the Call Period with respect to such Termination Security, whether the Company will exercise its right to purchase such Termination Security (the date on which a Terminated Management Stockholder is so notified, the “Call Notice Date”). The Company may assign its right to purchase all or any portion of the Termination Securities under this Article VI to the Avista Funds (pro rata among the Avista Funds), and the Avista Funds
may exercise the rights of the Company under this Article VI in the same manner in which the Company could exercise such rights.
(c) The closing of the purchase by the Company or the Avista Funds, as applicable, of Termination Securities pursuant to this Article VI shall take place at the principal office of the Company on the date chosen by such purchaser, which date shall, except as may be reasonably necessary to determine the Termination Price, in no event be more than forty-five (45) days after the Call Notice Date. At such closing, (i) the Company or the Avista Funds, as applicable, shall pay the Terminated Management Stockholder and/or such Terminated Management Stockholder’s Permitted Transferees, as applicable, against delivery of duly endorsed certificates described below representing such Termination Securities, the aggregate Termination Price by wire transfer of immediately available funds and (ii) the Terminated Management Stockholder and/or such Terminated Management Stockholder’s Permitted Transferees, as applicable, shall deliver to the Company a certificate or certificates representing the Termination Securities to be purchased by the Company or the Avista Funds, as applicable, duly endorsed, or with share (or equivalent) powers duly endorsed, for transfer with signature guaranteed, free and clear of any lien or encumbrance, with any necessary share (or equivalent) transfer tax stamps affixed. The delivery of a certificate or certificates for the Termination Securities by any Person selling such Termination Securities pursuant to this Section 6.01 shall be deemed a representation and warranty by such Person that: (i) such Person has full right, title and interest in and to such Termination Securities; (ii) such Person has all necessary power and authority and has taken all necessary action to sell such Termination Securities as contemplated; (iii) such Termination Securities are free and clear of any and all liens or encumbrances and (iv) there is no adverse claim with respect to such Termination Securities.
Section 6.02 Termination Pricing and Payment Terms.
(a) The Termination Price of a Termination Security shall be determined as follows:
(i) With respect to a Termination Security that is a Purchased Share:
(A) If the Termination Event was for any reason other than a termination by the Employer for Cause, the Termination Price for such Termination Security shall be the Fair Market Value on the FMV Calculation Date of such Termination Security;
(B) If the Termination Event was a termination by the Employer for Cause, the Termination Price for such Termination Security shall be the lower of (1) the Fair Market Value on the FMV Calculation Date of such Termination Security and (2) the Original Issue Price of such Termination Security.
(ii) With respect to a Termination Security purchased pursuant to the exercise of any Incentive Security:
(A) With respect to any part of any Incentive Security that is unvested as of the Termination Date, such part will be forfeited in accordance with the terms of the grant agreement with respect to such Incentive Security and there shall be no Termination Price with respect thereto;
(B) With respect to any part of any Incentive Security that is vested (but not exercised) as of the Termination Date, the provisions of the grant agreement with respect to such Incentive Security regarding such Terminated Management Stockholder having a certain period of time to exercise such Incentive Security shall apply and, in the event that such Terminated Management Stockholder exercises such Incentive Security, the provisions of Section 6.02(a)(ii)(C) and Section 6.02(a)(ii)(D) shall apply;
(C) With respect to any part of any Incentive Security that is vested and exercised before or after the Termination Date in accordance with the terms of the grant agreement relating to such option, if the Termination Event was for any reason other than a termination by the Employer for Cause or termination by the Management Stockholder without Good Reason (except for a termination resulting from death or permanent disability, as such term may be defined in the applicable award agreement), the Termination Price for such Termination Security shall be the Fair Market Value on the FMV Calculation Date of such Termination Security (it being understood that this clause (C) shall apply with respect to any termination arising for death or permanent disability);
(D) With respect to any part of any Incentive Security that is vested and exercised before or after the Termination Date in accordance with the grant agreement relating to such award, if the Termination Event was a termination by the Employer for Cause or termination by the Management Stockholder without Good Reason (except for a termination resulting from death or permanent disability), the Termination Price for such Termination Security shall be the lower of (1) the Fair Market Value on the FMV Calculation Date of such Termination Security and (2) the exercise price paid with respect to the purchase of such share in connection with such exercise.
(b) In the event that the Company or the Avista Funds, as applicable, exercises a repurchase right pursuant to Section 6.01(a), the Company or the Avista Funds, as applicable, shall pay the Termination Price in cash; provided, however, that if
the Company did not assign its right to purchase all or any portion of the Termination Securities pursuant to Section 6.01(b) and the Company is at the time of the closing of the purchase of such Termination Securities (the “Repurchase Closing”) prohibited from purchasing all or any portion of such Termination Securities (i) because restrictive covenants or other provisions contained in the documents evidencing such entity’s or any of its Affiliates’ indebtedness for borrowed money do not permit or allow such entity to make such payments in cash in whole or in part; or (ii) pursuant to applicable law, the portion of the Termination Price not permitted to be made in cash may be paid by the execution and delivery by the Company of a promissory note or other deferred cash payment arrangement (if applicable, any promissory note to be subordinated to the indebtedness for borrowed money of such company or any of its Affiliates) bearing interest at the prime rate, as published in the Wall Street Journal, Eastern edition, on the first Business Day immediately prior to the day on which such promissory note or other deferred cash payment is issued, with principal and accrued interest payable at such time as is required in the Board’s determination to ensure that any payment pursuant to such promissory note or other deferred cash payment arrangement is not prohibited because of any of the matters described in clauses (i) or (ii) of this Section 6.02(b) above.
Section 6.03 Termination of Repurchase Right. Upon the consummation of an IPO, the repurchase rights of the Company under this Article VI shall terminate except as follows:
(a) With respect to a Termination Security that is an unvested Incentive Security (or part thereof) as of the date of the consummation of the IPO, the Company shall continue to have all rights pursuant to this Article VI until such Incentive Security (or part thereof) vests, at which point the rights of the Company pursuant to this Article VI with respect to such Incentive Security (or part thereof) shall terminate unless such vesting occurs prior to the first anniversary of the IPO, in which case the Company shall have the rights described in Section 6.03(b); and
(b) With respect to a Termination Security that is a Purchased Share or a share purchased pursuant to the exercise of any Incentive Security, if prior to the first anniversary of the consummation of the IPO, the employment or consultancy, as applicable, of a Management Stockholder with the Company or any of its Subsidiaries terminates and the Termination Event is a termination by the Company or any of its Subsidiaries for Cause, all rights pursuant to this Article VI shall remain in effect and be applicable to such Termination Event except that, notwithstanding anything in this Agreement to the contrary, the Termination Price for each such Terminated Security shall be the Fair Market Value on the FMV Calculation Date of such Terminated Security.
ARTICLE VII
REGISTRATION RIGHTS
Section 7.01 Demand Registration.
(a) If the Company shall receive a written request from any Avista Fund holding outstanding Registrable Securities (such requesting Persons, the “Requesting Stockholders”) that the Company effect the registration under the Securities Act of all or any portion of such Requesting Stockholders’ Registrable Securities, and specifying the intended method of disposition thereof, then the Company shall promptly give notice of such requested registration (each such request shall be referred to herein as a “Demand Registration”) at least ten (10) days prior to the anticipated filing date of the registration statement relating to such Demand Registration to the other Stockholders and thereupon shall use its reasonable best efforts to effect, as expeditiously as possible, the registration under the Securities Act of:
(i) all Registrable Securities for which the Requesting Stockholders have requested registration under this Section 7.01, and
(ii) subject to the restrictions set forth in Section 7.01(d), all other Registrable Securities that any other Stockholders (all such Stockholders, together with the Requesting Stockholders, the “Registering Stockholders”) have requested the Company to register by request received by the Company within seven (7) days after such Stockholders receive the Company’s notice of the Demand Registration, all to the extent necessary to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered; provided that no Person may participate in any registration pursuant to this Section 7.01(a) unless such Person agrees to sell their Registrable Securities to the underwriters selected as provided in Section 7.05(f) on the same terms and conditions as apply to the Requesting Stockholders; provided, however, that no such Registering Stockholders shall be required to make any representations or warranties, or provide any indemnity, in connection with any such registration other than representations and warranties (or indemnities with respect thereto) as to (i) such Person’s ownership of his, her or its Registrable Securities to be transferred free and clear of all liens, claims, and encumbrances, (ii) such Person’s power and authority to effect such transfer, and (iii) such matters pertaining to compliance with securities laws by such Registering Stockholder as may be reasonably requested; provided, further, however, that the obligation of such Person to indemnify pursuant to any such underwriting arrangements shall be several, not joint and several, among such Persons selling Registrable Securities, and the liability of each such Person will be in proportion thereto; and provided, further, that such liability will be limited to, the net proceeds received by such Person from
the sale of his, her or its Registrable Securities pursuant to such registration;
provided that, the Company shall not be obligated to effect a Demand Registration unless the aggregate gross proceeds expected to be received from the sale of the Registrable Securities requested to be included by all Registering Stockholders in such Demand Registration are at least $25,000,000.
(b) Promptly after the expiration of the seven (7)-day period referred to in Section 7.01(a)(ii) hereof, the Company will notify all Registering Stockholders of the identities of the other Registering Stockholders and the number of shares of Registrable Securities requested to be included therein. At any time prior to the effective date of the registration statement relating to such registration, a majority of the Requesting Stockholders may revoke such request without liability to any of the other Registering Stockholders, by providing a notice to the Company revoking such request.
(c) The Company shall be liable for and pay all Registration Expenses in connection with each Demand Registration, regardless of whether such Registration is effected; provided that holders of Registrable Securities shall pay all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for any Stockholder, except for the fees and disbursements of the Stockholders borne and paid by the Company as a Registration Expense.
(d) If a Demand Registration involves a Public Offering and the managing underwriter advises the Company and the Requesting Stockholders that, in its view, the number of Registrable Securities that the Registering Stockholders and the Company propose to include in such registration exceeds the largest number of Registrable Securities that can be sold without having an adverse effect on such offering, including the price at which such Registrable Securities can be sold (the “Demand Maximum Offering Size”), the Company shall include in such registration, in the priority listed below, up to the Demand Maximum Offering Size:
(i) first, all Registrable Securities requested to be registered by the Registering Stockholders (the Registrable Securities in this clause (i) allocated, if necessary for the offering not to exceed the Demand Maximum Offering Size, pro rata among the Requesting Stockholders and the other holders of Registrable Securities on the basis of the relative number of Registrable Securities so requested to be included in such registration by each); and
(ii) second, all Registrable Securities proposed to be registered by the Company.
(e) The Company may defer the filing (but not the preparation) of a registration statement, or suspend the continued use of a registration statement, required by Section 7.01 for a period of up to sixty (60) days after the request to file a registration
statement if at the time the Company receives the request to register Registrable Securities, the Company or any of its Subsidiaries are engaged in confidential negotiations or other confidential business activities, disclosure of which would be required in such registration statement (but would not be required if such registration statement were not filed), and the Board determines in good faith, after consultation with external legal counsel, that such disclosure would have a material adverse effect on the Company or its business or on the Company’s ability to effect a proposed material acquisition, disposition, financing, reorganization, recapitalization or similar transaction. A deferral of the filing of a registration statement, or the suspension of the continued use of a registration statement, pursuant to this Section 7.01(e), shall be lifted, and the requested registration statement shall be filed forthwith, in the case of a deferral, if the negotiations or other activities are disclosed or terminated. In order to defer the filing of a registration statement, or suspend the continued use of a registration statement, pursuant to this Section 7.01(e), the Company shall promptly (but in any event within five (5) days), upon determining to seek such deferral or suspension, deliver to each Requesting Stockholder a certificate signed by an executive officer of the Company stating that the Company is deferring such filing, or suspending the continued use of a registration statement, pursuant to this Section 7.01(e) and a general statement of the reason for such deferral or suspension, as the case may be, and an approximation of the anticipated delay. The Company may defer the filing, or suspend the continued use of, a particular registration statement pursuant to this Section 7.01(e) no more than twice in any twelve (12) month period; provided, that there must be an interim period of at least sixty (60) days between the end of one deferral or suspension period and the beginning of a subsequent deferral or suspension period. The Company agrees, that in the event it exercises its rights under this Section 7.01(e), it shall, within ten (10) days following receipt by the holders of Registrable Securities of the notice of deferral or suspension, as the case may be, update the deferred or suspended registration statement as may be necessary to permit the holders of Registrable Securities to resume use thereof in connection with the offer and sale of their Registrable Securities in accordance with applicable law.
Section 7.02 Piggyback Registration.
(a) If the Company proposes to register any Equity Securities under the Securities Act (whether for itself or otherwise in connection with a sale of securities by another Person, but other than (i) in connection with a Shelf Registration and any resale of Registrable Securities pursuant to a Shelf Registration, which shall be governed by the terms of Section 7.03, (ii) a registration on a Form S-4 in connection with a direct or indirect acquisition by the Company of another Person, (iii) a registration on a Form S-8, or (iv) an IPO (unless the Avista Funds are participating therein as selling stockholders), the Company shall at each such time give prompt written notice at least ten (10) days prior to the anticipated filing date of the registration statement relating to such registration to each Stockholder holding Registrable Securities hereunder, which notice shall set forth such Stockholder’s rights under this Section 7.02 and shall offer such Stockholder the opportunity to include in such registration statement all or any portion of the Registrable Securities held by such Stockholder (a “Piggyback Registration”),
subject to the restrictions set forth herein. Upon the request of any such Stockholder made within ten (10) days after the receipt of notice from the Company (which request shall specify the number of Registrable Securities intended to be registered by such Stockholder), the Company shall use its reasonable best efforts to effect the registration under the Securities Act of all Registrable Securities that the Company has been so requested to register by all such Stockholders with rights to require registration of Registrable Securities hereunder, to the extent requisite to permit the disposition of the Registrable Securities so to be registered, provided that if such registration involves a Public Offering, all such Stockholders requesting to be included in the Company’s registration must sell their Registrable Securities to the underwriters selected as provided in Section 7.05(f) on the same terms and conditions as apply to the Company or any other selling stockholders; provided, however, that no such Person shall be required to make any representations or warranties, or provide any indemnity, in connection with any such registration other than representations and warranties (or indemnities with respect thereto) as to (i) such Person’s ownership of his, her or its Registrable Securities to be transferred free and clear of all liens, claims, and encumbrances, (ii) such Person’s power and authority to effect such transfer, and (iii) such matters pertaining to compliance with securities laws by such Person as may be reasonably requested; provided, further, however, that the obligation of such Person to indemnify pursuant to any such underwriting arrangements shall be several, not joint and several, among such Persons selling Registrable Securities, and the liability of each such Person will be in proportion thereto, and provided, further, that such liability will be limited to the net proceeds received by such Person from the sale of his, her or its Registrable Securities pursuant to such registration. If, at any time after giving notice of its intention to register any Registrable Securities pursuant to this Section 7.02(a) and prior to the effective date of the registration statement filed in connection with such registration, the Company or the initiating holders, as applicable, shall determine for any reason not to register such securities, the Company shall give notice to all such Stockholders and, thereupon, shall be relieved of its obligation to register any Registrable Securities in connection with such registration. No registration effected under this Section 7.02 shall relieve the Company of its obligations to effect a Demand Registration to the extent required by Section 7.01. The Company shall be liable for and pay all Registration Expenses in connection with each Piggyback Registration, regardless of whether such registration is effected.
(b) If a Piggyback Registration involves a Public Offering (other than any Demand Registration, in which case the provisions with respect to priority of inclusion in such offering set forth in Section 7.01(d) shall apply) and the managing underwriter advises the Company that, in its view, the number of Registrable Securities that the Company and all selling stockholders propose to include in such registration exceeds the largest number of Registrable Securities that can be sold without having an adverse effect on such offering, including the price at which such Registrable Securities can be sold (the “Piggyback Maximum Offering Size”), the Company shall include in such registration, in the following priority, up to the Piggyback Maximum Offering Size:
(i) first, such number of Registrable Securities proposed to be registered for the account of the Company, if any, as would not cause the offering to exceed the Piggyback Maximum Offering Size; and
(ii) second, all Registrable Securities requested to be included in such registration by any Stockholders pursuant to this Section 7.02 (the Registrable Securities in this clause (ii) allocated, if necessary for the offering not to exceed the Piggyback Maximum Offering Size, pro rata among such Stockholders based on their relative number of Registrable Securities requested to be included in the Piggyback Registration); provided, however, that notwithstanding the foregoing, in no event shall the number of Registrable Securities of Stockholders included in the offering be reduced below thirty percent (30%) of the total number of securities included in such offering, unless such offering is the IPO, in which case the selling Stockholders may be excluded further if the underwriters make the determination described above and no other Stockholder’s securities are included in such offering.
Section 7.03 Shelf Registration.
(a) At any time after the 12 month anniversary of the consummation by the Company of the IPO, upon receipt of a written request (the “Shelf Request”) from the Avista Entities that the Company file a “shelf” registration statement pursuant to Rule 415 under the Securities Act (the “Shelf Registration”) on Form S-3 (or any successor form to Form S-3, or any similar short-form registration statement), covering the resale of Registrable Securities, the reasonably anticipated gross proceeds from all resales covered thereunder of which would exceed $25,000,000, the Company shall use its reasonable best efforts, consistent with the terms of this Agreement, to cause the Shelf Registration to be filed with the SEC as soon as practicable (but in no event later than thirty (30) days of its receipt of the Shelf Request) and to include all Registrable Securities held by the Avista Entities to be registered on such form and (iii) use its reasonable best efforts, consistent with the terms of this Agreement, to cause such Shelf Registration to be declared effective by the SEC as soon as possible. As soon as reasonably practicable after the IPO, the Company will use its reasonable best efforts, consistent with the terms of this Agreement, to qualify for and remain eligible to use Form S-3 registration or a similar short-form registration. The provisions of Section 7.05 shall be applicable to each take-down from a Shelf Registration initiated under this Section 7.03 and any subsequent resale of Registrable Securities pursuant thereto; provided, that the gross proceeds from such take-down equal at least $10,000,000.
(b) In connection with any proposed firmly underwritten resale of Registrable Securities by the Avista Entities which is not pursuant to a Demand Registration under Section 7.01 and with respect to which such Shelf Registration is expressly being utilized to effect such resale (an “Underwritten Shelf Take-down”), the Avista Entities must sell their Registrable Securities to the underwriters selected as provided in Section 7.05(f) on the same terms and conditions as apply to any other selling
stockholders; provided, however, that no such Person shall be required to make any representations or warranties, or provide any indemnity, in connection with any such registration other than representations and warranties (or indemnities with respect thereto) as to (i) such Person’s ownership of his, her or its Registrable Securities to be transferred free and clear of all liens, claims, and encumbrances, (ii) such Person’s power and authority to effect such transfer, and (iii) such matters pertaining to compliance with securities laws by such Person as may be reasonably requested; provided, further, however, that the obligation of such Person to indemnify pursuant to any such underwriting arrangements shall be several, not joint and several, among such Persons selling Registrable Securities, and the liability of each such Person will be in proportion thereto, and provided, further, that such liability will be limited to, the net proceeds received by such Person from the sale of his, her or its Registrable Securities pursuant to such registration.
(c) The Company shall be liable for and pay all Registration Expenses in connection with each Shelf Registration, regardless of whether such Shelf Registration is effected, and any Underwritten Shelf Take-Down; provided that holders of Registrable Securities shall pay all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for the Avista Entities, except for the fees and disbursements of the Avista Entities borne and paid by the Company as a Registration Expense.
(d) Notwithstanding anything to the contrary contained herein, no Management Stockholder will be entitled to participate with respect to any shelf registration effected pursuant to this Section 7.03 or with respect to any resales of securities pursuant to any shelf registration.
Section 7.04 Lock-Up Agreements.
(a) In connection with each underwritten Public Offering (excluding, in the case of the Avista Funds only, an Underwritten Shelf Take-Down) and if requested by the managing underwriter, each of the Company and the Stockholders agree not to effect any public sale or private offer or distribution (other than a distribution-in-kind pro rata to all limited partners or members, as the case may be, of such Stockholder) of any Registrable Securities during the ten (10) days prior to the consummation of such Public Offering and during such time period after the consummation of such Public Offering, not to exceed ninety (90) days (one-hundred and eighty (180) days in the case of the IPO) as may be requested by the managing underwriter; provided that such lock-up agreements are also required by the managing underwriter from all directors, executive officers and Stockholders who hold at least five percent (5%) of the Registrable Securities and that are party to this Agreement; provided, further that each such director, executive officer or Stockholder referenced in the foregoing proviso, shall enter into such lock-up agreements if so required. Notwithstanding the foregoing, this Section 7.04 shall not apply to any sale by a Stockholder or a director or officer of a Stockholder of Common Stock acquired in open market transactions or block purchases by such Stockholder or its Affiliates subsequent to the IPO. Any discretionary waiver or reduction of the requirements under
the foregoing provisions made by the Company or the applicable lead managing underwriters shall apply to each Stockholder on a pro rata basis.
(b) At any time following the IPO, if the Avista Funds or Kinderhook, together with their respective Affiliates, hold less than five percent (5%) of the then outstanding Common Stock, then the Avista Funds or Kinderhook may elect (on behalf of themselves and their Affiliates (collectively, the “Withdrawing Holders”)), by written notice to the Company, to withdraw from the provisions of this Article VII. As a result of such withdrawals, each Withdrawing Holder shall no longer be entitled to the rights, nor be subject to the obligations, of this Article VII and the Common Stock held by such Withdrawing Holder shall conclusively be deemed thereafter not to be “Registrable Securities” under this Agreement. No withdrawal pursuant to this Section 7.04(b) shall release any Withdrawing Holder from its indemnification and contribution rights and obligations, if any, pursuant to Sections 7.06, Section 7.07, 7.09 and 9.11 herein.
Section 7.05 Registration Procedures. Whenever any Stockholders request that any Registrable Securities be registered pursuant to Section 7.01, Section 7.02, or Section 7.03 hereof, subject to the provisions of such Sections, the Company shall use its reasonable best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof as quickly as practicable, and, in connection with any such request:
(a) The Company shall, as expeditiously as possible, and, if the Company is not qualified for the use of Form S-3, no later than sixty (60) days from the date of receipt by the Company of the written request, and if the Company is qualified for use of Form S-3, no later than forty-five (45) days from the date of receipt by the Company of the written request, prepare and file with the SEC a registration statement on any form for which the Company then qualifies and the managing underwriter, if any, and the holders of a majority of the Registrable Securities to be registered thereunder shall deem appropriate and which form shall be available for the sale of the Registrable Securities to be registered thereunder in accordance with the intended method of distribution thereof, and use its reasonable best efforts to cause such filed registration statement to become and remain effective for a period of not less than one-hundred and eighty (180) days or in the case of a Shelf Registration, not less than two years (or such shorter period in which all of the Registrable Securities of the Registering Stockholders included in such registration statement shall have actually been sold thereunder); provided, however, that such one-hundred and eighty (180) day period or two year period, as applicable, shall be extended for a period of time equal to the period any Stockholder refrains from selling any securities included in such registration at the request of an underwriter and in the case of any Shelf Registration, subject to compliance with applicable SEC rules, such two year period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold.
(b) Prior to filing a registration statement or prospectus or any amendment or supplement thereto, the Company shall furnish to each participating Stockholder and each underwriter, if any, of the Registrable Securities covered by such
registration statement copies of such registration statement as proposed to be filed, and thereafter the Company shall furnish to such Stockholder and underwriter, if any, such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto and documents incorporated by reference therein), the prospectus included in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 or Rule 430A under the Securities Act and such other documents as such Stockholder or underwriter may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Stockholder.
(c) After the filing of the registration statement, the Company shall (i) cause the related prospectus to be supplemented by any required prospectus supplement, and, as so supplemented, to be filed pursuant to Rule 424 under the Securities Act and shall incorporate such information as the managing underwriter or underwriters and the Avista Funds agree should be included therein relating to the plan of distribution, (ii) comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement during the applicable period in accordance with the intended methods of disposition by the Registering Stockholders thereof set forth in such registration statement or supplement to such prospectus and (iii) promptly notify each Registering Stockholder holding Registrable Securities covered by such registration statement of any stop order issued or threatened by the SEC or any state securities commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered.
(d) The Company shall use its reasonable best efforts to (i) register or qualify the Registrable Securities covered by such registration statement under such other securities or “blue sky” laws of such jurisdictions in the United States as any Registering Stockholder holding such Registrable Securities reasonably (in light of such Stockholder’s intended plan of distribution) requests and (ii) cause such Registrable Securities to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company and do any and all other acts and things that may be reasonably necessary or advisable to enable such Stockholder to consummate the disposition of the Registrable Securities owned by such Stockholder; provided that the Company shall not be required to (A) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 7.05(d), (B) subject itself to taxation in any such jurisdiction or (C) consent to general service of process in any such jurisdiction.
(e) The Company shall immediately notify each Registering Stockholder holding such Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the occurrence of an event requiring the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make
the statements therein not misleading and promptly prepare and make available to each such Stockholder and file with the SEC any such supplement or amendment.
(f) Except for a Demand Registration and Underwritten Shelf Take-down, the Board shall have the right to select the underwriter or underwriters in connection with any Public Offering. In connection with the offering of Registrable Securities pursuant to a Demand Registration or Underwritten Shelf Take-down, the holders of a majority of the Registrable Securities to be registered in a Demand Registration shall select the underwriter or underwriters, provided that such selection shall be subject to the consent of the Board, which consent shall not be unreasonably withheld. In connection with any Public Offering, the Company shall enter into customary agreements (including an underwriting agreement in customary form, provided that the scope of the indemnity contained in such underwriting agreement on the part of the selling Stockholders is not more extensive than the indemnity described in Section 7.07 hereof), provided that such agreements are consistent with this Agreement, and take all such other actions as are reasonably required in order to expedite or facilitate the disposition of such Registrable Securities in any such Public Offering, including the engagement of a “qualified independent underwriter” in connection with the qualification of the underwriting arrangements with FINRA. The Company shall make such representations and warranties to the holders of Registrable Securities being registered, and the underwriters or agents, if any, in form, substance and scope as are customarily made by issuers in secondary underwritten public offerings and take any other actions as the Avista Funds, or the managing underwriter or underwriters, if any, reasonably request in order to expedite or facilitate the registration and disposition of such Registrable Securities. Each Stockholder participating in such underwriting shall also enter into such agreement, provided that the terms of any such agreement are consistent with this Agreement.
(g) Upon execution of confidentiality agreements in form and substance reasonably satisfactory to the Company, the Company shall make available for inspection by any Registering Stockholder and any underwriter participating in any disposition pursuant to a registration statement being filed by the Company pursuant to this Section 7.05 and any attorney, accountant or other professional retained by any such Stockholder or underwriter (collectively, the “Inspectors”), all financial and other records, pertinent corporate documents and properties of the Company (collectively, the “Records”) as shall be reasonably necessary or desirable to enable them to exercise their due diligence responsibility, and cause the Company’s officers, directors and employees to supply all information reasonably requested by any Inspectors in connection with such registration statement. Records that the Company determines, in good faith, to be confidential and that it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in such registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or is otherwise required by law. Each Stockholder agrees that at the time that such Stockholder is a Registering Stockholder, information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it or its Affiliates as the
basis for any market transactions in Common Stock unless and until such information is made generally available to the public, and further agrees that, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, it shall give notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential.
(h) The Company shall cause to be furnished to each Registering Stockholder and to each such underwriter, if any, a signed counterpart, addressed to such Stockholder or underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a comfort letter or comfort letters from the Company’s independent public accountants, each in customary form and covering such matters of the kind customarily covered by opinions or comfort letters, as the case may be, as a majority of such Stockholders or the managing underwriter therefor reasonably requests.
(i) The Company shall otherwise use its reasonable best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earning statement or such other document that shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder. The Company shall cooperate with each seller of Registrable Securities and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings to be made with FINRA.
(j) The Company may require each such Registering Stockholder, by written notice given to each such Registering Stockholder not less than ten (10) days prior to the filing date of such registration statement, to promptly, and in any event within seven (7) days after receipt of such notice, furnish in writing to the Company such information regarding the distribution of the Registrable Securities as the Company may from time to time reasonably request and such other information as may be legally required in connection with such registration. Each holder of Registrable Securities agrees to furnish such information to the Company and cooperate with the Company as reasonably necessary to enable the Company to comply with the provisions of this Agreement.
(k) Each Stockholder agrees that at the time that such Stockholder is a Registering Stockholder, upon receipt of any written notice from the Company of the occurrence of any event requiring the preparation of a supplement or amendment of a prospectus relating to the Registrable Securities covered by a registration statement that is required to be delivered under the Securities Act so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or to make the statements therein not misleading, such Stockholder shall forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Stockholder’s receipt of the copies of a supplemented or amended prospectus, and, if so directed by the Company, such Stockholder shall deliver to the Company all copies, other than any permanent file copies
then in such Stockholder’s possession, of the most recent prospectus covering such Registrable Securities at the time of receipt of such notice. If the Company shall give such notice, the Company shall extend the period during which such registration statement shall be maintained effective (including the period referred to in Section 7.05(a)) by the number of days during the period from and including the date of the giving of notice pursuant to Section 7.05(e) to the date when the Company shall make available to such Stockholder a prospectus supplemented or amended to conform with the requirements of Section 7.05(e).
(l) The Company shall use its reasonable best efforts to list all Registrable Securities covered by such registration statement on any securities exchange or quotation system on which any of the Registrable Securities are then listed or traded and if none of the Registrable Securities are so listed, on any securities exchange or quotation system on which similar securities issued by the Company are then listed, and if no such similar securities are listed, on any national securities exchange.
(m) The Company shall have appropriate officers of the Company (i) prepare and make presentations at any “road shows” and before analysts and rating agencies, as the case may be, (ii) take other reasonable actions to obtain ratings for any Registrable Securities and (iii) otherwise use their reasonable best efforts to cooperate as requested by the underwriters in the offering, marketing or selling of the Registrable Securities.
Section 7.06 Indemnification by the Company. The Company agrees to indemnify and hold harmless each Stockholder, its officers, directors, employees, managers, members, partners and agents, and each Person, if any, who controls any such Persons within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable expenses of investigation and reasonable attorneys’ fees and expenses) (“Damages”) caused by or relating to any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Securities (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by or relating to any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or caused by or related to any violation or alleged violation of the Securities Act or Exchange Act, except insofar as such Damages are caused by or related to any such untrue statement or omission or alleged untrue statement or omission so made in reliance upon and in conformity with information furnished in writing to the Company by such Stockholder or on such Stockholder’s behalf expressly for use therein, provided that, with respect to any untrue statement or omission or alleged untrue statement or omission made in any preliminary prospectus, or in any prospectus, as the case may be, the indemnity agreement contained in this Section 7.06 shall not apply to the extent that any Damages result from the fact that a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) was not sent or given to the Person asserting any such Damages at or prior to the written confirmation of the sale of the
Registrable Securities concerned to such Person if it is determined that the Company has provided such prospectus to such Stockholder and it was the responsibility of such Stockholder to provide such Person with a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) would have cured the defect giving rise to such Damages.
Section 7.07 Indemnification by the Participating Stockholders. Each Stockholder, at the time that such Stockholder is a Registering Stockholder holding Registrable Securities included in any registration statement agrees, severally but not jointly, to indemnify and hold harmless from and against all Damages the Company, its officers, directors and agents and each Person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (i) with respect to information furnished in writing to the Company by such Stockholder or on such Stockholder’s behalf expressly for use in any registration statement or prospectus relating to the Registrable Securities, or any amendment or supplement thereto, or any preliminary prospectus or (ii) to the extent that any Damages result from the fact that a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) was not sent or given to the Person asserting any such Damages at or prior to the written confirmation of the sale of the Registrable Securities concerned to such Person if it is determined that it was the responsibility of such Stockholder to provide such Person with a current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) and such current copy of the prospectus (or such amended or supplemented prospectus, as the case may be) was available to such Stockholder and would have cured the defect giving rise to such Damages. As a condition to including Registrable Securities in any registration statement filed in accordance with Article VII, the Company may require that it shall have received an undertaking reasonably satisfactory to it from any underwriter to indemnify and hold it harmless to the extent customarily provided by underwriters with respect to similar securities. No Stockholder shall be liable under this Section 7.07 for any Damages in excess of the net proceeds realized by such Stockholder in the sale of Registrable Securities of such Stockholder to which such Damages relate except for fraud.
Section 7.08 Conduct of Indemnification Proceedings. If any proceeding (including any governmental investigation) shall be instituted involving any Person in respect of which indemnity may be sought pursuant to this Article VII, such Person (an “Indemnified Party”) shall promptly notify the Person against whom such indemnity may be sought (the “Indemnifying Party”) in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses, provided that the failure of any Indemnified Party so to notify the Indemnifying Party shall not relieve the Indemnifying Party of its obligations hereunder except to the extent that the Indemnifying Party is materially prejudiced by such failure to notify. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (ii) in the reasonable judgment of such Indemnified Party, representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that, in connection with any proceeding or related proceedings in the same jurisdiction, the Indemnifying Party shall not be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any Damages (to the extent stated above) by reason of such settlement or judgment. Without the prior written consent of the Indemnified Party, no Indemnifying Party shall effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such proceeding.
Section 7.09 Contribution.
(a) If the indemnification provided for in this Article VII is unavailable to the Indemnified Parties or insufficient in respect of any Damages (other than by reason of the exceptions provided herein), then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Damages, as between the Company on the one hand and each such Stockholder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of each such Stockholder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of each such Stockholder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
(b) The Company and the Stockholders agree that it would not be just and equitable if contribution pursuant to this Section 7.09 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the Damages referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7.09, no Stockholder shall be required to
contribute any amount in excess of the amount by which the net proceeds realized by such Stockholder in the sale of Registrable Securities of such Stockholder to which such Damages relate exceeds the amount of any Damages that such Stockholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Subject to the foregoing and as among the Stockholders, each Stockholder’s obligation to contribute pursuant to this Section 7.09 is several in the proportion that the proceeds of the offering received by such Stockholder bears to the total proceeds of the offering received by all such Registering Stockholders and not joint.
Section 7.10 Cooperation by the Company. With a view to making available to the Stockholders the benefits of certain rules and regulations of the SEC that may at any time permit the sale of securities to the public without registration, the Company agrees to use its reasonable best efforts to:
(a) make and keep public information available, as those terms are defined in Rule 144, at all times after the effective date that the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act;
(b) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements);
(c) furnish to any Stockholder, so long as such Stockholder owns any Registrable Securities, upon request by such Stockholder, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 (at any time after ninety (90) days after the effective date of the first registration statement filed by the Company for a Public Offering), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements) or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and (iii) such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Stockholder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Stockholder to sell any such securities without registration.
(d) Upon the request of any Stockholder, instruct the transfer agent in writing that it shall rely on the written legal opinion of such Stockholder’s counsel, and shall act in accordance with the written instructions of such Stockholder’s counsel, with respect to any transfer of Equity Securities.
Section 7.11 Restriction on Company Grants of Subsequent Registration Rights. The Company covenants and agrees, that so long as the Avista Funds hold any Registrable Securities in respect of which registration rights provided for in Section 7.01 of this Agreement remain in effect, the Company will not, directly or indirectly, without
the prior written consent of the Avista Entities, grant to any Person or agree to otherwise become obligated in respect of (i) the rights of registration in the nature or substantially in the nature of those set forth in Section 7.01 of this Agreement that would have priority over or parity with the Registrable Securities with respect to the inclusion of such securities in any registration or (ii) demand registration rights exercisable prior to such time as the Avista Funds can first exercise their rights under Section 7.01.
Section 7.12 Assignment of Registration Rights. Following an IPO, the registration rights granted pursuant to this Article VII shall not be assignable (except to a Permitted Transferee in connection with a Transfer to such Permitted Transferee of Equity Securities in accordance with Section 4.04).
ARTICLE VIII
CERTAIN COVENANTS AND AGREEMENTS
Section 8.01 Information Rights.
(a) Until the consummation of an IPO, the Company will deliver, or will cause to be delivered to (x) each Avista Entity until such time as such Avista Entity ceases to own any Equity Securities and (y) Kinderhook so long as Kinderhook, together with its Permitted Transferees, own at least 50% of Kinderhook’s Initial Shares of Common Stock, the following:
(i) as soon as available after the end of each fiscal year of the Company, and in any event within one hundred and twenty (120) days thereafter, either (A) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries or (B) (x) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of IDQ Acquisition and its Subsidiaries and (y) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of AAG OpCo and its Subsidiaries, in each case, as of the end of such fiscal year or for such year, as applicable, prepared in accordance with GAAP and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by the opinion of independent public accountants of recognized national standing selected by the Company; and
(ii) as soon as available after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within sixty (60) days thereafter, either (A) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries or (B) (x) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of IDQ Acquisition and its Subsidiaries and (y) a consolidated balance sheet and consolidated statements of
income, retained earnings and cash flows of AAG OpCo and its Subsidiaries, in each case, as of the end of such quarterly period, or for such period and for the current fiscal year to date, as applicable, prepared in accordance with GAAP (subject to normal year-end audit adjustments and the absence of notes thereto) and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year, all in reasonable detail and certified by the principal financial or accounting officer of the Company.
The Company shall determine in its sole discretion whether to provide the financial statements contemplated by clause (A) or clause (B) of each of clauses (i) and (ii) above; provided, however, that if such financial statements contemplated by clause (A) of either clause (i) or (ii) above are available at the time financial statements are delivered by the Company pursuant to this Section 8.01(a), the Company shall deliver the financial statements contemplated by clause (A) of clause (i) or (ii) above.
(b) Until the consummation of an IPO, the Company will deliver, or will cause to be delivered to Kinderhook, so long as Kinderhook, together with its Permitted Transferees, own at least 50% of Kinderhook’s Initial Shares of Common Stock, either (A) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of the Company and its Subsidiaries or (B) (x) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of IDQ Acquisition and its Subsidiaries and (y) a consolidated balance sheet and consolidated statements of income, retained earnings and cash flows of AAG OpCo and its Subsidiaries, in each case, as of the end of each month, or for such period, but only if, when and as delivered to the Avista Funds.
(c) Other Information. The Company covenants and agrees to deliver to the Avista Funds until such time as the Avista Funds cease to own at least 5% of the then outstanding Equity Securities, with reasonable promptness, such other information and data, including, but not limited to any information necessary to assist such Person in preparing its tax filings and obtaining and/or preserving its qualification as a “venture capital operating company” as defined in the regulations promulgated under the Employment Retirement Income Security Act of 1974 by the United States Department of Labor, with respect to the Company and each of its Subsidiaries as from time to time may be reasonably requested by the Avista Funds.
Section 8.02 Access. The Company shall, and shall cause its and its Subsidiaries’ officers, directors, employees, auditors and other agents to, until such time as the Avista Funds cease to own at least 5% of the then outstanding Equity Securities, (a) afford the officers, employees, auditors and other agents of the Avista Funds, during normal business hours and upon reasonable notice, reasonable access and consultation rights at all reasonable times to its officers, employees, auditors, legal counsel, properties, offices, plants and other facilities and to all books and records, and (b) afford the Avista Funds the opportunity to discuss the Company’s affairs, finances and accounts with the Company’s officers from time to time as the Avista Funds may reasonably request.
Section 8.03 Confidentiality.
(a) Each Stockholder agrees that it shall (and shall cause its Affiliates (other than Affiliates that are a Company Competitor) and its and their officers, directors, employees, partners, legal counsel, agents and representatives to) (collectively, the “Confidentiality Affiliates”)) (i) hold confidential and not disclose (other than by a Stockholder to its Confidentiality Affiliates having a reasonable need to know in connection with the permitted purposes hereunder), without the prior approval of the Board, all confidential or proprietary written, recorded or oral information or data (including research, developmental, engineering, manufacturing, technical, marketing, sales, financial, operating, performance, cost, business and process information or data, know how and computer programming and other software techniques) provided or developed by the Company and any of its Subsidiaries, another Stockholder or its Confidentiality Affiliates in connection herewith or with the Business, whether such confidentiality or proprietary status is indicated orally or in writing or in a context in which any of the Company and any of its Subsidiaries or the disclosing Stockholder or any of their Confidentiality Affiliates reasonably communicated, or the receiving Stockholder or its Confidentiality Affiliates should reasonably have understood, that the information should be treated as confidential, whether or not the specific words “confidential” or “proprietary” are used (“Confidential Information”) and (ii) use such Confidential Information only for the purposes of performing its obligations hereunder to which it is a party and carrying on the business of the Company and monitoring its investment in the Company; provided, however, that Stockholders may disclose any such Confidential Information on a confidential basis to current and prospective lenders in connection with a loan or prospective loan to a Stockholder and, in connection with a Transfer of Equity Securities permitted under this Agreement, to prospective purchasers of Equity Securities from a Stockholder, after such prospective purchaser has entered into a non-disclosure agreement reasonably acceptable to the Company, as well as to such prospective purchaser’s legal counsel, auditors, agents and representatives. Notwithstanding the foregoing, Stockholders may disclose any such Confidential Information on a confidential basis to limited partners or prospective limited partners or investors of a Stockholder or its Confidentiality Affiliates, subject to such limited partners or prospective limited partners or investors having agreed to maintain the confidentiality of any such Confidential Information; provided, however, that each Stockholder shall not (and shall cause its Confidentiality Affiliates and its limited partners or prospective limited partners or investors of such Stockholder or its Confidentiality Affiliates not to) disclose any Confidential Information to any Person that is a Company Competitor. Each Stockholder agrees that it shall be responsible and liable for any breach of this Section 8.03 by its Confidentiality Affiliates and its limited partners or prospective limited partners or investors of such Stockholder or its Confidentiality Affiliates (as if such Confidentiality Affiliates, limited partners or prospective limited partners or investors were parties to and bound by the provisions of this Section 8.03 by which such Stockholder is bound).
(b) The obligations contained in Section 8.03(a) shall not apply, or shall cease to apply, to Confidential Information if or when, and to the extent that, such
Confidential Information (i) was, or becomes through no breach of the receiving Stockholder’s obligations hereunder, known to the public, (ii) becomes known to the receiving Stockholder or its Confidentiality Affiliates from other sources under circumstances not involving any breach of any confidentiality obligation between such source and the disclosing Stockholder’s or discloser’s Confidentiality Affiliates or a third party, (iii) is independently developed by the receiving Stockholder or its Confidentiality Affiliates, or (iv) is required to be disclosed by law, governmental regulation or applicable legal process; provided, that to the extent permitted by law, such Stockholder shall notify the Company promptly of such request or requirement so that the Company may seek an appropriate protective order or other appropriate relief; provided, further, that in the absence of a protective order or other appropriate relief, the Stockholder shall use commercially reasonable efforts to obtain an order or other assurance that confidential treatment will be accorded to such portion of the information required to be disclosed as the Company shall designate.
Section 8.04 Management Stockholders Non-Compete.
(a) Except as provided below, each Management Stockholder who is an employee of the Company or any of its Subsidiaries agrees that, for so long as such Management Stockholder is employed by the Company or any of its Subsidiaries and for the Non-Competition Period, such Management Stockholder shall not, without the express written consent of the Company, directly or indirectly, engage in any activity which is, or participate or invest in or assist (whether as owner, part-owner, stockholder, partner, director, officer, trustee, employee, agent, independent contractor or consultant, or in any other capacity) any Company Competitor.
(b) Each Management Stockholder agrees that, for so long as such Management Stockholder is employed by, or provides services to, the Company or any of its Subsidiaries and for the period of twelve (12) following the last day that such Management Stockholder was employed by, or provided services to, the Company or its Subsidiaries, such Management Stockholder shall not, directly or indirectly, (i) solicit for employment or employ any person who is employed by the Company, (ii) encourage any officer, employee, client, customer or supplier to terminate or alter his, her, or its relationship or employment with the Company or any of its Subsidiaries, or (iii) solicit for or on behalf of any Company Competitor any client, customer or supplier of the Company or any of its Subsidiaries, and divert to any Person any client or business opportunity of the Company or any of its Subsidiaries.
(c) In furtherance and not in limitation of the foregoing restrictions, each Management Stockholder who is an employee of the Company or any of its Subsidiaries agrees that, for so long as such Management Stockholder is employed by the Company or any of its Subsidiaries and for the Non-Competition Period, subject to such Management Stockholder’s duties of employment, agrees that such Management Stockholder shall not devote any time to consulting, lecturing or engaging in other self-employment or employment activities without the prior written consent of the Company.
(d) If any court of competent jurisdiction in a final nonappealable order determines that a specified time period, a geographical area, a specified business limitation or any other relevant feature of this Section 8.04 is unreasonable, arbitrary or against public policy, then a lesser time period, geographical area, business limitation or other relevant feature which is determined by such court to be reasonable, not arbitrary and not against public policy may be enforced against the applicable party.
(e) Each Management Stockholder, while he or she is employed by, or provides services to, the Company and its Subsidiaries, agrees to offer or otherwise make known or available to the Company or any Subsidiary, as directed by the Company and without additional compensation or consideration, any business prospects, contracts or other business opportunities that he may discover, find, develop or otherwise have available to him in any field in which the Company or any of its Subsidiaries is engaged, and further agrees that any such prospects, contracts or other business opportunities shall be the property of the Company.
Section 8.05 Directors’ and Officers’ Insurance; Expense Reimbursement.
(a) The Company shall purchase, within a reasonable period following the Closing, and maintain for such periods as the Board shall in good faith determine, at its expense, insurance in an amount determined in good faith by the Board to be appropriate, on behalf of any person who after the Closing is or was a director or officer of the Company or any Subsidiary, or is or was serving at the request of the Company or any Subsidiary as a director, officer, employee or agent of another limited company, corporation, partnership, joint venture, trust or other enterprise, including any direct or indirect subsidiary of the Company, against any expense, liability or loss asserted against such Person and incurred by such Person in any such capacity, or arising out of such Person’s status as such, subject to customary exclusions. The provisions of this Section 8.05(a) shall survive any termination of this Agreement.
(b) The Company shall reimburse all directors for any reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the Board, any board of directors of any Subsidiary of the Company or any committee thereof or in connection with performance of their service as directors, but only to the extent such director is not otherwise entitled to be reimbursed by any other Person, and in any event subject to the Company’s requirements with respect to reporting and documentation of such expenses.
Section 8.06 No Exclusive Duty to Company. In recognition that the Avista Funds and Kinderhook currently have, and will in the future have or will consider acquiring, investments in numerous companies with respect to which the Avista Funds and Kinderhook (or one or more of their respective Affiliates, associated investment funds, portfolio companies or employees) may serve as an advisor, a director or in some other capacity, and in recognition that the Avista Funds and Kinderhook (or one or more of their respective Affiliates, associated investment funds, portfolio companies or employees) may have a myriad of duties to various investors and partners, and in
anticipation that the Company, on the one hand, and such Stockholder (or one or more Affiliates, associated investment funds, portfolio companies or employees), on the other hand, may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of the benefits to be derived by the Company hereunder and in recognition of the difficulties which may confront the Avista Funds and Kinderhook who desire and endeavor fully to satisfy the Avista Funds’ and Kinderhook’s duties, in determining the full scope of such duties in any particular situation, the provisions of this Section 8.06 are set forth to regulate, define and guide the conduct of certain affairs of the Company as they may involve the Avista Funds and Kinderhook.
(a) The Avista Funds and Kinderhook shall have the right:
(i) to directly or indirectly engage in or invest in any business (including any business activities or lines of business that are the same as or similar to those pursued by, or competitive with, the Company or any of its Subsidiaries);
(ii) to directly or indirectly do business with any client or customer of the Company or any of its Subsidiaries;
(iii) to take any other action that the Avista Funds and Kinderhook believe in good faith is necessary to or appropriate to fulfill its obligations as described in the first sentence of this Section 8.06; and
(iv) not to present potential transactions, matters or business opportunities to the Company or any of its Subsidiaries, and to pursue, directly or indirectly, any such opportunity for itself, and to direct any such opportunity to another person.
(b) The Avista Funds and Kinderhook (or one or more of their respective Affiliates, associated investment funds, portfolio companies or employees) shall have no duty (contractual or otherwise) to communicate or present any corporate opportunities to the Company or any of its Subsidiaries or to refrain from any actions specified in Section 8.06(a), and the Company, on its own behalf and on behalf of its Subsidiaries, hereby renounces and waives any right to require the Avista Funds and Kinderhook (or one or more of their respective Affiliates, associated investment funds, portfolio companies or employees) to act in a manner inconsistent with the provisions of Section 8.06(a).
(c) The Avista Funds, Kinderhook and their respective Affiliates, associated investment funds, portfolio companies and employees shall not be liable to the Company or any of its Subsidiaries for breach of any duty (contractual or otherwise) by reason of any activities or omissions of the types referred to in this Section 8.06(c) or the participation therein by the Avista Funds, Kinderhook or their respective Affiliates, associated investment funds, portfolio companies or employees.
Section 8.07 Conflicting Agreements. Each Stockholder represents and agrees that it shall not (i) grant any proxy or enter into or agree to be bound by any voting trust or agreement with respect to the Equity Securities, except as expressly contemplated by this Agreement, (ii) enter into any agreement or arrangement of any kind with any Person with respect to its Equity Securities inconsistent with the provisions of this Agreement or for the purpose or with the effect of denying or reducing the rights of any other Stockholder under this Agreement, including agreements or arrangements with respect to the Transfer or voting of its Equity Securities or (iii) act, for any reason, as a member of a group or in concert with any other Person in connection with the Transfer or voting of its Equity Securities in any manner that is inconsistent with this Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.01 Binding Effect; Assignability; Benefit.
(a) This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and permitted assigns. Any Stockholder that ceases to beneficially own any Equity Securities shall cease to be bound by the terms hereof (other than as expressly set forth herein or with respect to Section 8.03 or Article IX).
(b) Other than as expressly set forth herein, neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by any party hereto pursuant to any Transfer of Equity Securities or otherwise. Any Person acquiring Equity Securities that is required or permitted by the terms of this Agreement to become a party hereto shall (unless already bound hereby) execute a Joinder Agreement and shall thenceforth be a “Stockholder”; provided, however, for all purposes of this Agreement, that any Person that acquires all Equity Securities then held by any Avista Fund shall be deemed an Avista Fund.
(c) Subject to Section 9.04, nothing in this Agreement, expressed or implied, is intended to confer on any Person other than the parties hereto, and their respective heirs, successors, legal representatives and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.
Section 9.02 Notices. All notices provided for or permitted hereunder shall be made in writing by hand-delivery, registered or certified first-class mail, telex, telecopier or air courier guaranteeing overnight delivery to the other party at the following addresses (or at such other address as shall be given in writing by any party to the others):
If to the Company, to:
c/o Avista Capital Holdings, L.P.
65 East 55th Street
18th Floor
New York, NY 10022
Attention: David Burgstahler; Ben Silbert, Esq.
Facsimile: (212) 593-6901
If to any of the Avista Funds, to:
c/o Avista Capital Holdings, L.P.
65 East 55th Street
18th Floor
New York, NY 10022
Attention: David Burgstahler; Ben Silbert, Esq.
Facsimile: (212) 593-6901
with a copy to (which shall not constitute notice):
Kirkland & Ellis LLP
601 Lexington Avenue
New York, NY 10022
Attention: Jai Agrawal and Joshua Kogan
Facsimile: (212) 446-6460
If to any other Stockholder, to the address or facsimile number under such Stockholder’s name on Schedule A attached hereto.
All such notices shall be deemed to have been duly given: when delivered by hand, if personally delivered; five (5) business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when transmission confirmation is received, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery.
Section 9.03 Waiver; Amendment; Termination.
(a) No provision of this Agreement may be waived, amended or otherwise modified except by an instrument in writing executed by the Company and the Avista Funds; provided, that any waiver, amendment or modification that materially and adversely affects a Stockholder disproportionately as compared to all other Stockholders, shall require the prior written consent of a majority-in-interest of such Stockholders so adversely affected; provided, further, that no update of any Schedule hereto shall be deemed to constitute an amendment to this Agreement.
(b) This Agreement shall terminate upon the earlier to occur of (i) the IPO, (ii) a Change of Control of the Company and (iii) the bankruptcy, liquidation,
dissolution or winding-up of the Company; provided, however, the provisions of Sections 4.01, 4.02, 4.04, Article VI, Article VII, Article VIII and Article IX, and any defined terms used in such surviving provisions, shall survive the IPO.
Section 9.04 Non-Recourse. Notwithstanding anything that may be expressed or implied in this Agreement, the Company and each Stockholder covenant, agree and acknowledge that no recourse under this Agreement or any documents or instruments delivered in connection with this Agreement shall be had against any current or future director, officer, employee, general or limited partner or member or equity holder of any Stockholder or of any Affiliate or assignee thereof, whether by the enforcement of any assessment or by any legal or equitable proceeding, or by virtue of any statute, regulation or other applicable law; it being expressly agreed and acknowledged that no personal liability whatsoever shall attach to, be imposed on or otherwise be incurred by any current or future officer, agent or employee of any Stockholder or any current or future member or equity holder of any Stockholder or any current or future director, officer, employee, partner or member or equity holder of any Stockholder or of any Affiliate or assignee thereof, as such for any obligation of any Stockholder under this Agreement or any documents or instruments delivered in connection with this Agreement for any claim based on, in respect of or by reason of such obligations or their creation.
Section 9.05 Governing Law; Venue. All issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement and the exhibits and schedules hereto, and their negotiation, execution, performance or nonperformance, interpretation, termination, construction and all matters based upon, arising out of or related to any of the foregoing, whether arising in law or equity, shall be governed by, and construed in accordance with, the laws of the State of Delaware, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. Any legal action or proceeding with respect this Agreement shall be brought in the courts of the United States District Court for the District of Delaware or any other competent court of the State of Delaware, and, by execution and delivery of this Agreement, each party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the exclusive jurisdiction of such courts. Each party irrevocably waives any objection which it may now or hereafter have to the laying of venue of the aforesaid actions or proceedings arising out of or in connection with this Agreement in the courts referred to in this paragraph and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. Each party agrees that service of process upon such party in any action shall be effective if notice is given in accordance with Section 9.02.
Section 9.06 WAIVER OF JURY TRIAL. EACH OF THE STOCKHOLDERS HEREBY IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING (INCLUDING COUNTERCLAIMS) RELATING TO OR ARISING OUT OF OR IN CONNECTION
WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS OR RELATIONSHIPS HEREBY CONTEMPLATED OR OTHERWISE IN CONNECTION WITH THE ENFORCEMENT OF ANY RIGHTS OR OBLIGATIONS HEREUNDER.
Section 9.07 Specific Enforcement; Cumulative Remedies. The parties hereto acknowledge that money damages may not be an adequate remedy for violations of this Agreement and that any party, in addition to any other rights and remedies which the parties may have hereunder or at law or in equity, may, in his or its sole discretion, apply to a court of competent jurisdiction for specific performance or injunction or such other relief as such court may deem just and proper in order to enforce this Agreement or prevent any violation hereof and, to the extent permitted by applicable law, each party waives any objection to the imposition of such relief. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise or beginning of the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such rights, powers or remedies by such party.
Section 9.08 Entire Agreement. This Agreement amends and restates the Original Stockholders Agreement in its entirety. This Agreement, together with all agreements referenced to herein and any schedules, exhibits and other documents referred to herein or therein constitute the entire agreement and understanding among the parties hereto in respect of the subject matter hereof and thereof and supersede all prior and contemporaneous arrangements, agreements and understandings, both oral and written, whether in term sheets, presentations or otherwise among the parties hereto, or between any of them, with respect to the subject matter hereof and thereof.
Section 9.09 Severability.
(a) If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner so that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.
(b) To the extent the terms of the By-laws or any other constitutive documents of the Company are contradictory to, or inconsistent with, the terms of this Agreement, the terms of this Agreement shall, to the extent permitted by law, supersede such conflicting or inconsistent terms. All terms of the By-laws and any other constitutive documents not contradictory to, or inconsistent with, the terms of this Agreement shall remain in full force and effect.
Section 9.10 Aggregation of Shares. All Equity Securities held by a Stockholder and its other Permitted Transferees and, with respect to the Avista Funds, including the Avista Syndication Vehicle, shall be aggregated together for purposes of
determining the availability of any rights under this Agreement; provided, that for the purposes of Sections 5.01 and 5.04 hereof, the Equity Securities held by the Avista Syndication Vehicle shall not be aggregated with the Avista Funds and, with respect to such sections, the Avista Syndication Vehicle will be entitled to participate in such Tag-Along Sale or preemptive rights offer, as applicable, as a Stockholder hereunder in accordance with the terms of such sections, as applicable, and in accordance with the applicable terms of the Syndication Vehicle Agreement.
Section 9.11 Counterparts; Effectiveness. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
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ARMORED AUTOGROUP PARENT INC. | |
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By: |
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Title: |
[Signature Page to Stockholders Agreement]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
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AVISTA CAPITAL PARTNERS II, L.P. | ||
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By: |
Avista Capital Partners II GP, LLC | |
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its General Partner | |
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By: |
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Name: |
David Burgstahler |
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Title: |
Authorized Representative |
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AVISTA CAPITAL PARTNERS (OFFSHORE) II, L.P. | ||
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By: |
Avista Capital Partners II GP, LLC | |
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its General Partner | |
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By: |
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Name: |
David Burgstahler |
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Title: |
Authorized Representative |
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AVISTA CAPITAL PARTNERS (OFFSHORE) II-A, L.P. | ||
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By: |
Avista Capital Partners II GP, LLC | |
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its General Partner | |
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By: |
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Name: |
David Burgstahler |
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Title: |
Authorized Representative |
Signature Page to Stock Purchase Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
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KI-IDQ 2012 HOLDINGS, LLC | |
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By: |
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Name: |
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Title: |
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MICHAEL KLEIN | |
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GERARD ROONEY | |
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ROGER REEVES | |
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SERGIO PUENTES | |
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ROBERT DERIDDER | |
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JAMES WINTON | |
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KERRY WHITAKER | |
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SUE DIEHL-SELLMAN | |
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KENNETH MOTUSH | |
Signature Page to Stock Purchase Agreement
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VIN CARRUBBA |
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STEVE SMART |
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CHRIS COLE |
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PHIL HENDERSON |
Signature Page to Stock Purchase Agreement
SCHEDULE A
STOCKHOLDERS OF THE COMPANY
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STOCKHOLDER |
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NUMBER OF |
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NUMBER OF |
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AVISTA CAPITAL PARTNERS II, L.P. c/o Avista Capital Holdings, L.P. Ben Silbert, Esq. |
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113,663,859 |
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44,031 |
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AVISTA CAPITAL PARTNERS (OFFSHORE) II, L.P. c/o Avista Capital Holdings, L.P. Ben Silbert, Esq. |
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37,325,647 |
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14,459 |
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AVISTA CAPITAL PARTNERS (OFFSHORE) II-A, L.P. c/o Avista Capital Holdings, L.P. Ben Silbert, Esq. |
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9,060,494 |
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3,510 |
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ACP VIKING CO-INVEST, LLC c/o Avista Capital Holdings, L.P. Ben Silbert, Esq. |
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103,200,000 |
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0 |
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STOCKHOLDER |
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NUMBER OF |
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NUMBER OF |
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DAVID LUNDSTEDT |
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1,000,000 |
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0 |
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ALLEN YURKO |
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500,000 |
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0 |
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CHARLES MCILVAINE |
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250,000 |
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0 |
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GUY ANDRYSICK |
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250,000 |
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0 |
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FRANK JUDGE |
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150,000 |
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0 |
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ROBIN TRAINOR |
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75,000 |
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0 |
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TAMMY CHAFFEE |
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70,000 |
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0 |
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PAUL BLAIR |
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50,000 |
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0 |
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DAN FERUS |
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50,000 |
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0 |
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STOCKHOLDER |
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NUMBER OF |
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NUMBER OF |
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PAUL BERNSTEIN |
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50,000 |
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0 |
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NORMAN ALLMEN |
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50,000 |
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0 |
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KI-IDQ 2012 HOLDINGS, LLC |
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20,343,232 |
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4,746 |
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MICHAEL KLEIN |
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803,731 |
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188 |
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GERRY ROONEY |
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551,077 |
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129 |
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ROGER REEVES |
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193,191 |
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45 |
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SERGIO PUENTES |
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89,248 |
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21 |
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ROB DERIDDER |
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286,381 |
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67 |
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STOCKHOLDER |
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NUMBER OF |
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NUMBER OF |
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JAMES WINTON |
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254,302 |
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59 |
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KERRY WHITAKER |
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71,506 |
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17 |
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SUE DIEHL-SELLMAN |
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132,438 |
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31 |
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KEN MOTUSH |
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204,123 |
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48 |
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VIN CARRUBBA |
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71,506 |
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17 |
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STEVE SMART |
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35,842 |
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8 |
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CHRIS COLE |
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53,764 |
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13 |
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PHIL HENDERSON |
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17,921 |
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4 |
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TOTAL |
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288,853,262 |
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67,391 |
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SCHEDULE B
INITIAL SHARES OF THE COMPANY
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STOCKHOLDER |
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NUMBER OF SHARES OF |
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NUMBER OF SHARES |
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AVISTA CAPITAL PARTNERS II, L.P. |
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113,663,859 |
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44,031 |
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AVISTA CAPITAL PARTNERS (OFFSHORE) II, L.P. |
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37,325,647 |
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14,459 |
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AVISTA CAPITAL PARTNERS (OFFSHORE) II-A, L.P. |
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9,060,494 |
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3,510 |
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ACP VIKING CO-INVEST, LLC |
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103,200,000 |
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0 |
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DAVID LUNDSTEDT |
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1,000,000 |
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0 |
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ALLEN YURKO |
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500,000 |
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0 |
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CHARLES MCILVAINE |
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250,000 |
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0 |
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GUY ANDRYSICK |
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250,000 |
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0 |
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FRANK JUDGE |
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150,000 |
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0 |
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ROBIN TRAINOR |
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75,000 |
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0 |
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TAMMY CHAFFEE |
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70,000 |
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0 |
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PAUL BLAIR |
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50,000 |
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0 |
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DAN FERUS |
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50,000 |
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0 |
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PAUL BERNSTEIN |
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50,000 |
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0 |
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NORMAN ALLMEN |
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50,000 |
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0 |
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KI-IDQ 2012 HOLDINGS, LLC |
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20,343,232 |
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4,746 |
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MICHAEL KLEIN |
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803,731 |
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188 |
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GERRY ROONEY |
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551,077 |
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129 |
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ROGER REEVES |
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193,191 |
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45 |
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SERGIO PUENTES |
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89,248 |
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21 |
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STOCKHOLDER |
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NUMBER OF SHARES OF |
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NUMBER OF SHARES |
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ROB DERIDDER |
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286,381 |
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67 |
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JAMES WINTON |
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254,302 |
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59 |
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KERRY WHITAKER |
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71,506 |
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17 |
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SUE DIEHL-SELLMAN |
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132,438 |
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31 |
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KEN MOTUSH |
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204,123 |
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48 |
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VIN CARRUBBA |
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71,506 |
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17 |
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STEVE SMART |
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35,842 |
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8 |
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CHRIS COLE |
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53,764 |
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13 |
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PHIL HENDERSON |
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17,921 |
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4 |
EXHIBIT A
JOINDER AGREEMENT
This Joinder Agreement (this “Joinder Agreement”) is made as of the date written below by the undersigned (the “Joining Party”) in accordance with the Amended and Restated Stockholders Agreement, dated as of March 17, 2014 (the “Stockholders Agreement”), among ARMORED AUTOGROUP PARENT INC. (formerly known as Viking Parent Inc.), AVISTA CAPITAL PARTNERS II, L.P., AVISTA CAPITAL PARTNERS (OFFSHORE) II, L.P., AVISTA CAPITAL PARTNERS (OFFSHORE) II-A, L.P., KI-IDQ 2012 HOLDINGS, LLC and certain other persons named therein, as the same may be amended from time to time. Capitalized terms used, but not defined, herein shall have the meaning ascribed to such terms in the Stockholders Agreement.
The Joining Party hereby acknowledges, agrees and confirms that, by its execution of this Joinder Agreement, the Joining Party shall be deemed to be a party to, and a “Stockholder” for all purposes of, (except in the event a Person acquires all Equity Securities held by the Avista Funds in accordance with the Stockholders Agreement and as contemplated in Section 9.01(b) of the Stockholders Agreement) the Stockholders’ Agreement as of the date of the Stockholders Agreement and shall have all of the rights and obligations of the Stockholder from whom it has acquired Equity Securities (to the extent permitted by the Stockholders Agreement) as if it had executed the Stockholders Agreement. The Joining Party hereby ratifies, as of the date of the Stockholders Agreement, and agrees to be bound by, all of the terms, provisions and conditions contained in the Stockholders Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Joinder Agreement as of the date written below.
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Date: , |
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[NAME OF JOINING PARTY] | ||
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By: |
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Name: | |
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Title: | |
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Address for Notices: | ||
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AGREED ON THIS [ ] day of [ ], 20[ ]: |
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[ ] |
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By: |
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Name: |
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Title: |
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EXHIBIT B
BY-LAWS OF THE COMPANY
See attached.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth (in thousands) our ratio of earnings to fixed charges for each of the periods shown on a combined basis for the Predecessor periods and on a consolidated basis for the Successor periods. For purposes of determining the ratio of earnings to fixed charges, earnings are defined as (loss) earnings from continuing operations before income taxes, plus fixed charges. Fixed charges consist of interest expense on all indebtedness, amortization of debt discount, amortization of debt issuance costs and an interest factor attributable to operating leases.
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COMBINED | |||||||||||||||||
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CONSOLIDATED | Year ended June 30, | ||||||||||||||||||||
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Period from November 5, 2010 to December 31, 2010 |
Period from July 1, 2010 to November 4, 2010 |
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Year ended December 31, | |
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2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||||
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(Successor) |
(Successor) |
(Successor) |
(Successor) |
(Predecessor) |
(Predecessor) |
(Predecessor) |
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(Loss) earnings before income taxes |
$ | (24,144 | ) | $ | (52,841 | ) | $ | (29,373 | ) | $ | (30,366 | ) | $ | 24,852 | $ | 90,302 | $ | 74,186 | ||||
Add: Fixed charges (from below) |
48,153 | 49,092 | 48,239 | 7,465 | 19 | 71 | 112 | |||||||||||||||
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(Loss) earnings as defined |
$ | 24,009 | $ | (3,749 | ) | $ | 18,866 | $ | (22,901 | ) | $ | 24,871 | $ | 90,373 | $ | 74,298 | ||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Fixed charges: |
||||||||||||||||||||||
Interest expense |
43,716 | 44,828 | 44,257 | 6,865 | — | — | — | |||||||||||||||
Amortization of debt discount |
2,722 | 2,529 | 2,354 | 352 | — | — | — | |||||||||||||||
Amortization of debt issuance costs |
1,586 | 1,530 | 1,482 | 216 | — | — | — | |||||||||||||||
Estimated interest factor from rental expense |
129 | 205 | 146 | 32 | 19 | 71 | 112 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
Total fixed charges |
$ | 48,153 | $ | 49,092 | $ | 48,239 | $ | 7,465 | $ | 19 | $ | 71 | $ | 112 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Ratio of earnings to fixed charges(1) |
— | — | — | — | 1,321.9x | 1,281.5x | 661.2x | |||||||||||||||
Subsidiaries of the Registrant
|
Jurisdiction of Incorporation or Formation |
|
|---|---|---|
| The Armor All / STP Products Company | Delaware | |
| STP Products Manufacturing Company | Delaware | |
| Armored AutoGroup Sales Inc. | Delaware | |
| AA Group (U.S.)—A LLC | Delaware | |
| AA Group (U.S.)—B LLC | Delaware | |
| Shanghai AAG Automotive Products Trading Co., Ltd. | China | |
| Armored Auto (UK) LP | United Kingdom | |
| AAG UK Parent Limited | United Kingdom | |
| Armored Auto UK Ltd. | United Kingdom | |
| AAG UK Holding Limited | United Kingdom | |
| Kent Chamois Company Limited | United Kingdom | |
| Armored AutoGroup Canada ULC | Canada | |
| Armored AutoGroup New Zealand ULC | New Zealand | |
| Armored AutoGroup Australia Pty Ltd | Australia | |
| Armored AutoGroup Malaysia Sdn. Bhd. | Malaysia | |
| Armored AutoGroup HK Limited | Hong Kong | |
| Armored AutoGroup Philippines Inc. | Philippines | |
| Armored AutoGroup Puerto Rico LLC | Puerto Rico | |
| Viking Acquisitions, S. de R.L. de C.V. | Mexico | |
| Viking Acquisitions Servicios, S. de R.L. de C.V. | Mexico |
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David P. Lundstedt, certify that:
| /s/ DAVID P. LUNDSTEDT David P. Lundstedt Chairman, President and Chief Executive Officer March 19, 2014 |
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Andrew Bolt, certify that:
| /s/ J. ANDREW BOLT J. Andrew Bolt Executive Vice President, Chief Financial Officer and Principal Accounting Officer March 19, 2014 |
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, David P. Lundstedt, certify that:
A signed original of this written statement required by Section 906 has been provided to Armored AutoGroup Inc. and will be retained by Armored AutoGroup Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.
|
/s/ DAVID P. LUNDSTEDT David P. Lundstedt Chairman, President and Chief Executive Officer March 19, 2014 |
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Andrew Bolt, certify that:
A signed original of this written statement required by Section 906 has been provided to Armored AutoGroup Inc. and will be retained by Armored AutoGroup Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The undersigned expressly disclaims any obligation to update the foregoing certification except as required by law.
|
/s/ J. ANDREW BOLT J. Andrew Bolt Executive Vice President, Chief Financial Officer and Principal Accounting Officer March 19, 2014 |
|
Share Based Compensation Plans (Tables)
|
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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|
Dec. 31, 2013
|
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| Share Based Compensation Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of total share based compensation expense included in the Company's statements of comprehensive loss | The following table presents details of total share based compensation expense that is included in the Company's statements of comprehensive loss (in thousands):
|
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|
2010 AAG Option Plan | Time-based and performance based options
|
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| Share Based Compensation Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of weighted-average assumptions used for time-based and performance based option grants |
|
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|
2010 AAG Option Plan | Time-based options
|
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| Share Based Compensation Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of stock option activity | The following table summarizes stock option activity for time based options under the 2010 AAG Option Plan for the periods presented (in thousands, except per share amounts):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
2010 AAG Option Plan | Performance based options
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share Based Compensation Plans | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of stock option activity | The following table summarizes stock option activity for performance based options under the 2010 AAG Option Plan for the periods presented (in thousands, except per share and year amounts):
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Goodwill and Intangible Assets, net (Details 3) (USD $)
In Thousands, unless otherwise specified |
Dec. 31, 2013
|
|---|---|
| Expected future amortization expense for intangible assets | |
| 2014 | $ 36,961 |
| 2015 | 36,759 |
| 2016 | 35,661 |
| 2017 | 34,173 |
| 2018 | 26,090 |
| Thereafter | 49,117 |
| Total | $ 218,761 |
|
Accounts Receivable, net (Details) (USD $)
In Thousands, unless otherwise specified |
12 Months Ended | ||
|---|---|---|---|
|
Dec. 31, 2013
|
Dec. 31, 2012
|
Dec. 31, 2011
|
|
| Summary of allowance for obsolescence | |||
| Beginning Balance | $ 682 | $ 390 | $ 108 |
| Provision for Doubtful Accounts | 174 | 370 | 282 |
| Amounts Written-Off | (408) | (78) | |
| Ending Balance | $ 448 | $ 682 | $ 390 |
|
Accounts receivable | Credit concentration risk | First
|
|||
| Credit Concentration Risk | |||
| Percentage of concentration risk | 24.00% | 22.00% | |
|
Accounts receivable | Credit concentration risk | Second
|
|||
| Credit Concentration Risk | |||
| Percentage of concentration risk | 7.00% | 9.00% | |
|
Net sales | Credit concentration risk | First
|
|||
| Credit Concentration Risk | |||
| Percentage of concentration risk | 22.00% | 22.00% | 20.00% |
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