<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 26, 1999
COMMISSION FILE NO. 0-22989
------------------------
WHITE CAP INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 84-1380403
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
3120 AIRWAY AVENUE
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(714) 850-0900
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT 6/30/99
----- ----------------------
<S> <C>
Common Stock, $.01 Par Value 10,725,265
</TABLE>
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WHITE CAP INDUSTRIES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended June 27, 1998 and June 26,
1999........................................................ 3
Condensed Consolidated Balance Sheets at March 27, 1999 and
June 26, 1999 (Unaudited)................................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended June 27, 1998 and June 26,
1999........................................................ 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 14
Item 2 Changes in Securities....................................... 14
Item 3 Defaults upon Senior Securities............................. 14
Item 4 Submission of Matters to a Vote of Security Holders......... 14
Item 5 Other Information........................................... 15
Item 6 Exhibits and Reports on Form 8-K............................ 15
Signatures ............................................................ 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WHITE CAP INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
JUNE 27, JUNE 26,
1998 1999
-------- --------
<S> <C> <C>
Net sales................................................... $68,637 $80,515
Cost of sales............................................... 46,563 54,130
------- -------
Gross profit................................................ 22,074 26,385
Selling, general and administrative......................... 16,882 20,405
------- -------
Income from operations...................................... 5,192 5,980
Interest expense, net....................................... 881 1,019
------- -------
Income before income taxes.................................. 4,311 4,961
Income tax provision........................................ 1,707 1,960
------- -------
Net income.................................................. $ 2,604 $ 3,001
======= =======
Basic income per share:
Income per share.......................................... $ 0.25 $ 0.28
Basic weighted average shares outstanding................. 10,601 10,724
Diluted income per share:
Income per share.......................................... $ 0.23 $ 0.27
Diluted weighted average shares outstanding............... 11,112 11,193
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
WHITE CAP INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 27, JUNE 26,
1999 1999
--------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,994 $ 1,174
Accounts receivable, net of allowance for doubtful
accounts of $1,346 and 1,653, respectively............. 42,434 49,729
Inventories............................................... 48,940 49,824
Prepaid expenses and other................................ 1,200 1,172
Deferred income taxes..................................... 2,553 2,553
-------- --------
97,121 104,452
-------- --------
PROPERTY AND EQUIPMENT, net................................. 12,806 13,034
RENTAL EQUIPMENT, net....................................... 6,071 6,031
INTANGIBLE ASSETS, net...................................... 56,868 56,606
OTHER ASSETS................................................ 326 267
-------- --------
$173,192 $180,390
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 707 $ 703
Accounts payable.......................................... 31,117 32,848
Accrued liabilities....................................... 7,328 8,709
-------- --------
39,152 42,260
-------- --------
LONG-TERM DEBT, net of current portion...................... 52,965 54,029
-------- --------
DEFERRED INCOME TAXES....................................... 2,329 2,329
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B Convertible Preferred Stock, $.10 par value:
Designated -- 1,000 shares; issued and
outstanding -- 60..................................... 6 6
Common Stock, $.01 par value:
Authorized -- 20,000 shares; issued and
outstanding -- 10,720 at March 27, 1999 and 10,725 at
June 26, 1999......................................... 104 105
Additional paid-in capital................................ 77,298 77,324
Retained earnings......................................... 1,338 4,337
-------- --------
78,746 81,772
-------- --------
$173,192 $180,390
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
WHITE CAP INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
JUNE 27, JUNE 26,
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,604 $ 3,001
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation........................................... 637 831
Amortization........................................... 396 514
Gain on disposition of property and equipment.......... (6) (18)
Changes in assets and liabilities, net of effects from
acquisitions:
Increase in accounts receivable........................ (8,173) (7,295)
Increase in inventories................................ (2,522) (884)
Increase in prepaid expenses and other................. (853) (132)
Decrease in deferred tax asset......................... 179 --
Increase in accounts payable........................... 4,664 1,731
Increase in accrued expenses........................... 318 1,381
Increase in deferred tax liability..................... 40 --
-------- -------
Net cash used in operating activities..................... (2,716) (871)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,335) (796)
Proceeds from sale of property and equipment.............. 10 10
Acquisitions of businesses, net of $875 in cash
acquired............................................... (27,596) --
-------- -------
Net cash used in investing activities..................... (28,921) (786)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement............. 31,500 1,000
Principal payments on notes payable....................... (173) (190)
Proceeds received from notes payable...................... 384 --
Proceeds from the exercise of stock options............... -- 27
Common stock issued....................................... 57 --
-------- -------
Net cash provided by financing activities................. 31,768 837
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 131 (820)
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,720 1,994
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 1,851 $ 1,174
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 159 $ 829
======== =======
DETAILS OF ACQUISITIONS:
Fair value of assets...................................... $ 34,892 $ --
Liabilities assumed....................................... (4,093) --
-------- -------
Acquisitions price........................................ 30,799 --
Less cash acquired........................................ (875) --
Less common stock issued for acquisition.................. (2,328) --
-------- -------
Net cash paid for acquisitions............................ $ 27,596 $ --
======== =======
NON CASH FINANCING ACTIVITIES:
Common stock issued for acquisition....................... $ 2,328 $ --
======== =======
Equipment acquired under capital lease obligations........ $ -- $ 250
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
WHITE CAP INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
JUNE 26, 1999
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements presented herein are
unaudited. Accordingly, information and footnote disclosures normally prepared
in accordance with generally accepted accounting principles have been either
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the registrant believes that all adjustments
necessary for a fair presentation (consisting of only normal recurring
adjustments) have been made, interim period results are not necessarily
indicative of the results of operations for a full year. As such, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the most recent Form 10-K which was filed for the
year ended March 27, 1999.
2. RECENT ACQUISITIONS:
During 1998, the Company acquired the following businesses:
<TABLE>
<CAPTION>
BUSINESS ACQUIRED DATE ACQUIRED
----------------- -----------------
<S> <C>
JEF Supply............................................... February 1, 1998
Sierra Supply............................................ April 1, 1998
CCS...................................................... April 1, 1998
Charles R. Watts Co...................................... May 1, 1998
Nyco..................................................... May 1, 1998
Sun City................................................. December 14, 1998
</TABLE>
The acquisitions described above were accounted for as purchases and the
purchase prices were allocated based on management's estimate of the fair value
of the assets acquired and liabilities assumed with respect to each acquisition
at the dates of acquisition. The Company has made a preliminary purchase price
allocation pending additional market information related to the closure of
certain acquired locations and the related facility's future lease obligations.
Costs in excess of net assets acquired were allocated to goodwill.
Had the acquisitions occurred at the beginning of the fiscal year of
acquisition and prior fiscal years, the unaudited and pro forma net sales, net
income, diluted net income per share and diluted weighted average number of
common shares outstanding would be as follows (in thousands, except net income
per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
JUNE 27, JUNE 26,
1998 1999
-------- --------
<S> <C> <C>
Net sales................................................ $72,568 $80,515
Net income............................................... $ 2,551 $ 3,001
Diluted net income per share............................. $ 0.23 $ 0.27
Diluted weighted average shares outstanding.............. 11,165 11,193
</TABLE>
6
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WHITE CAP INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) (CONTINUED)
JUNE 26, 1999
3. EARNINGS PER SHARE:
The following is a reconciliation of the Company's net income and weighted
average shares outstanding for the purpose of calculating basic and diluted
earnings per share for all periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
JUNE 27, 1998 JUNE 26, 1999
---------------- ----------------
INCOME SHARES INCOME SHARES
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS:
Income allocated to common
shareholders/weighted average shares....... $2,604 10,601 $3,001 10,724
Effect of Dilutive Securities:
Options....................................... 511 469
------ ------ ------ ------
Diluted EPS................................... $2,604 11,112 $3,001 11,193
====== ====== ====== ======
</TABLE>
4. INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109. The statement
requires an asset and liability approach for financial accounting and reporting
of income taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial and tax basis of assets and
liabilities given the provisions of the enacted tax laws.
5. SUBSEQUENT EVENT AND COMMITMENTS AND CONTINGENCIES:
On July 23, 1999, the Company entered into a Transaction Agreement
("Transaction Agreement") with WC Recapitalization Corp. ("WCRC"), an affiliate
of Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement provides
for WCRC to purchase all of the Company's outstanding stock for $16.50 per
share, except that, Greg Grosch and certain other members of management
("Management") will sell all but approximately 25 to 30 percent of their
stockholdings in the surviving corporation. Approximately 70 to 75 percent of
Management's shares will be acquired at the same price as all other shares
acquired by WCRC. Subsequent to the purchase of the above referenced shares and
WCRC's merger into White Cap Industries, Inc. ("WCI"), LGP will own a
controlling interest in WCI and Management will retain a portion of their
stockholdings in the surviving corporation equal to approximately 14% of the
total outstanding capital stock of WCI. The transaction is valued at $240
million. The debt and equity financing necessary for the transaction has been
fully committed by LGP, through Green Equity Investors III, L.L.P. and
affiliates of Donaldson, Lufkin & Jenrette Securities Corporation. Certain
members of management will also enter into employment and stockholder agreements
with WCI.
Completion of the transaction is subject to customary conditions including
stockholder approval and receipt of regulatory approvals. Stockholder approval
will be solicited by means of a proxy statement, to be mailed to stockholders
upon the completion of the required Securities and Exchange Commission filing
and review process. Pursuant to a voting agreement executed on July 23, 1999,
certain members of management, KRG Capital Partners, and Apex Investment
Partners who collectively own 45% of the outstanding stock of the Company,
agreed to vote their shares in favor of the merger transaction. The Company
anticipates completing the transaction in the fourth calendar quarter of 1999.
There can be no assurance that the Transaction Agreement will be consummated. If
the Transaction Agreement is terminated, the Company could be required under
certain circumstances to pay WCRC a $12 million termination fee and expenses
associated with the transaction.
7
<PAGE> 8
WHITE CAP INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED) (CONTINUED)
JUNE 26, 1999
In connection with the Transaction, during the last week of July 1999, two
complaints (Casey v. White Cap, et al. case number 17329-NC and Ruth Grenning v.
Greg Grosch, et al., case number 1733-NC) were filed against the Company,
members of its Board of Directors and, in one case, against Leonard Green and
Partners in the Delaware Court of Chancery, Newcastle County. The complaints,
filed on behalf of a purported class of the Company's stockholders, generally
allege that the Transaction is unfair and inadequate to the Company's
stockholders and charge the defendants with breach of fiduciary duties. The
complaints generally request injunctive relief to prevent the consummation of
the Transaction, and seek other remedies in the event the Transaction is
completed. The Company has not yet responded to the complaints.
There can be no assurance that the Company will successfully defend the
allegations included in the complaints. Regardless of whether the Transaction is
consummated or of the outcome of these lawsuits, the Company will likely incur
significant related expenses and costs that could have an adverse effect on the
Company's business and operations. Furthermore, these proceedings could involve
a substantial diversion of the time of some members of management. Accordingly,
the Company is unable to estimate the impact of the outcome of any potential
liabilities associated with the complaints.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis of the Company's results of operations and
financial condition should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and the notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 26, 1999 COMPARED TO
THREE MONTHS ENDED JUNE 27, 1998
Net Sales. Net sales for the three months ended June 26, 1999 ("first
quarter 1999") increased $11.9 million, or 17%, to $80.5 million compared to
$68.6 million for the three months ended June 27, 1998 ("first quarter 1998").
The growth in net sales compared to the prior year was the result of a 9%
increase in same store sales, the expansion of product lines, the opening of two
new stores, and the acquisitions of Watts, Nyco, and Sun City.
Gross Profit. Gross profit for the first quarter 1999 increased $4.3
million, or 20%, to $26.4 million compared to $22.1 million for the first
quarter 1998. The increase in gross profit was the result of increased net sales
and higher gross profit margins. The gross profit margin for the first quarter
of 1999 was 32.8% compared to 32.2% for the first quarter of 1998. The higher
gross profit margin over the prior year is primarily due to a change in product
mix and early payment discounts, partially offset by a decrease in rental
business.
Selling, General and Administrative Expense. Selling, general and
administrative expense ("SG&A") increased $3.5 million or 21%, to $20.4 million
for the first quarter 1999 compared to $16.9 million for the first quarter 1998.
As a percent of sales, SG&A was 25.3% for the first quarter 1999 and 24.6% for
the first quarter of 1998.
Selling expenses increased $2.9 million, or 21%, to $16.6 million for the
first quarter 1999 from $13.7 million for the first quarter 1998. The increase
is due to the opening of two new branches, the expansion of one branch, the
remodeling of two branches, increased commissions to the outside sales force due
to the sales growth, and increased costs of customer service, principally the
addition of transportation, communication, and branch personnel costs. Selling
expenses as a percent of net sales for the first quarter 1999 were 20.6%
compared to 20.0% for the first quarter 1998.
General and administrative expenses increased $0.7 million, or 21%, to $3.8
million for the first quarter 1999 from $3.2 million for the first quarter 1998.
The increase in general and administrative expenses is primarily due to
increased labor and administration costs to process and support the increased
sales volume. General and administrative expenses as a percentage of net sales
for the first quarter 1999 were 4.7%, as compared to 4.6% for the first quarter
1998. Exclusive of the effects of goodwill and covenant not to compete
amortization of $0.5 million in the first quarter 1999 and $0.4 million in the
first quarter 1998, general and administrative expenses increased 22%.
Income from Operations. Income from operations for the first quarter 1999
increased $0.8 million, or 15%, to $6.0 million compared to $5.2 million for the
first quarter 1998. The increase in operating income for the first quarter 1999
compared to the first quarter 1998 was primarily the result of the increase in
sales and gross profit margin as a percent of sales, offset, in part, by the
increase in SG&A expenses as a percent of sales.
Interest Expense, net. Interest expense, net of interest income, increased
$0.1 million, or 16%, to $1.0 million in the first quarter 1999 from $0.9
million in the first quarter 1998. The increase in interest expense is primarily
the result of increased borrowings to fund acquisitions and early payment
discounts from vendors.
Net Income. Net income for the first quarter 1999 was $3.0 million compared
to net income of $2.6 million for the first quarter 1998. This increase reflects
the cumulative effects of the increase in gross profit offset, in part, by the
increase in SG&A, interest, and income taxes.
9
<PAGE> 10
FINANCIAL CONDITION
Working Capital. During the first quarter 1999, operating working capital
increased $5.0 million. The change in operating working capital was primarily
the result of increases in accounts receivable of $7.3 million, inventories of
$0.9 million, accounts payable of $1.7 million and accrued liabilities of $1.4
million. The change in operating working capital excludes changes in cash and
cash equivalents and current maturities of long-term debt.
Cash Flow. For the first quarter 1999, the Company used approximately $0.9
million of net cash from operating activities. Net cash used in investing
activities was approximately $0.8 million for additions to property and
equipment. Financing activities during the first quarter 1999 provided net cash
of $0.8 million, including $1.0 million borrowed under the Credit Facility.
Liquidity and Capital Resources. At June 26, 1999, the Company had cash of
$1.2 million and working capital of $62.2 million. The Company's capitalization,
defined as the sum of long-term debt and stockholders' equity, at June 26, 1999,
was approximately $135.8 million.
The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth, acquisitions, facilities and
product line expansions. The Company's primary sources of financing have been
cash from operations and bank borrowings under the Company's revolving and term
credit facility (the "Credit Facility"). In prior years, in addition to the
above sources, the Company accessed financing through senior and subordinated
debt, the sale of preferred equity, and proceeds from the initial public
offering.
The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the Credit Facility will be
sufficient to meet the Company's liquidity requirements for its operations
through the remainder of the fiscal year ended March 25, 2000. However, the
Company is currently, and intends to continue, pursuing additional acquisitions,
which are expected to be funded through a combination of cash and common stock.
There can be no assurances that additional sources of financing will not be
required during the next twelve months or thereafter to fund the Company's
acquisition program. Accordingly, the Company continuously evaluates its
financing capabilities based on changing market conditions and opportunities.
The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability have been lower in the last two quarters
of its fiscal year. As the Company's mix of businesses evolves through future
acquisitions, those seasonal fluctuations may change. In addition, quarterly
results also may be materially affected by the timing of acquisitions, the
timing and magnitude of costs related to such acquisitions, variations in the
prices paid by the Company for the products it sells, the mix of products sold,
and general or regional economic conditions. Therefore, results for any quarter
are not necessarily indicative of the results that the Company may achieve for
any subsequent fiscal quarter or for a full fiscal year.
In October, 1997 the Company entered into a Credit Facility with available
borrowings of up to $100 million (including a $75 million delayed draw term
facility for acquisitions and a $25 million revolving credit facility). The
Credit Facility expires October 29, 2001, and has a one year option to extend
through October 2002. Interest on the amounts borrowed may be paid at the option
of the Company at a rate per annum equal to the lead bank's prime or reference
rate or LIBOR rate plus margins, in each case based upon the Company's ratio of
total debt to operating cash flow. The Credit Facility contains certain
restrictive covenants limiting mergers, use of proceeds, indebtedness, liens,
investments, sale of assets and acquisitions. The Credit Facility also contains
financial covenants which require the Company to maintain a minimum net worth,
leverage ratio, fixed charge coverage ratio and asset coverage ratio. At June
26, 1999, the Company had approximately $48.6 million available under the
aforementioned facility.
On July 23, 1999, the Company entered into a Transaction Agreement (the
"Transaction Agreement") with WC Recapitalization Corp. ("WCRC"), an affiliate
of Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement provides
for WCRC to purchase all of the Company's outstanding stock for $16.50 per
share, except that, Greg Grosch and certain other members of management
("Management") will sell all but approximately 25 to 30 percent of their
stockholdings in the surviving corporation. Approximately 70 to
10
<PAGE> 11
75 percent of Management's shares will be acquired at the same price as all
other shares acquired by WCRC. Subsequent to the purchase of the above
referenced shares and WCRC's merger into White Cap Industries, Inc. ("WCI"), LGP
will own a controlling interest in WCI and Management will retain a portion of
their stockholdings in the surviving corporation equal to approximately 14% of
the total outstanding capital stock of WCI. The transaction is valued at $240
million. The debt and equity financing necessary for the transaction has been
fully committed by LGP, through Green Equity Investors III, L.L.P. and
affiliates of Donaldson, Lufkin & Jenrette Securities Corporation. Certain
members of management will also enter into employment and stockholder agreements
with WCI.
Completion of the transaction is subject to customary conditions including
stockholder approval and receipt of regulatory approvals. Stockholder approval
will be solicited by means of a proxy statement, to be mailed to stockholders
upon the completion of the required Securities and Exchange Commission filing
and review process. Pursuant to a voting agreement executed on July 23, 1999,
certain members of management, KRG Capital Partners, and Apex Investment
Partners who collectively own 45% of the outstanding stock of the Company,
agreed to vote their shares in favor of the merger transaction. The Company
anticipates completing the transaction in the fourth calendar quarter of 1999.
There can be no assurance that the Transaction Agreement will be consummated. If
the Transaction Agreement is terminated, the Company could be required under
certain circumstances to pay WCRC a $12 million termination fee or expenses
associated with the transaction.
Year 2000
Many existing computer programs use only two digits to identify a year in
the date field. As the century date change occurs, these programs may recognize
the year 2000 as 1900, or not at all. If not corrected, computer systems and
applications could fail or create erroneous results by or at the year 2000 (the
"Year 2000 Issue").
The Company has developed plans to address its possible exposures related
to the impact of the Year 2000 Issue on each of its internal systems and those
of third parties. These plans are expected to be implemented primarily with the
use of internal personnel.
The Company's internal systems consist of its central operating and
accounting systems, that handle the majority of its business transactions, and
other remote operating systems, which have resulted from the Company's
acquisition program. Plans to address the Year 2000 Issue with respect to the
Company's internal systems include an assessment phase, a remediation phase and
a testing phase.
The Company has completed an assessment of its central operating and
accounting systems. This assessment resulted in the identification of certain
modifications which were necessary to bring these systems into year 2000
compliance. These modifications have been made and are in the final testing
phase. Final testing, along with any further remediation efforts necessary to
ensure year 2000 compliance, is scheduled for completion in fiscal 1999. Based
on the results of initial testing, with respect to these two systems, the
Company does not anticipate that the Year 2000 Issue, with respect to its
central operating and accounting system, will materially impact its operations
or operating results.
An assessment of the Company's two remote operating systems is also
complete. The hardware component of one of these systems is not year 2000
compliant. This system is, however, expected to be converted to the Company's
central operating and accounting systems. The remediation and testing phases for
this remote operating system is expected to be completed by September 30, 1999.
Management estimates total pretax costs relating to the Year 2000 Issue to
be approximately $300,000. Approximately 80% of these costs were incurred
through June 26, 1999 and the remaining costs are expected to be incurred
through March 2000. The estimate of $300,000 excludes costs of converting remote
operating systems to the Company's central operating and accounting systems,
because such costs are not expected to be material or the conversion is
scheduled to be performed as part of the Company's normal integration
activities.
11
<PAGE> 12
The Company believes its planning efforts are adequate to address the Year
2000 Issue and that its greatest risks in this area are primarily those that it
cannot directly control, including the readiness of its major suppliers,
customers and service providers. Failure on the part of any of these entities to
timely remediate their Year 2000 Issues could result in disruptions in the
Company's supply of materials, disruptions in its customers' ability to conduct
business and interruptions to the Company's daily operations. Management
believes that its exposure to third party risk may be minimized to some extent
because it does not rely significantly on any one supplier or customer. There
can be no guarantee, however, that the systems of other third parties on which
the Company's systems and operations rely will be corrected on a timely basis
and will not have a material adverse effect on the Company.
Over the past year, the Company has been contacting its major suppliers,
customers and service providers regarding their Year 2000 Issues. However, the
Company does not currently have adequate information to assess the risk of these
entities not being able to provide goods and services to the Company. However,
because the Company believes this area is among its greatest risks, as
information is received and evaluated, the Company intends to develop
contingency plans, as deemed necessary, to safeguard its ongoing operations.
Such contingency plans may include identifying alternative suppliers or service
providers, stockpiling certain inventories if alternative sources of supply are
not available, evaluating the impact and credit worthiness of non-compliant
customers and the addition of lending capacity if deemed necessary to finance
higher levels of inventory or working capital on an interim basis.
Impact of Inflation and Changing Prices
Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on sales or results of operations.
FORWARD-LOOKING STATEMENTS -- UNDER THE PRIVATE SECURITIES LITIGATION ACT OF
1995
Certain statements in this quarterly report are forward-looking statements.
These statements are subject to various risks and uncertainties, many of which
are outside the control of the Company, including the level of market demand for
the Company's products, competitive pressures, the ability to achieve reductions
in operating costs and management's ability to continue to integrate
acquisitions, dependence on systems, environmental matters and other specific
factors discussed in the Company's Form 10-K for the fiscal year ended March 27,
1999, and other Securities and Exchange Commission filings. The information
contained herein represents management's best judgment as of the date hereof
based on information currently available; however, the Company does not intend
to update this information to reflect developments or information obtained after
the date hereof and disclaims any legal obligation to the contrary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in interest
rates on long-term and short-term debt. Currently, the Company does not utilize
interest rate swaps, forward or option contracts on foreign currencies or
commodities, or other types of derivative financial instruments. The purpose of
the following analysis is to provide a framework to understand the Company's
sensitivity to hypothetical changes in interest rates as of June 26, 1999. You
should be aware that many of the statements contained in this section are
forward looking and should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements."
The Company utilizes debt financing primarily for the purpose of strategic
acquisitions. Historically, the Company has borrowed under its revolving credit
and term debt facilities to fund these acquisitions. Borrowings under these
facilities are at variable rates.
The Company also has fixed rate debt in the form of capitalized leases. For
fixed rate debt, changes in interest rates generally affect the fair market
value of the debt, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence the fair market value
of the debt, but do affect future earnings and cash flows. Holding the variable
rate debt balance constant, each one percentage
12
<PAGE> 13
point increase in interest rates occurring on the first day of the year would
result in an increase in interest expense for the coming year of approximately
$514,000.
The table below details the principal amount and the average interest rates
for debt for each category based upon the expected maturity dates. The carrying
value of the variable rate senior loan and security agreement approximates fair
value due to the frequency of repricing of this debt. Fixed rate debt consists
of capital leases with interest rates that approximate current market rates with
similar terms and maturities, and as a result, their carrying amounts
approximate fair value.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
------------------------------------------------ FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ------- ---- ---------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate notes payable..... $703 $624 $400 $ 418 $451 $736 $ 3,332 $ 3,332
Average interest rate...... 8.05% 7.38% 8.35% 8.25% 8.25% 8.25%
Variable rate senior loan and
security agreement......... -- -- -- 51,400 -- -- 51,400 51,400
Average interest rate(1)...
</TABLE>
- ---------------
(1) Based on LIBOR contracts purchased and lead bank's prime or reference rate
as of June 26, 1999, which ranged in interest rates from 5.9% to 8.5%.
The Company does not believe that the future market rate risks related to
the above securities will have a material adverse impact on our financial
position, results of operations or liquidity.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 23, 1999, the Company entered into a Transaction Agreement (the
"Transaction Agreement") with WC Recapitalization Corp. ("WCRC"), an affiliate
of Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement provides
for WCRC to purchase all of the Company's outstanding stock for $16.50 per
share, except that, Greg Grosch and certain other members of management
("Management") will sell all but approximately 25 to 30 percent of their
stockholdings in the surviving corporation. Approximately 70 to 75 percent of
Management's shares will be acquired at the same price as all other shares
acquired by WCRC. Subsequent to the purchase of the above referenced shares and
WCRC's merger into White Cap Industries, Inc. ("WCI"), LGP will own a
controlling interest in WCI and Management will retain a portion of their
stockholdings in the surviving corporation equal to approximately 14% of the
total outstanding capital stock of WCI. The transaction is valued at $240
million. The debt and equity financing necessary for the transaction has been
fully committed by LGP, through Green Equity Investors III, L.L.P. and
affiliates of Donaldson, Lufkin & Jenrette Securities Corporation. Certain
members of management will also enter into employment and stockholder agreements
with WCI.
Completion of the transaction is subject to customary conditions including
stockholder approval and receipt of regulatory approvals. Stockholder approval
will be solicited by means of a proxy statement, to be mailed to stockholders
upon the completion of the required Securities and Exchange Commission filing
and review process. Pursuant to a voting agreement executed on July 23, 1999,
certain members of management, KRG Capital Partners, and Apex Investment
Partners who collectively own 45% of the outstanding stock of the Company,
agreed to vote their shares in favor of the merger transaction. The Company
anticipates completing the transaction in the fourth calendar quarter of 1999.
There can be no assurance that the Transaction Agreement will be consummated. If
the Transaction Agreement is terminated, the Company could be required under
certain circumstances to pay WCRC a $12 million termination fee or expenses
associated with the transaction.
In connection with the Transaction, during the last week of July 1999, two
complaints (Casey v. White Cap, et al case number 17329-NC and Ruth Grenning v.
Greg Grosch, et al, case number 1733-NC) were filed against the Company, members
of its Board of Directors and, in one case, against Leonard Green and Partners
in the Delaware Court of Chancery, Newcastle County. The complaints, filed on
behalf of a purported class of the Company's stockholders, generally allege that
the Transaction is unfair and inadequate to the Company's stockholders and
charge the defendants with breach of fiduciary duties. The complaints generally
request injunctive relief to prevent the consummation of the Transaction, and
seek other remedies in the event the Transaction is completed. The Company has
not yet responded to the complaints.
There can be no assurance that the Company will successfully defend the
allegations included in the complaints. Regardless of whether the Transaction is
consummated or of the outcome of these lawsuits, the Company will likely incur
significant related expenses and costs that could have an adverse effect on the
Company's business and operations. Furthermore, these proceedings could involve
a substantial diversion of the time of some members of management. Accordingly,
the Company is unable to estimate the impact of the outcome of any potential
liabilities associated with the complaints.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<PAGE> 15
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27.0 Financial Data Schedule
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements 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.
WHITE CAP INDUSTRIES, INC.
August 5, 1999 /s/ GREG GROSCH
--------------------------------------
Greg Grosch
President/Chief Executive Officer
August 5, 1999 /s/ CHRIS LANE
--------------------------------------
Chris Lane
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
27.0 Financial Data Schedule.....................................
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> MAR-25-2000 MAR-25-2000
<PERIOD-START> MAR-28-1999 MAR-28-1999
<PERIOD-END> JUN-26-1999 JUN-26-1999
<CASH> 1,174 1,174
<SECURITIES> 0 0
<RECEIVABLES> 49,729 49,729
<ALLOWANCES> 1,653 1,653
<INVENTORY> 49,824 49,824
<CURRENT-ASSETS> 104,452 104,452
<PP&E> 31,339 31,339
<DEPRECIATION> (12,274) (12,274)
<TOTAL-ASSETS> 180,390 180,390
<CURRENT-LIABILITIES> 45,376 45,376
<BONDS> 0 0
0 0
6 6
<COMMON> 105 105
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 180,390 180,390
<SALES> 80,515 80,515
<TOTAL-REVENUES> 80,515 80,515
<CGS> 54,130 54,130
<TOTAL-COSTS> 20,405 20,405
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,019 1,019
<INCOME-PRETAX> 4,961 4,961
<INCOME-TAX> 1,960 1,960
<INCOME-CONTINUING> 3,001 3,001
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,001 3,001
<EPS-BASIC> 0.28 0.28
<EPS-DILUTED> 0.27 0.27
</TABLE>
