<PAGE>
As filed with the Securities and Exchange Commission on October 27, 1998
Registration No. 333-62635
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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CENTURY MAINTENANCE SUPPLY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 5070 76-0542935
(State or other (Primary Standard Industrial (I.R.S. Employer)
jurisdiction of Classification Code Identification No.)
incorporation or Number)
organization)
9100 Winkler Drive
Houston, Texas 77017
(713) 947-6703
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-----------------------------------
Richard E. Penick
Chief Financial Officer, Vice President and Assistant Secretary
Century Maintenance Supply, Inc.
9100 Winkler Drive
Houston, Texas 77017
(713) 947-6703
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
Cynthia M. Dunnett, Esq.
Riordan & McKinzie
300 South Grand Avenue, 29th Floor
Los Angeles, California 90071
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, COMPLETION OR AMENDMENT
WITHOUT NOTICE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED BEFORE THIS
PROSPECTUS IS DELIVERED IN FINAL FORM.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 27, 1998
PROSPECTUS
CENTURY MAINTENANCE SUPPLY, INC.
Offer to Exchange its
13 1/4% Series C Senior Exchangeable PIK Preferred Stock due 2010
(Liquidation Preference $100 per share)
which has been registered under the Securities Act,
for any and all of its outstanding
13 1/4% Series A Senior Exchangeable PIK Preferred Stock due 2010
(Liquidation Preference $100 per share)
The Exchange Offer will expire at 5:00 P.M., New York City time, on
------------------------
, 1998, unless extended. Century Maintenance Supply, Inc.
("Century" or the "Company") hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal" and together
with this Prospectus, the "Exchange Offer"), to exchange one share of its 13
1/4% Series C Senior Exchangeable PIK Preferred Stock due 2010 (Liquidation
Preference $100 per share) (the "Exchange Preferred Stock") which have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a registration statement (the "Registration Statement") of
which this Prospectus is a part, for one share of its Series A Senior
Exchangeable PIK Preferred Stock due 2010 (Liquidation Preference $100 per
share) (the "Initial Preferred Stock"), of which 280,000 shares are
outstanding as of the date hereof.
The Company will accept for exchange any and all validly tendered shares of
Initial Preferred Stock prior to 5:00 P.M., New York City time, on
, 1998, unless extended (the "Expiration Date"). Tenders of shares
of Initial Preferred Stock may be withdrawn at any time prior to 5:00 P.M., New
York City time, on the Expiration Date. The Exchange Offer is not conditioned
upon any minimum number of shares of Initial Preferred Stock being tendered for
exchange. However, the Exchange Offer is subject to certain customary
conditions. In the event the Company terminates the Exchange Offer and does not
accept for exchange any shares of Initial Preferred Stock, the Company will
promptly return the shares of Initial Preferred Stock to the holders thereof.
The Company will not receive any proceeds from the Exchange Offer. See "The
Exchange Offer."
The Exchange Preferred Stock will be an equity security of the Company
evidencing the same equity interest as the Initial Preferred Stock, and will be
entitled to the rights and preferences set forth in the same Certificate of
Designation (the "Certificate of Designation"). See "Description of Exchange
Preferred Stock." The form and terms of the Exchange Preferred Stock are the
same as the form and terms of the Initial Preferred Stock in all material
respects except that the Exchange Preferred Stock has been registered under the
Securities Act and hence does not include certain rights to registration
thereunder and does not contain transfer restrictions. The Initial Preferred
Stock was issued on July 8, 1998 pursuant to an offering exempt from
registration under the Securities Act. See "The Exchange Offer."
The Exchange Preferred Stock is being offered hereunder in order to satisfy
certain obligations of the Company under the Registration Agreement, dated as of
July 8, 1998 (the "Exchange Offer Registration Agreement"), by and
(Continued on following page)
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO
HOLDERS OF SHARES OF INITIAL PREFERRED STOCK ON , 1998.
SEE "RISK FACTORS" ON PAGE 16 FOR INFORMATION THAT SHOULD BE CONSIDERED IN
CONNECTION WITH THIS EXCHANGE OFFER.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
(Continuation of cover page)
between the Company and Salomon Brothers Inc (the "Initial Purchaser"), a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Exchange Offer is intended to satisfy the
Company's obligations under the Exchange Offer Registration Agreement to
register the Initial Preferred Stock under the Securities Act. Once the Exchange
Offer is consummated, the Company will have no further obligations to register
any shares of the Initial Preferred Stock not tendered by the holders of the
Initial Preferred Stock (the "Holders") for exchange. However, the Company has
an obligation pursuant to the Private Registration Agreement (as defined on page
59) to file and use its best efforts to cause to become effective registration
statements for its Series B Senior Exchangeable Preferred Stock due 2010
(Liquidation Preference $100 per share) (the "Series B Preferred Stock") sold to
Dennis C. Bearden, Century's Chief Executive Officer, and to Freeman Spogli &
Co. LLC ("FS&Co.") (the "Private Placement") (the Series B Preferred Stock,
Exchange Preferred Stock and Initial Preferred Stock, collectively, the
"Preferred Stock"). The Private Registration Agreement also provides that (i)
the Company will bear all costs and expenses associated with filing the Private
Registration Statements (as defined on page 59) and causing them to become
effective and (ii) the Company will not file the Private Registration Statements
until any exchange offer registration statement or resale shelf registration
statement required by the Registration Rights Agreement between the Company and
the Initial Purchaser (the "Registration Rights Agreement") have ceased to be
effective and are no longer required to be effective. See "Risk Factors--
Consequences to Non-Tendering Holders of Initial Preferred Stock" and "Certain
Transactions--Private Placement and Registration Rights."
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in several no-action letters to third
parties, the Company believes that the Exchange Preferred Stock issued pursuant
to the Exchange Offer in exchange for Initial Preferred Stock may be offered for
resale, resold and otherwise transferred by holders thereof without compliance
with the registration and prospectus delivery provisions of the Securities Act.
However, any Holder who is an "affiliate" of the Company, any Holder who
intended to participate in the Exchange Offer for the purpose of distributing
the Exchange Preferred Stock or any broker-dealer who acquired Initial Preferred
Stock directly from the Company (i) cannot rely on the interpretation by the
staff of the Commission set forth in the above referenced no-action letters,
(ii) cannot tender its shares of Initial Preferred Stock in the Exchange Offer,
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Initial
Preferred Stock, unless such sale or transfer is made pursuant to an exemption
from such requirements. See "Risk Factors--Consequences to Non-Tendering
Holders of Initial Preferred Stock." In addition, each broker-dealer that
receives Exchange Preferred Stock for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Preferred Stock. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Preferred
Stock received in exchange for Initial Preferred Stock where such Initial
Preferred Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities and not acquired directly from the
Company. The Company has agreed that for a period of 180 days after the
consummation of the Exchange Offer, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution." EXCEPT AS DESCRIBED IN THIS PARAGRAPH, THIS PROSPECTUS MAY NOT
BE USED FOR AN OFFER TO RESELL, RESALE OR OTHER TRANSFER OF EXCHANGE PREFERRED
STOCK.
The Initial Preferred Stock was initially represented by one global
certificate (the "Global Certificate") in fully registered form, registered in
the name of a nominee of The Depository Trust Company ("DTC"), as depository.
The Exchange Preferred Stock exchanged for Initial Preferred Stock represented
by the Global Certificate may be initially represented by one or more global
securities ("Global Exchange Certificate") in fully registered form, each
registered in the name of the nominee of DTC. The Global Exchange Certificate
will be exchangeable for Exchange Preferred Stock in registered form. The
Exchange Preferred Stock in global form will trade in The Depository Trust
Company's Same-Day Funds Settlement System, and secondary market trading
activity in such Exchange Preferred Stock will therefore settle in immediately
available funds. See "Description of Exchange Preferred Stock--Book-Entry
System."
(Continued on following page)
<PAGE>
(Continuation of cover page)
Dividends on the Exchange Preferred Stock will accrue from the date of
issuance and will be payable semi-annually in arrears on January 1 and July 1 of
each year (each a "Dividend Payment Date"), commencing January 1, 1999, at a
rate per annum of 13 1/4% of the liquidation preference per share. The
liquidation preference of each share of Exchange Preferred Stock will be $100
(the "Liquidation Preference"). Dividends will be payable in cash, except that
on each Dividend Payment Date occurring on or prior to July 1, 2003, dividends
may be paid, at the Company's option, by the issuance of additional shares of
Exchange Preferred Stock (including fractional shares) having an aggregate
liquidation preference equal to the amount of such dividends. The payment of
cash dividends is currently prohibited by the terms of the New Credit Facility
and therefore the Company does not anticipate paying cash dividends prior to
January 1, 2004. The Exchange Preferred Stock will not be redeemable prior to
July 1, 2003, except that, on or prior to January 1, 2001, the Company may
redeem at its option, (i) up to 50% or (ii) all, but not less than all, of the
outstanding shares of Exchange Preferred Stock with the net proceeds of any
Public Equity Offering (as defined on page 84) of common stock of the Company,
at a redemption price of 113 1/4% of the Liquidation Preference thereof plus
accumulated and unpaid dividends. On or after July 1, 2003, the Exchange
Preferred Stock will be redeemable at the Company's option in whole or in part,
at the prices set forth herein plus accumulated and unpaid dividends, if any, to
the date of redemption. The Company is required to redeem the Exchange Preferred
Stock on July 1, 2010, at a redemption price equal to 100% of the Liquidation
Preference thereof plus accumulated and unpaid dividends, if any, to the date of
redemption.
Holders whose Initial Preferred Stock is accepted for exchange will receive
accrued dividends thereon to, but not including, the date of issuance of the
Exchange Preferred Stock. Such dividends will be paid with the first dividend
payment on the Exchange Preferred Stock. Dividends on the Initial Preferred
Stock accepted for exchange will cease to accrue interest upon cancellation of
the Initial Preferred Stock and issuance of the Exchange Preferred Stock.
The Exchange Preferred Stock will rank (i) senior to all existing and
future Junior Stock (as defined on page 62) of the Company and (ii) on a parity
with all existing and future Parity Stock (as defined on page 62) of the
Company. As of the date of this Prospectus there is no Parity Stock outstanding
other than the 120,000 shares of Series B Preferred Stock outstanding. The
Exchange Preferred Stock will rank junior in right of payment to all obligations
of the Company and its subsidiaries.
At any time, the Company may, at its sole option, exchange the Exchange
Preferred Stock, in whole but not in part, for the Company's 13 1/4%
Subordinated Exchange Debentures due 2010 (the "Exchange Debentures"). The
Exchange Debentures will be registered under the Securities Act pursuant to the
Registration Statement of which this Prospectus is a part. The Exchange
Debentures will bear interest at a rate of 13 1/4% per annum, payable semi-
annually on January 1 and July 1 of each year, commencing with the first such
date to occur after the date of exchange. The Exchange Debentures will be
subordinated in right of payment to all existing and future Senior Debt (as
defined on page 89) of the Company and will be effectively subordinated in right
of payment to all obligations of the Company's subsidiaries.
Prior to this offering, there has been no public market for the Initial
Preferred Stock. Following completion of the Exchange Offer, Century does not
intend to list the Exchange Preferred Stock on a national securities exchange or
to seek approval for quotation through the Nasdaq National Market. The Initial
Purchaser has informed the Company that it currently intends to make a market in
the Exchange Preferred Stock. However, the Initial Purchaser is not obligated
to do so and any such market making may be discontinued at any time without
notice. Therefore, no assurance can be given as to whether an active trading
market will develop or be maintained for the Exchange Preferred Stock. As the
Initial Preferred Stock was issued and the Exchange Preferred Stock is being
issued to a limited number of institutions who typically hold similar securities
for investment, the Company does not expect that an active public market for the
Exchange Preferred Stock will develop. In addition, resales by certain holders
of the Initial Preferred Stock or the Exchange Preferred Stock of a substantial
percentage of the aggregate principal amount of such notes could constrain the
ability of any market maker to develop or maintain a market for the Exchange
Preferred Stock. To the extent that a market for the Exchange Preferred Stock
should develop, the market value of the Exchange Preferred Stock will depend on
prevailing interest rates, the market for similar securities and other factors,
including the financial condition, performance and prospects the Company. Such
factors might cause the Exchange Preferred Stock to trade at a discount from
face value. See "Risk Factors--Lack of Public Market for the Exchange Preferred
Stock." The Company has agreed to pay the expenses of the Exchange Offer.
(Continued on following page)
(Continuation of cover page)
<PAGE>
THIS PROSPECTUS DESCRIBES CERTAIN DOCUMENTS WHICH ARE NOT PRESENTED HEREIN OR
DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM RICHARD E.
PENICK, CHIEF FINANCIAL OFFICER, VICE PRESIDENT AND ASSISTANT SECRETARY, CENTURY
MAINTENANCE SUPPLY, INC., 9100 WINKLER DRIVE, HOUSTON, TEXAS 77017, TELEPHONE
NUMBER (713) 947-6703.
<PAGE>
AVAILABLE INFORMATION
The Registrant has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 (together with all amendments
thereto, the "Registration Statement") under the Securities Act for the
registration of the Exchange Preferred Stock offered hereby and for the
registration of the Exchange Debentures into which the Exchange Preferred Stock
is exchangeable as set forth herein. As permitted by the rules and regulations
of the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Exchange Preferred Stock
offered hereby and with respect to the Exchange Debentures, reference is made to
the Registration Statement and to the exhibits and schedules filed therewith.
With respect to each such contract or other document filed with the Commission
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and any statement
concerning the contents of any such contract or document shall be deemed
qualified in its entirety by such reference.
Upon consummation of the Exchange Offer, the Registrant will be
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act") for a period following the effectiveness of the Registration
Statement. The Registration Statement, the exhibits and schedules forming a
part thereof and the reports and other information filed by the Registrant with
the Commission in accordance with the Exchange Act may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained upon written
request from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. The Commission also maintains
a World Wide Web site (http://www.sec.gov) that contains reports, proxy and
other information regarding registrants that file electronically with the SEC.
While any Initial Preferred Stock remains outstanding, the Company will make
available, upon request, to any holder and any prospective purchaser of the
Initial Preferred Stock the information required by Rule 144A(d)(4) under the
Securities Act during any period in which the Company is not subject to Section
13 or 15(d) of the Exchange Act. Any such request should be mailed to Century
Maintenance Supply, Inc., 9100 Winkler Drive, Houston, Texas 77017. Telephone
requests may be directed to the Assistant Corporate Secretary at (713) 947-6703.
i
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SUMMARY TEXT
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
contained elsewhere in this Prospectus. As used herein and unless the context
requires otherwise, the "Company" and "Century" refer to Century Maintenance
Supply, Inc. Unless otherwise indicated, all references to non-financial data
are as of June 30, 1998. See "Risk Factors" for certain factors Holders of the
Initial Preferred Stock should consider in evaluating an investment in the
Exchange Preferred Stock.
THE COMPANY
Century Maintenance Supply, Inc. ("Century" or the "Company") is a leading
distributor of maintenance, repair, and operations ("MRO") supplies to the $2
billion multifamily apartment market segment of the estimated $10 billion
domestic MRO market. The Company offers a broad selection of high quality MRO
items, with prompt, free delivery provided through the Company's extensive
distribution network. Century currently supplies over 4,100 name brand and
private label stock-keeping units ("SKUs"), including plumbing, hardware,
electrical, heating, ventilation and air conditioning ("HVAC") and lighting
products, to over 25,000 active customer accounts. The Company markets its
products to individual apartment maintenance managers as well as to larger
property management companies which own and/or manage multiple apartment
complexes. Century provides free same-day or next-day service on virtually all
orders by delivering its products via Company-operated trucks from 30
distribution centers which are strategically located in major metropolitan
markets throughout the United States. Since its inception in 1988, the Company
has reported increased annual net sales, operating income and Adjusted EBITDA.
From 1993 to 1997 the Company has realized compound annual sales growth of
38.6%, increased operating income from $2.3 million in 1993 to $11.3 million in
1997 and improved Adjusted EBITDA (as defined) margins from 6.2% in 1993 to
13.0% in 1997. See footnotes (e) and (f) to "--Summary Historical and Pro Forma
Financial Information" for information with respect to EBITDA and Adjusted
EBITDA, and "--Summary Historical and Pro Forma Financial Information" for
certain cash flow information.
In July 1997, the Company acquired Nationwide Apartment Supply, Inc.
("Nationwide"), an operator of 11 distribution centers located primarily in the
midwestern United States (the "Nationwide Acquisition"). The Nationwide
Acquisition has expanded the Company's geographic reach, generated efficiencies
through the consolidation of three distribution centers and provided the
potential for purchasing synergies and margin improvements, as well as with what
it believes is a complementary management team. For the twelve months ended
June 30, 1997, Nationwide generated $35.0 million of annual sales, operating
income of $2.5 million and $2.8 million of EBITDA. Pro forma for the Nationwide
Acquisition, the Company's 1997 net sales, operating income and Adjusted EBITDA
were $166.0 million, $12.7 million and $20.7 million, respectively. See the
Combined Financial Statements of Nationwide Apartment Supply, Inc. contained
elsewhere in this Prospectus and "--Summary Historical and Pro Forma Financial
Information" for EBITDA and Adjusted EBITDA information, and for certain cash
flow information.
BUSINESS STRATEGY
The central focus of the Company's business strategy is to provide the
highest level of customer service in the industry. The Company has historically
focused on the multifamily apartment segment of the MRO market, specifically on
two or three story, garden style apartment complexes with 75 or more units
located in major metropolitan markets. The Company believes that such apartment
complexes have more frequent maintenance requirements and generate higher
average invoice amounts than complexes with fewer units. The Company's business
strategy is based upon (i) developing and maintaining strong and enduring
customer relationships through a strong local presence, (ii) controlling the
distribution of its products to provide reliable same-day or next-day delivery,
(iii) maintaining superior fill rates in order to satisfy customer needs, and
(iv) enhancing its ability to service and secure relationships with national
accounts, including large, nationally-focused property owners and
1
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management companies. In addition, the Company continues to realize operating
efficiencies by centralizing key corporate functions and integrating new
distribution centers.
DEVELOP AND MAINTAIN STRONG CUSTOMER RELATIONSHIPS THROUGH STRONG LOCAL
PRESENCE. Century maintains high levels of customer service through its local
outside salesforce which maintains frequent personal customer contact. The
outside salesforce is complemented by an inside salesforce which is primarily
responsible for receiving customer orders and providing technical support. In
addition, Century's products are delivered through its Company-operated fleet of
trucks, by a driver with whom the customer is typically familiar and who can
address the customer's specific needs or requests. The personalized interaction
that results from this strong local presence helps the Company build and
maintain a loyal customer base. Century reinforces its customer loyalty by
providing value-added services, such as educational classes and training for its
customers held at most of the Company's distribution centers. In addition, the
Company participates in over 80 apartment associations, thereby enhancing its
understanding of and presence in local markets.
CONTROL OF DISTRIBUTION. Through its extensive network of local
distribution centers and Company-operated delivery fleet, Century is able to
control the entire distribution process. In this manner, the Company strives to
distinguish itself from many of its competitors and maintain high levels of
customer satisfaction. The Company limits the number of different parties
handling a product, which minimizes faulty deliveries and damage while reducing
delivery time. The Company guarantees same-day or next-day delivery of its
products in virtually all of its markets. Century's distribution system allows
for quicker and less costly delivery of large and heavy items, for which United
Parcel Service and similar services are not as competitively priced.
MAINTAIN HIGH FILL RATES. By carefully managing levels of inventory at
each distribution center and maintaining up to date information on customer
buying patterns, the Company estimates it is able to achieve a fill rate in
excess of 97%. The Company continually monitors the demand for all products and
adjusts inventory levels accordingly to maintain appropriate stock levels at
each distribution center in order to meet customer needs. In addition, each
distribution center is able to offer an additional 100 SKUs in order to meet
specific local needs. Maintaining high fill rates reduces the risk of losing
customers to competition and reinforces customer loyalty.
SERVICE NATIONAL ACCOUNTS. The consolidation of the apartment market has
created a new class of national customers who demand the high quality service,
broad product line, competitive pricing and national distribution capability
which Century offers. Century's high level of service and extensive network of
distribution centers has enabled the Company to develop supply relationships
with national apartment management companies and group purchasing organizations
("GPOs"). In 1995, the Company established a national salesforce to complement
its local salesforce by focusing on servicing these national customers. Of the
largest 50 property management companies, 46 are active customers of Century.
Furthermore, the Company is a preferred supplier to Buyers Access Group, a major
GPO. Sales to the Company's top five national accounts (including GPOs)
increased from 9.1% of overall sales in 1995 to 15.0% in 1997. With its core
base of national accounts and extensive network of distribution centers, Century
believes that it is better positioned to capitalize on the consolidation trends
in the industry than are smaller local and regional suppliers. The Company
plans to open additional distribution centers to expand its national presence.
See "--Growth Strategy."
GROWTH STRATEGY
The Company's growth strategy is based on the following elements: (i)
continuing comparable-center sales growth; (ii) entering new geographic markets;
and (iii) actively developing strategies to enter new end-user markets.
CONTINUING COMPARABLE-CENTER SALES GROWTH. Century's strategy for
comparable-center sales growth is focused on: (i) expanding the customer base
served by existing distribution centers and (ii) gaining a larger portion of
each existing customer's MRO dollar, primarily through the selective addition of
SKUs. In each year since 1993, the Company has realized comparable center sales
growth rates ranging from 20.8% to 28.2%.
2
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Century's comparable-center growth is primarily driven by the relationship-
building efforts of its outside salesforce, which regularly calls on prospective
customers. Once the outside salesforce makes a successful sales call, Century's
management believes that its combination of service, reliable same day/next day
delivery, high fill rate and competitive pricing allows it to gain market share
and increase its loyal customer base. Moreover, as the consolidation of the
Company's customer base continues, Century expects to supply additional
properties built or acquired by existing customers and capture a larger share
from the many local and regional competitors which currently comprise 70-80% of
the total apartment MRO market. In addition, the Company expects comparable
center sales will grow due to market growth caused by the increase in
construction of new apartment buildings and the higher standard of amenities in
the typical apartment unit.
Century's management believes that by continuing to provide superior
service to its existing customer base, it is capturing a growing portion of each
customer's MRO dollar. Century has been successful in introducing new products
into existing markets. In 1997, the Company introduced approximately 150 new
products, which contributed more than $3 million to net sales.
ENTERING NEW GEOGRAPHIC MARKETS. The Company plans to open new
distribution centers in carefully selected markets. These target markets
typically contain more than 60,000 apartment units in complexes of more than 75
units. From 1993 to 1997, the Company opened 14 new distribution centers,
generating an aggregate of $48.4 million in sales in 1997. The Company's goal
is to add at least 10 new distribution centers by the end of the year 2000. In
addition, the Company plans to extend the range of its distribution centers
through mail-order and line-haul delivery methods to locations that do not meet
the Company's criteria for a local distribution center. Line-haul delivery is a
distribution method in which freight lines deliver aggregated customer orders to
a location beyond the local delivery range, at which point the orders are
subsequently transferred to third-party delivery services. The Company primarily
intends to expand into new markets through internal growth, but may make
strategic acquisitions from time to time. The Company is not presently
contemplating any material acquisition opportunities.
NEW END-USER MARKETS. The Company believes substantial growth
opportunities exist by targeting new end-user markets, which it estimates have
$8 billion in yearly sales volume. Potential new markets include high rise
apartment buildings, hotels/motels, nursing homes, prisons, military
installations, and schools and universities. The Company believes that these
new end-user markets have demands similar to those of the apartment MRO market
and can be served by the Company's present distribution channel with the
addition of certain SKUs. The Company is in the investigative and planning
stages with respect to its entry into certain of these end user markets.
THE RECAPITALIZATION
On July 8, 1998, the Company consummated a recapitalization pursuant to an
Agreement and Plan of Merger (the "Recapitalization Agreement"). Under the
terms of the Recapitalization Agreement, Century Acquisition Corporation, an
entity formed by affiliates of Freeman Spogli & Co. LLC ("FS&Co.") merged with
and into the Company, with the Company as the surviving corporation.
Pursuant to the Recapitalization, FS&Co. invested $67.5 million, a director
of the Company invested $750,000, and a third party, The Parthenon Group,
invested $125,000, in cash for common stock of the Company (the "Common Stock
Investment") and stockholders of the Company (the "Continuing Stockholders")
retained common stock with a value of $54.2 million (based on the valuation of
the Company used in the Recapitalization). As part of the Recapitalization,
shares of Series A 13 1/4% Senior Exchangeable PIK Preferred Stock due 2010 of
the Company with an aggregate liquidation preference of $28.0 million were sold
(the "Offering"), and shares of Series B 13 1/4% Senior Exchangeable Preferred
Stock of the Company with an aggregate liquidation preference of $12.0 million
were sold to FS&Co. and Dennis C. Bearden, the Company's Chief Executive
Officer, in a private placement that was consummated simultaneously with the
Offering (the "Private Placement" and, together with the Offering, the "Sales of
Preferred"). Immediately following consummation of the Recapitalization, FS&Co.
and the Continuing Stockholders beneficially owned approximately 55.1% and 44.2%
of the outstanding common stock of the Company, respectively, and FS&Co. and Mr.
Bearden beneficially owned 10.0% and 20.0% respectively of the outstanding
Preferred Stock sold pursuant to the Offering and the Private Placement
combined.
On July 8, 1998, the Company entered into a credit agreement (the "New
Credit Facility") providing for a $100.0 million secured term loan facility (the
"Term Loan Facility"), which was funded in connection with the
3
<PAGE>
consummation of the Recapitalization, and a $25.0 million revolving loan
facility (the "Revolving Credit Facility"). The Revolving Credit Facility will
be available to the Company and its subsidiaries (i) for future working capital
and general corporate purposes, (ii) to finance certain permitted acquisitions,
and (iii) for issuing commercial and standby letters of credit. See "Description
of New Credit Facility."
The Offering and the Private Placement and the application of the net
proceeds from each, the payments to the Continuing Stockholders and to option
holders under the Recapitalization Agreement, the Common Stock Investment and
the related borrowings under the New Credit Facility are collectively referred
to herein as the "Recapitalization."
The sources and uses of funds in connection with the Recapitalization are
presented in the following table (dollars in millions):
<TABLE>
<CAPTION>
SOURCES OF FUNDS:
<S> <C>
New Credit Facility....................................... $100.0
Sales of Preferred(1)..................................... 40.0
Common Stock Investment................................... 68.3
Continuing Stockholders' retained interest................ 54.2
------
Total sources of funds............................... $262.5
======
USES OF FUNDS:
Payment of cash consideration in Recapitalization(2)...... $179.3
Repayment of existing indebtedness, net of cash........... 14.0
Continuing Stockholders' retained interest................ 54.2
Other fees and expenses................................... 15.0
------
Total uses of funds.................................. $262.5
======
</TABLE>
___________________
(1) Comprised of (a) $28.0 million of Preferred Stock sold in the Offering and
(b) $12.0 million of Preferred Stock sold in the Private Placement.
(2) Comprised of (a) payments of approximately $178.3 million to Continuing
Stockholders upon conversion of certain shares of common stock of the
Company and to option holders and (b) bonus payments of approximately $1.0
million to certain employees. See "Certain Transactions--Payments Relating
to the Recapitalization."
RISK FACTORS
Holders of the Initial Preferred Stock should consider carefully the
information set forth under the caption "Risk Factors" and all other information
set forth in this Prospectus in evaluating an investment in the Exchange
Preferred Stock.
4
<PAGE>
TERMS OF THE EXCHANGE PREFERRED STOCK
<TABLE>
<S> <C>
Issuer....................... Century Maintenance Supply, Inc.
Securities Offered........... 280,000 shares of 13 1/4% Series C Senior Exchangeable PIK Preferred Stock due 2010 (the "Exchange
Preferred Stock").
Dividends.................... Dividends on the Exchange Preferred Stock will accrue at a rate per share of 13 1/4% per annum of the
Liquidation Preference thereof. Dividends will be payable in cash, except that on each Dividend
Payment Date occurring on or prior to July 1, 2003, dividends may be paid, at the Company's option,
by the issuance of additional shares of Exchange Preferred Stock (including fractional shares having
an aggregate Liquidation Preference equal to the amount of such dividends. It is not anticipated that
the Company will pay any dividends in cash for any period ending on or prior to July 1, 2003, so
prior to that time, dividends will be paid in additional shares of Exchange Preferred Stock. The
terms of the New Credit Facility currently prohibit the Company from paying any cash dividends on the
Exchange Preferred Stock. See "Risk Factors--Ability to Make Distributions on Exchange Preferred
Stock," "Risk Factors--Holding Company Structure" and "Description of New Credit Facility."
Dividend Payment Dates....... Dividends on the Exchange Preferred Stock will be payable semi-annually in arrears on January 1 and
July 1 of each year (each a "Dividend Payment Date") commencing January 1, 1999.
Liquidation Preference....... $100 per share.
Ranking...................... The Exchange Preferred Stock will rank (i) senior to all existing and future Junior Stock; and (ii)
on a parity with all existing and future Parity Stock. In addition, the Exchange Preferred Stock will
rank junior in right of payment to all obligations of the Company and its subsidiaries. As of June
30, 1998, after giving effect to the Recapitalization, the Company would have had no Parity Stock or
Junior Stock outstanding, other than the Series B Preferred Stock, and would have had Senior Debt
outstanding of $100.0 million and the Company's subsidiaries would have had total balance sheet
liabilities of $18.9 million, all of which is senior or effectively senior to the Preferred Stock. In
addition, the Company would have had up to $25.0 million of undrawn commitments available under the
Revolving Credit Facility. See "Description of the Exchange Preferred Stock--Ranking."
Optional Redemption.......... The Exchange Preferred Stock will not be redeemable prior to July 1, 2003, except that, prior to
January 1, 2001, the Company may redeem, at its option, (i) up to 50% or (ii) all, but not less than
all, of the outstanding Exchange Preferred Stock with the net proceeds of any Public Equity Offering
by the Company at a redemption price of 113.25% of the Liquidation Preference thereof plus
accumulated and unpaid dividends. On or after July 1, 2003, the Exchange Preferred Stock is
redeemable at the option of the Company, in whole or in part, at the redemption prices set forth
herein plus accumulated and unpaid dividends, if any, to the date of redemption. See "Description of
the Exchange Preferred Stock--Optional Redemption."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Mandatory Redemption......... The Exchange Preferred Stock is subject to mandatory redemption at its Liquidation
Preference, plus accumulated and unpaid dividends, if any, on July 1, 2010, out of any
funds legally available therefor.
Change of Control............ In the event of a Change of Control (as defined on page 76), the Company will be required to make an
offer to repurchase all or any part of each holder's Exchange Preferred Stock, at a purchase price
equal to 101% of the aggregate Liquidation Preference thereof, plus accrued and unpaid dividends, if
any, to the date of purchase. The New Credit Facility includes events of default triggered by a
Change of Control of the Company and prohibits the Company from repurchasing the Exchange Preferred
Stock, including upon a Change of Control. In addition, there can be no assurance that in the event
of a Change of Control the Company would have sufficient or legally available funds to purchase all
shares of Preferred Stock tendered. See "Risk Factors--Possible Inability to Make Required Payment
Upon a Change of Control."
Voting Rights................ Holders of the Exchange Preferred Stock will have no voting rights, except as required by law and
except that holders of the Exchange Preferred Stock, voting together as a class with the holders of
any other series of preferred stock upon which like rights have been conferred and are exercisable,
will be entitled to elect two additional members to the Board of Directors of the Company and the
number of members of the Board of Directors will be immediately and automatically increased by two if
(i) the Company fails to pay dividends, in cash or additional shares of Exchange Preferred Stock, as
applicable, for six or more semi-annual periods when dividends are payable (each a "Dividend
Period"), whether or not consecutive, (ii) the Company fails to satisfy any mandatory redemption
obligation with respect to the Exchange Preferred Stock, (iii) the Company fails to make an offer to
purchase all of the outstanding shares of Exchange Preferred Stock following a Change of Control,
(iv) the Company fails to comply with the covenants set forth in the Certificate of Designation (as
defined below under "--Certain Covenants") or, (v) the Company fails to pay, at final maturity, the
principal amount of any indebtedness of the Company or any subsidiary of the Company or in the event
that the stated maturity of any such indebtedness is accelerated because of a default and the total
amount of such indebtedness unpaid or accelerated exceeds $7.5 million. In addition, holders of the
Exchange Preferred Stock shall have the right to approve each authorization by the Company of any
class of Senior Stock (as defined on page 62) or Parity Stock or the issuance by the Company of
additional shares of Exchange Preferred Stock (other than additional shares of Exchange Preferred
Stock to be issued as dividends on outstanding shares of Exchange Preferred Stock). However, the
Company may create additional classes of stock or issue series of Junior Stock without the consent of
the holders of Exchange Preferred Stock. See "Description of the Exchange Preferred Stock--Voting
Rights."
Certain Covenants............ The Certificate of Designation for the Exchange Preferred Stock (the "Certificate of Designation")
contains limitations on, among other things: (i) the ability of the Company and any Restricted
Subsidiaries (as defined on page 84) to incur additional Debt (as defined on page 79), (ii) the
making of certain Restricted Payments (as defined on page 84) including certain Investments (as
defined on page 81), (iii) the issuance and sale of Capital Stock (as defined on page 76) of
Restricted Subsidiaries, (iv) payment restrictions affecting Restricted Subsidiaries, (v)
transactions with Affiliates (as defined on page 75), (vi) the ability of the Company to engage in
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
any business or activity other than the business currently conducted by it and its Restricted
Subsidiaries and Related Businesses (as defined on page 84), and (vii) certain mergers,
consolidations and sales of property involving the Company or its Restricted Subsidiaries. All of
these limitations will be subject to a number of important qualifications. See "Description of the
Exchange Preferred Stock--Certain Covenants."
Debt Restrictions............ The New Credit Facility prohibits the redemption or repurchase of the Exchange Preferred Stock
(except out of a portion of the proceeds of an initial public offering), including upon a redemption
or upon a Change of Control, and currently prohibits the payment of cash dividends on the Exchange
Preferred Stock (provided that payment of cash dividends is permitted after July 1, 2003, subject to
financial performance tests). The New Credit Facility prohibits the exchange of the Exchange
Preferred Stock for Exchange Debentures. Other future debt of the Company may require repayment upon
a Change of Control and may prohibit the Company from repurchasing Exchange Preferred Stock. See
"Risk Factors--Ability to Make Distributions on Exchange Preferred Stock" and "Description of New
Credit Facility."
Exchange Feature............. At any time, the Company may, at its sole option, exchange all but not less than all of the shares of
the Exchange Preferred Stock then outstanding for Exchange Debentures in a principal amount equal to
the Liquidation Preference of the shares of Exchange Preferred Stock being exchanged. The New Credit
Facility currently prohibits the Company from exchanging the Exchange Preferred Stock.
TERMS OF THE EXCHANGE DEBENTURES
Securities Offered........... 13 1/4% Subordinated Exchange Debentures due 2010 issuable in exchange for the Preferred Stock in an
aggregate principal amount equal to the Liquidation Preference of the Preferred Stock, plus
accumulated and unpaid dividends to the date of exchange (the "Exchange Debentures").
Maturity Date................ July 1, 2010.
Interest Rate................ The Exchange Debentures will bear interest at a rate of 13 1/4% per annum. On or prior to July 1,
2003, interest may, at the option of the Company, be paid by issuing additional Exchange Debentures
with a principal amount equal to such interest. After July 1, 2003, interest on the Exchange
Debentures may be paid only in cash.
Interest Payment Dates....... Interest will accrue on the Exchange Debentures from the date of exchange (the "Exchange Date") and
will be payable semiannually on each January 1 and July 1 commencing with the first of such dates to
occur after the Exchange Date.
Subordination................ The Exchange Debentures will be general unsecured obligations of the Company, subordinated in right
of payment to all existing and future Senior Debt of the Company, including the Company's obligations
under the New Credit Facility. The Exchange Debentures will also be effectively subordinated to all
obligations of the Company's subsidiaries. As of
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
June 30, 1998, after giving effect to the Recapitalization, the Company would have had Senior Debt
outstanding of $100.0 million and the Company's subsidiaries would have had total balance sheet
liabilities of $18.9 million (excluding guaranties under the New Credit Facility), all $118.9 million
of which would have been senior or effectively senior in right of payment to the Exchange Debentures.
In addition, the Company would have had up to $25.0 million in undrawn commitments available under
the Revolving Credit Facility, which when drawn would constitute Senior Debt. See "Description of the
Exchange Debentures--Subordination."
Optional Redemption.......... The Exchange Debentures will not be redeemable prior to July 1, 2003, except that, prior to January
1, 2001, the Company may redeem, at its option, (i) up to 50% or (ii) all, but not less than all, of
the aggregate principal amount of the Exchange Debentures at the redemption price set forth herein
with the net proceeds of any Public Equity Offering by the Company, in whole or in part, at the
redemption prices set forth herein of 113 1/4% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of redemption.
Change of Control............ In the event of a Change of Control, the Company will be required to make an offer to repurchase all
or any part of each holder's Exchange Debentures at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. There
can be no assurance that the Company will have sufficient funds available at the time of any Change
of Control to effect the repurchase of Exchange Debentures tendered by holders pursuant to such
offer.
Certain Covenants............ The indenture under which the Exchange Debentures will be issued (the "Exchange Indenture") will
contain limitations on, among other things: (i) the ability of the Company and any Restricted
Subsidiaries to Incur (as defined on page 81) additional Debt, (ii) the making of certain Restricted
Payments including certain Investments, (iii) the creation of certain Liens (as defined on page 82),
(iv) the issuance and sale of Capital Stock of Restricted Subsidiaries, (v) Asset Sales (as defined
on page 75), (vi) payment restrictions affecting Restricted Subsidiaries, (vii) transactions with
Affiliates, (viii) the ability of the Company to engage in any business or activity other than the
business currently conducted by it and its Restricted Subsidiaries and Related Businesses, and (ix)
certain mergers, consolidations and sales of property involving the Company and the Restricted
Subsidiaries. All of these limitations will be subject to a number of important qualifications. See
"Description of the Exchange Debentures--Certain Covenants."
Debt Restrictions............ The New Credit Facility prohibits the redemption or repurchase of the Exchange Debentures, including
upon a Change of Control. The New Credit Facility prohibits the exchange of the Exchange Preferred
Stock for Exchange Debentures. See "Risk Factors--Ability to Make Distributions on Exchange Preferred
Stock" and "Description of New Credit Facility."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
THE EXCHANGE OFFER
The Exchange Offer........... 280,000 shares of Exchange Preferred Stock in exchange for 280,000 shares of Initial Preferred Stock.
As of the date hereof, 280,000 shares of Initial Preferred Stock are outstanding. The Company will
issue the Exchange Preferred Stock to Holders on or promptly after the Expiration Date.
Based on an interpretation by the staff of the Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange Preferred Stock issued pursuant to the Exchange
Offer in exchange for Initial Preferred Stock may be offered for resale, resold and otherwise
transferred by Holders thereof without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such Exchange Preferred Stock is acquired in the
ordinary course of such holders' business and such holders have no arrangement with any person to
participate in the distribution of such Exchange Preferred Stock. However, the Company does not
intend to request the Commission to consider, and the Commission has not considered, the Exchange
Offer in a no-action letter and there can be no assurance that the Commission would make a similar
determination with respect to the Exchange Offer. However, any Holder who is an "affiliate" of the
Company or who intends to participate in the Exchange Offer for the purpose of distributing the
Exchange Preferred Stock (i) cannot rely on the interpretation by the staff of the Commission set
forth in the above referenced no-action letters, (ii) cannot tender its Initial Preferred Stock in
the Exchange Offer, and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the Initial Preferred Stock, unless
such sale or transfer is made pursuant to an exemption from such requirements. See "Risk Factors--
Consequences to Non-Tendering Holders of Initial Preferred Stock."
Each broker-dealer that receives Exchange Preferred Stock for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Preferred Stock. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of Exchange Preferred Stock
received in exchange for Initial Preferred Stock where such Initial Preferred Stock were acquired by
such broker-dealer as a result of market-making activities or other trading activities and not
acquired directly from the Company. The Company has agreed that for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
Expiration Date.............. 5:00 p.m., New York City time, on , 1998, unless the Exchange Offer is extended,
in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer
is extended.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Dividends on the Exchange
Preferred Stock; Accrued
Dividends on the Initial
Preferred Stock............. Dividends will accrue on the Exchange Preferred Stock from their issuance date. Holders whose Initial
Preferred Stock is accepted for exchange will receive accrued dividends thereon to, but excluding,
the issuance date of the Exchange Preferred Stock. Such dividends will be paid with the first
dividend payment on the Exchange Preferred Stock. Dividends on the Initial Preferred Stock accepted
for exchange will cease to accrue upon cancellation of the Initial Preferred Stock and issuance of
the Exchange Preferred Stock. Holders of Initial Preferred Stock whose Initial Preferred Stock is not
exchanged will receive the accrued dividend payable on January 1, 1999 on such date in accordance
with the terms of the Certificate of Designation.
Condition to the Exchange
Preferred Stock............. The Exchange Offer is subject to certain customary conditions. The conditions are limited and relate
in general to proceedings which have been instituted or laws which have been adopted that might
impair the ability of the Company to proceed with the Exchange Offer. As of , 1998, none of these
events had occurred, and the Company believes their occurrence to be unlikely. If any such conditions
do exist prior to the Expiration Date, the Company may (i) refuse to accept any Initial Preferred
Stock and return all previously tendered Initial Preferred Stock, (ii) extend the Exchange Offer or
(iii) waive such conditions. See "The Exchange Offer--Conditions."
Procedures for Tendering Initial
Preferred Stock............. Each Holder of Initial Preferred Stock wishing to accept the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained
herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile,
together with such Initial Preferred Stock to be exchanged and any other required documentation to
United States Trust Company of New York, as Exchange Agent, at the address set forth herein and
therein or effect a tender of such Initial Preferred Stock pursuant to the procedures for book-entry
transfer as provided for herein. By executing the Letter of Transmittal, each Holder will represent
to the Company that, among other things, the Exchange Preferred Stock acquired pursuant to the
Exchange Offer is being obtained in the ordinary course of business of the person receiving such
Exchange Preferred Stock, whether or not such person is the Holder, that neither the Holder nor any
such other person has an arrangement or understanding with any person to participate in the
distribution of such Exchange Preferred Stock and that neither the Holder nor any such person is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company. Each broker-dealer that
receives Exchange Preferred Stock for its own account in exchange for Initial Preferred Stock, where
such Initial Preferred Stock was acquired by such broker-dealer as a result of market-making
activities or other trading activities and not acquired directly from the Company, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange Preferred Stock. See
"The Exchange Offer--Procedures for Tendering" and "Plan of Distribution."
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Special Procedures for
Beneficial Owners........... Any beneficial owner whose Initial Preferred Stock is registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and who wishes to tender such Initial Preferred Stock
in the Exchange Offer should contact such registered Holder promptly and instruct such registered
Holder to tender on such beneficial owner's behalf. If such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to completing and executing the Letter of Transmittal and
delivering its Initial Preferred Stock, either make appropriate arrangements to register ownership of
the Initial Preferred Stock in such owner's name or obtain a properly completed bond power from the
registered Holder. The transfer of registered ownership may take considerable time and may not be
able to be completed prior to the Expiration Date. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery
Procedures.................. Holders of Initial Preferred Stock who wish to tender their Initial Preferred Stock and whose Initial
Preferred Stock is not immediately available or who cannot deliver their Initial Preferred Stock, the
Letter of Transmittal or any other documents required by the Letter of Transmittal to United States
Trust Company of New York, as Exchange Agent, or cannot complete the procedure for book-entry
transfer, prior to the Expiration Date must tender their Initial Preferred Stock according to the
guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights............ Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
Acceptance of Initial Preferred
Stock and Delivery of Exchange
Preferred Stock............. The Company will accept for exchange any and all shares of Initial Preferred Stock which are properly
tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The
Exchange Preferred Stock issued pursuant to the Exchange Offer will be delivered promptly following
the Expiration Date. Any Initial Preferred Stock not accepted for exchange will be returned without
expense to the tendering Holder thereof as promptly as practicable after the expiration or
termination of the Exchange Offer. See "The Exchange Offer--Terms of the Exchange Offer."
Certain Tax Considerations... The exchange pursuant to the Exchange Offer will not constitute a recognition event for federal
income tax purposes, and, thus, no gain or loss will be recognized by a Holder upon the exchange of
Initial Preferred Stock for Exchange Preferred Stock pursuant to the Exchange Offer. See "Certain
U.S. Federal Income Tax Considerations."
Exchange Agent............... United States Trust Company of New York is serving as Exchange Agent in connection with the Exchange
Offer.
</TABLE>
GENERAL
The Company's principal executive offices are located at 9100 Winkler
Drive, Houston, Texas 77017 and its telephone number is (713) 947-6703.
11
<PAGE>
ADDITIONAL INFORMATION
For additional information regarding the Exchange Preferred Stock, see
"Description of the Exchange Preferred Stock" and "Certain U.S. Federal Income
Tax Consequences."
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following summary historical financial data for each of the three years
and the period ended December 31, 1997 are derived from the audited consolidated
financial statements of the Company. The summary financial data for the years
ended December 31, 1993 and 1994 and for the six month periods ended June 30,
1997 and June 30, 1998 are derived from the unaudited financial statements. The
unaudited financial statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for the fair
presentation of the financial position and the results of operations for these
periods. Operating results for the six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998. The summary pro forma financial data for the year
ended December 31, 1997 and the six months ended June 30, 1998 and June 30, 1997
are derived from the pro forma financial statements included elsewhere in this
Prospectus and give effect to the Recapitalization, the Reorganization (as
defined), the Common Control Mergers (as defined), and the Nationwide
Acquisition (as defined) as if they had occurred at the beginning of the period
presented with respect to the operating and other financial data, and as of June
30, 1998 with respect to balance sheet data. The summary pro forma financial
data does not necessarily represent what the Company's financial position and
results of operations would have been if these transactions had actually been
completed as of the dates indicated, and is not intended to project the
Company's financial position or results of operations for any future period. The
information contained in this table should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Company's audited consolidated financial statements and notes
thereto at December 31, 1996 and December 31, 1997 and for each of the three
years in the period ended December 31, 1997, the unaudited consolidated
financial statements at June 30, 1998 and for the six months ended June 30, 1997
and 1998 and the pro forma consolidated financial statements and notes thereto,
included elsewhere in this Prospectus.
13
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------------- -------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1996 1997 1997(a) 1997 1998 1998(b)
------- ---- ---- ---- ---- ------- ------ -------------
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $39,657 $56,873 $80,115 $103,113 $146,166 $166,011 $58,761 $94,182 $94,182
Cost of sales.................. 29,516 42,215 59,201 75,552 105,636 120,300 42,468 68,598 68,598
------- ------- ------- -------- -------- -------- ------- ------- -------
Gross profit................... 10,141 14,659 20,915 27,561 40,530 45,711 16,293 25,584 25,584
Operating expenses:
Selling, general and
administrative expenses.... 7,832 11,225 15,256 17,271 22,264 26,041 9,097 14,182 14,182
Stock based compensation
charges(c)................. -- -- -- -- 6,969 6,969 6,343 -- --
Total operating expenses....... 7,832 11,225 15,256 17,271 29,233 33,010 15,440 14,182 14,182
------- ------- ------- -------- -------- -------- ------- ------- -------
Operating income............... $ 2,309 $ 3,434 $ 5,659 $ 10,290 $ 11,297 $ 12,701 $ 853 $11,402 $11,402
======= ======= ======= ======== ======== ======== ======= ======= =======
OTHER FINANCIAL DATA:
EBITDA(d)...................... $ 2,475 $ 3,705 $ 6,031 $ 10,723 $ 12,066 $ 13,685 $ 1,099 $11,878 $ 11,878
Adj. EBITDA(e)................. $ 2,475 $ 3,705 $ 6,031 $ 10,723 $ 19,035 $ 20,654 $ 7,442 $11,878 $ 11,878
Adj. EBITDA margin(f).......... 6.2% 6.5% 7.5% 10.4% 13.0% 12.4% 12.7% 12.6% 12.6%
Depreciation and amortization.. $ 166 $ 271 $ 372 $ 433 $ 769 $ 984 $ 247 $ 476 $ 476
Capital expenditures........... $ 525 $ 524 $ 461 $ 513 $ 1,534 $ 1,686 $ 984 $ 500 $ 500
Ratio of Adj. EBITDA to
interest expense............. 9.4x 8.0x 7.6x 12.4x 16.6x 2.2x 23.0x 16.5x 2.6x
Ratio of total debt to Adj
EBITDA....................... 1.4x 1.9x 1.6x 1.1x 1.0x -- -- -- --
Ratio of earnings to fixed
charges(g)................... 6.5x 5.5x 5.6x 8.7x 7.1x 1.3x 2.0x 11.0x 2.4x
Ratio of earnings to fixed
charges and preferred stock
dividends(h)................. -- -- -- -- -- 0.7x -- -- 1.2x
OTHER DATA:
Distribution centers........... 9 13 17 20 29 -- 20 30 --
Comparable center sales
growth(i).................... 23.0% 26.7% 28.2% 21.0% 20.8% -- -- -- --
Active customers(j)............ N/A N/A 13,436 16,659 24,521 -- -- -- --
CASH FLOW DATA:
Net cash provided by (used in)
operating activities......... $ (264) $(2,529) $ (589) $ 785 $ 6,304 -- $(4,851) $(2,464) --
Net cash provided by (used in)
investing activities......... (520) (436) (458) (493) (9,575) -- (302) (460) --
Net cash provided by (used in)
financing activities......... 1,563 4,185 1,088 2,083 4,946 -- 2,498 629 --
BALANCE SHEET DATA:
Working capital................ $ 5,222 $ 8,799 $ 9,413 $ 14,456 $ 25,617 -- -- $30,007 $ 37,293
Operating working capital(k)... 5,128 9,271 13,778 20,065 29,487 -- -- 38,967 37,293
Total assets................... 12,353 19,630 22,981 32,936 57,254 -- -- 69,512 69,591
Total debt..................... 3,526 6,993 9,385 12,253 18,997 -- -- 19,976 100,000
Stockholders' equity (deficit). 3,267 5,053 6,578 11,035 25,568 -- -- 31,606 (86,896)
</TABLE>
______________________
(a) Pro forma for the Recapitalization, the Reorganization (as defined) and the
Nationwide Acquisition (as defined) as if they had occurred on January 1,
1997 with respect to the operating and other financial data.
(b) Pro forma for the Recapitalization as if it had occurred on January 1, 1998
with respect to the operating and other financial data, and as of June 30,
1998 with respect to the balance sheet.
(c) The stock based compensation charge in 1997 reflects (i) charges of $6.3
million for the difference between the fair market value of stock exchanged
by minority stockholders in connection with the Reorganization and the
recorded basis of minority stockholder interests consisting of amounts paid
by such stockholders for their stock in the Company's subsidiaries and their
allocated earnings reflected as charges to minority interest in earnings of
subsidiaries at June 30, 1997 and (ii) with respect to stock options granted
in July 1997, charges of $0.6 million representing the difference between
the fair market value of Common Stock and the exercise price of the related
options at the respective date of grant.
(d) EBITDA represents net income before depreciation and amortization, interest
expenses and income tax expense. EBITDA is not a measure of performance
under generally accepted accounting principles, and should not be considered
as a substitute for net income, cash flows from operating activities and
other income or cash flow statement data prepared in accordance with
generally accepted accounting principles, or as a measure of
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profitability or liquidity. The Company has included a measurement based on
EBITDA because it is one way in which the Company monitors its performance
and because it is commonly used by certain investors and analysts to (i)
analyze and compare companies on the basis of operating performance,
leverage and liquidity and (ii) determine a company's ability to service
debt. EBITDA should not be considered as an alternative to, or more
meaningful than, income from operations or cash flow as an indication of the
Company's operating performance, nor does it represent funds available for
management's discretionary use. EBITDA presented by the Company may not be
comparable to EBITDA defined and presented by other companies.
(e) Adjusted EBITDA represents net income before depreciation and amortization,
interest expense, income tax expense and the stock based compensation
charge. Adjusted EBITDA is not a measure of performance under generally
accepted accounting principles, and should not be considered as a substitute
for net income, cash flows from operating activities and other income or
cash flow statement data prepared in accordance with generally accepted
accounting principles, or as a measure of profitability or liquidity. The
Company has included a measurement based on Adjusted EBITDA because it is
one way in which the Company monitors its performance and because it is
commonly used by certain investors and analysts to (i) analyze and compare
companies on the basis of operating performance, leverage and liquidity and
(ii) determine a company's ability to service debt. In addition, certain
covenants in the Certificate of Designation are based upon a concept similar
to Adjusted EBITDA. Adjusted EBITDA should not be considered as an
alternative to, or more meaningful than, income from operations or cash flow
as an indication of the Company's operating performance, nor does it
represent funds available for management's discretionary use. Adjusted
EBITDA presented by the Company may not be comparable to Adjusted EBITDA
defined and presented by other companies.
(f) Represents ratio of Adjusted EBITDA to net sales.
(g) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes and fixed charges. Fixed
charges consist of interest on indebtedness, the amortization of debt issue
costs and that portion of operating rental expense the Company believes to
be representative of the interest factor.
(h) For the purpose of determining the ratio of earnings to fixed charges and
preferred stock dividends, earnings consist of earnings before income taxes
and fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issue costs and that portion of operating rental
expense the Company believes to be representative of the interest factor.
Preferred stock dividends consist of amounts to be paid-in-kind and
accretion of the carrying value of the Preferred Stock, which have been
"grossed up" to a pre-income tax basis to provide comparability to other
components of the ratio.
(i) Does not include centers acquired through the Nationwide Acquisition.
(j) Includes customers placing at least two orders over the previous 12 month
period.
(k) Operating working capital represents current assets, excluding cash, less
current liabilities, excluding the current portion of long-term debt and
note payable.
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RISK FACTORS
This Prospectus includes "forward-looking statements." All
statements other than statements of historical facts included in this
Prospectus, including without limitation, certain statements under the sections
"Summary," "Selected Historical and Pro Forma Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and Pro Forma Consolidated Financial
Statements and the notes thereto located elsewhere herein regarding the
Company's financial position, business strategy, prospects and other related
matters, may constitute such forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. Actual results could differ materially from the Company's expectations
as a result of a number of factors, including without limitation those set forth
below and those located elsewhere in this Prospectus.
In evaluating the Exchange Offer, Holders of the Initial Preferred Stock
should carefully consider the following factors in addition to the other
information contained in this Prospectus.
SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT
As of June 30, 1998, after giving effect to the Recapitalization, the
Company would have had $100.0 million of outstanding indebtedness, and a
stockholders' deficit of approximately $86.9 million. See "Capitalization." In
addition, the Company could have incurred additional indebtedness of up to $25.0
million under the Revolving Credit Facility. See "Capitalization." This level
of indebtedness is substantially higher than the Company's historical debt
levels and will reduce the flexibility of the Company to respond to changing
business and economic conditions. In addition, subject to the restrictions in
the New Credit Facility, the Company may incur additional senior or other
indebtedness from time to time to finance acquisitions or capital expenditures
or for other general corporate purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The New Credit Facility currently prohibits the payment of any
dividends in cash. See "Description of the Exchange Preferred Stock" and
"Description of New Credit Facility."
The Company's high degree of leverage may have important consequences for
the Company and the holders of Exchange Preferred Stock and Exchange Debentures,
including: (i) the ability of the Company to obtain additional financing for
working capital, capital expenditures, acquisitions or other purposes, if
necessary, may be impaired; (ii) a substantial portion of the Company's cash
flow will be dedicated to the payment of interest and principal on its
indebtedness and to the payment of dividends on the Exchange Preferred Stock
beginning no later than July 1, 2003 and such cash flow will not be available to
the Company for its operations and future business opportunities; (iii) the
covenants contained in the New Credit Facility and Exchange Debentures will
limit the Company's ability to, among other things, borrow additional funds,
dispose of assets or make investments and may affect the Company's flexibility
in planning for, and reacting to, changes in business conditions; (iv)
indebtedness under the New Credit Facility will be at variable rates of
interest, which will cause the Company to be vulnerable to increases in interest
rates; (v) the New Credit Facility and the Exchange Debentures contain financial
and/or restrictive covenants, which the failure to comply with may result in an
event of default which, if not cured or waived, could have a material adverse
effect on the Company, including the acceleration of the maturity of such
indebtedness; (vi) the indebtedness outstanding under the New Credit Facility is
secured by substantially all of the assets of the Company and its subsidiaries
and such indebtedness matures prior to the mandatory redemption date or maturity
of the Exchange Preferred Stock and Exchange Debentures; (vii) the Company may
be substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (viii) the Company's high degree
of leverage may make it more vulnerable to a downturn in its business or the
economy generally or limit its ability to withstand competitive pressures. If
the Company is unable to generate sufficient cash flow from operations in the
future to service its indebtedness, and to retire the Exchange Preferred Stock,
or Exchange Debentures, at maturity it may be required to refinance all or a
portion of its existing debt or to obtain additional financing. There can be no
assurance that any such actions could be effected on a timely basis or on
satisfactory terms or that these actions would enable the Company to continue to
satisfy its capital requirements. The Company's ability to meet its debt
service and preferred stock obligations and to reduce its total indebtedness
will be dependent upon the Company's future performance, which will be subject
to general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are
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<PAGE>
beyond its control. The terms of the Company's indebtedness, including the New
Credit Facility and the Exchange Debentures also may prohibit the Company from
taking such financing or refinancing actions. See "Description of New Credit
Facility" and "Description of Exchange Debentures."
ABILITY TO MAKE DISTRIBUTIONS ON EXCHANGE PREFERRED STOCK
The ability of the Company to pay any dividends or make distributions in
respect of its capital stock is subject to applicable provisions of state law
and its ability to pay cash dividends on the Exchange Preferred Stock will be
subject to the terms of the New Credit Facility, which currently prohibits the
Company from paying dividends in cash (provided that payment of cash dividends
is permitted after July 1, 2003 subject to financial performance tests), and/or
any other indebtedness of the Company then outstanding. The Company intends to
pay dividends on the Exchange Preferred Stock prior to that time by issuance of
additional shares of Exchange Preferred Stock. The ability of the Company to
comply with such conditions may be affected by events that are beyond the
control of the Company. Under Delaware law, the Company is permitted to pay
dividends on its Capital Stock, including the Exchange Preferred Stock, only out
of its surplus, or in the event that it has no surplus out of its net profits
for the year in which a dividend is declared or for the immediately preceding
fiscal year. Surplus is defined as the excess of a company's total assets over
the sum of its total liabilities plus the par value of its outstanding Capital
Stock. In order to pay dividends, the Company must have surplus or net profits
equal to the full amount of the cash dividend at the time such dividend is
declared. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay dividends on the Exchange
Preferred Stock. There can be no assurance that the assets of the Company would
be sufficient to repay all of such outstanding debt and to meet its obligations
under the Exchange Preferred Stock. Future borrowings by the Company can be
expected to contain restrictions or prohibitions on the making of distributions
by the Company on its capital stock. In addition, indebtedness outstanding under
the New Credit Facility will be secured by substantially all of the assets of
the Company (including the capital stock of its subsidiaries). The Certificate
of Designation governing the Preferred Stock permits the Company to pay
dividends in additional shares of Exchange Preferred Stock prior to January 1,
2004. The Company does not expect to pay cash dividends prior to such time and
there can be no assurance that the Company will have the funds necessary to pay
cash dividends on the Exchange Preferred Stock at any time.
SUBORDINATION
The Company's obligations with respect to the Exchange Preferred Stock (and
the Series B Preferred Stock) will be subordinated and junior in right of
payment to all present and future indebtedness and other liabilities of the
Company and its subsidiaries including the New Credit Facility, and to all
present and future Senior Stock of the Company. The Exchange Preferred Stock
will rank pari passu with all future Parity Stock. See "Description of the
Exchange Preferred Stock." As of June 30, 1998, after giving effect to the
Recapitalization, the Company would have had no outstanding Senior Stock or
Parity Stock and the Company and its subsidiaries would have had total
indebtedness and balance sheet liabilities of $118.9 million, excluding $25.0
million available for borrowing under the Revolving Credit Facility. In the
event of bankruptcy, liquidation or reorganization of the Company, the assets of
the Company will be available to pay obligations on the Exchange Preferred Stock
only after all Senior Stock and all indebtedness and other liabilities of the
Company have been paid, and there may not be sufficient assets remaining to pay
amounts due on any or all of the Exchange Preferred Stock then outstanding. See
"Description of the Exchange Preferred Stock--Ranking." While any shares of
Exchange Preferred Stock or Series B Preferred Stock are outstanding, the
Company may not authorize, create or increase the authorized amount of any class
or series of Parity Stock or Senior Stock without the consent of the holders of
66 2/3 of the outstanding shares of Exchange Preferred Stock and Series B
Preferred Stock, provided that for the purposes of calculating such percentage,
any shares of Exchange Preferred Stock or Series B Preferred Stock held by the
Company or any affiliate thereof shall not be counted to determine such consent.
The Exchange Debentures, if issued, will be subordinated in right of
payment to all existing and future Senior Debt of the Company, including the New
Credit Facility, and will be effectively subordinated to all obligations of the
Company's subsidiaries. The Exchange Debentures will also be effectively
subordinated in right of payment to all existing and future secured indebtedness
of the Company to the extent of the value of the assets securing such
indebtedness. The Company's obligations under the New Credit Facility are
secured by a pledge of substantially all of its assets. As of June 30, 1998,
after giving effect to the Recapitalization, the Company would
17
<PAGE>
have had Senior Debt of $100.0 million (plus up to $25.0 million available for
borrowing under the Revolving Credit Facility) and the Company's subsidiaries
would have had total indebtedness and balance sheet liabilities of $18.9 million
(excluding guaranties of Senior Debt and intercompany debt) all of which is
senior or effectively senior to the Preferred Stock. The New Credit Facility and
the Exchange Indenture permit the incurrence by the Company and its subsidiaries
of additional indebtedness, all of which may constitute Senior Debt under
certain circumstances. See "Description of Exchange Debentures--Subordination."
HOLDING COMPANY STRUCTURE
The Company conducts substantially all its operations through subsidiaries.
Substantially all of the assets of the Company are owned by its subsidiaries.
As a holding company, the Company's ability to pay dividends or make
distributions on the Exchange Preferred Stock is dependent upon the receipt of
dividends or other payments from its subsidiaries. The ability of the Company's
subsidiaries to pay dividends or make other distributions to the Company will be
subject to applicable provisions of various states' laws. The Company's
subsidiaries are guarantors of the Company's obligations under the New Credit
Facility. All assets of the Company's subsidiaries will be pledged to secure
their obligations under the New Credit Facility guarantees. The Company's
rights, and the rights of holders of Exchange Preferred Stock and shares issued
pursuant to the Private Placement, to participate in the assets of any
subsidiary of the Company upon such subsidiary's liquidation or recapitalization
will be subject to the prior claims of such subsidiary's creditors, including
trade creditors. As of June 30, 1998, after giving effect to the
Recapitalization, there would have been an aggregate of approximately $18.9
million of indebtedness and other balance sheet liabilities of subsidiaries of
the Company (excluding guarantees under the New Credit Facility and intercompany
debt) to which holders of the Exchange Preferred Stock and shares issued
pursuant to the Private Placement would have been effectively subordinated in
right of payment. The New Credit Facility and the terms of the Exchange
Preferred Stock and Series B Preferred Stock limit, but do not prohibit, the
incurrence of additional indebtedness by the Company's subsidiaries.
POSSIBLE INABILITY TO MAKE REQUIRED PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange
Preferred Stock or, if issued, Exchange Debentures, may require the Company to
purchase all or a portion of such holder's Exchange Preferred Stock or Exchange
Debentures at 101% of the Liquidation Preference thereof or the principal amount
of the Exchange Debentures, as the case may be, together with accrued and unpaid
dividends or interest, if any, to the date of purchase. In the case of the
Exchange Debentures, the Trustee does not have the authority under the Exchange
Indenture to waive the covenant relating to a holder's right to require the
Company to purchase Exchange Debentures upon the occurrence of a Change of
Control. Prior to any such repurchase of the Exchange Preferred Stock or
Exchange Debentures, the Company may be required to (i) repay all or a portion
of indebtedness under the New Credit Facility or other indebtedness of the
Company or (ii) obtain certain consents to permit the repurchase, including
consents under the New Credit Facility. If the Company is unable to repay all
of such indebtedness or is unable to obtain the necessary consents, the Company
would be unable to offer to repurchase the Exchange Preferred Stock, or Exchange
Debentures, which would constitute a breach of the covenants contained in the
Certificate of Designation or the Exchange Indenture. There can be no assurance
that the Company will have sufficient funds available at the time of any Change
of Control to make any debt payment (including repurchases of Exchange Preferred
Stock or, if issued, Exchange Debentures) as described above. See "Description
of the Exchange Preferred Stock--Redemption at the Option of Holders Upon a
Change of Control" and "Description of Exchange Debentures--Repurchase at the
Option of the Holders Upon a Change of Control."
The events that constitute a Change of Control under the Certificate of
Designation or the Exchange Indenture may also be events of default under the
New Credit Facility, or other indebtedness of the Company. Such events may
permit the lenders under such debt instruments to accelerate the debt and, if
the debt is not paid, to enforce security interests in, or to commence
litigation that could ultimately result in a sale of, substantially all the
assets of the Company, thereby limiting the Company's ability to raise cash to
repurchase the Exchange Preferred Stock or, if issued, Exchange Debentures. In
such circumstances, the provisions in the Certificate of Designation, or if
applicable, the subordination provisions of Exchange Indenture would likely
prohibit payments to holders of the Exchange Preferred Stock or, if issued,
Exchange Debentures.
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<PAGE>
LACK OF A PUBLIC MARKET FOR THE EXCHANGE PREFERRED STOCK
The Exchange Preferred Stock is being offered to Holders of the Initial
Preferred Stock. Prior to this Exchange Offer, there has been no market for the
Exchange Preferred Stock. The Company does not intend to apply for listing of
the Exchange Preferred Stock or, if issued, the Exchange Debentures on any
securities exchange or stock market. Although the Initial Purchaser has informed
the Company that it currently intends to make a market in the Exchange Preferred
Stock and, if issued, the Exchange Debentures, the Initial Purchaser is not
obligated to do so, and any such market making may be subject to certain
limitations and may be discontinued at any time without notice. The liquidity
of any market for the Exchange Preferred Stock will depend upon the number of
holders of the Exchange Preferred Stock, the interest of securities dealers in
making a market in the Exchange Preferred Stock and other factors. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Exchange Preferred Stock and, if issued, the Exchange Debentures. If the
Exchange Preferred Stock and, if issued, the Exchange Debentures, are traded
after their initial issuance, they may trade at a discount from their initial
offering price, depending on prevailing interest rates, the market for similar
securities, general economic conditions and the financial condition of the
Company.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The payments made in connection with the Recapitalization to the Continuing
Stockholders and option holders of the Company, the repayment of the Company's
existing indebtedness and the related incurrence by the Company of indebtedness
(including obligations under the New Credit Facility and, if issued, the
Exchange Debentures) and obligations under the Exchange Preferred Stock and the
Series B Preferred Stock may be subject to review under relevant state and
federal fraudulent conveyance laws, as well as other similar laws regarding
creditors rights generally. Under these laws, if a court were to find that,
after giving effect to the Recapitalization, either (a) the Company incurred
such indebtedness with the intent of hindering, delaying or defrauding creditors
or (b) the Company received less than reasonably equivalent value or
consideration for incurring such obligations and (i) was insolvent or rendered
insolvent by reason of such transaction, (ii) was engaged in a business or
transaction for which the assets remaining with the Company constituted
unreasonably small capital or (iii) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, such court
may subordinate the Exchange Debentures to presently existing and future
creditors of the Company, avoid the issuance of the Exchange Preferred Stock or
the Exchange Debentures and direct the repayment of any amounts paid thereunder
to the Company's creditors or take other action detrimental to the holders of
the Exchange Preferred Stock or the Exchange Debentures. The issuance of a
Subsidiary Guaranty in connection with the Exchange Debentures by any subsidiary
of the Company would be subject to similar analysis. See "Description of
Exchange Debentures--Subordination." There can be no assurance that a court
would not determine, regardless of whether the Company was solvent on the date
the Exchange Preferred Stock or, if issued the Exchange Debentures, were issued,
that the payments constituted fraudulent transfers on another ground. To the
extent that proceeds from the sale of the Exchange Preferred Stock are used to
repay indebtedness, or to make a distribution to a stockholder on account of the
ownership of capital stock, a court may find the Company did not receive fair
consideration or reasonably equivalent value for the incurrence of the
obligations represented by the New Credit Facility, the Exchange Preferred Stock
and, if issued, the Exchange Debentures.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction which is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and matured.
Based upon financial and other information currently available to it,
management of the Company believes that upon consummation of the
Recapitalization the Company was, (i) neither insolvent nor rendered insolvent
thereby, (ii) in possession of sufficient capital to run its business
effectively and (iii) incurring debts within its ability to pay as the same
mature or become due. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." In
reaching these conclusions, the Company has relied upon various valuations and
estimates of future cash flow that necessarily involve a number of assumptions
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<PAGE>
and choices of methodology. No assurance can be given, however, that the
assumptions and methodologies chosen by the Company would be adopted by a court
or that a court would concur with the Company's conclusions.
As of June 30, 1998, after giving effect to the Recapitalization, the
Company would have had $100.0 million of outstanding indebtedness, and the
Company would have had a stockholders' deficit of approximately $86.9 million.
POSSIBLE INABILITY TO EXPAND INTO NEW GEOGRAPHIC MARKETS
The Company intends to grow its business in large part by expanding into
new geographic regions. When entering new markets, the Company will be required
to establish or acquire suitable distribution centers, hire personnel and
establish distribution methods. To manage its expansion, the Company must
continuously evaluate the adequacy of its existing systems and procedures,
including, among others, its data processing, financial and internal control
systems and management structure. There can be no assurance that management
will adequately anticipate all of the changing demands that growth will impose
on the Company's systems, procedures and structure. Any failure to anticipate
and respond adequately to such changing demands is likely to have a materially
adverse effect on the Company. See "Business--Business Strategy."
In addition, when the Company establishes additional distribution centers
in new or existing geographic regions, such centers traditionally generate
negative EBITDA during the twenty-four to thirty-six month period immediately
following such centers' establishment. The Company believes that such negative
earnings occur because new distribution centers do not immediately possess a
revenue-generating customer base sufficient to offset the costs associated with
the establishment and ongoing operations of such centers. There can be no
assurance that, should the Company seek to establish a new distribution center,
such center will ever generate revenues sufficient to offset the cost of its
establishment and ongoing operation.
SUBSTANTIAL COMPETITION
The Company competes primarily on the basis of service, product selection
and availability and pricing, with broad-line suppliers, most of which are local
or regional and many of which employ sales representatives and feature catalogs
similar to the Company's. The Company also competes with mail order catalogs,
retail stores including superstores, specialty suppliers and industrial
suppliers. Some of the Company's competitors have greater financial resources
than the Company. There can be no assurance that additional competitors with
greater resources than the Company will not enter the industry, which could have
a material adverse effect upon the Company's operations and profitability. See
"Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's success will, to a large extent, depend upon the continued
services of its executive officers. The loss of services of any of these
executive officers could materially and adversely affect the Company. There can
be no assurance that the Company will retain the services of these individuals.
In connection with the Recapitalization, the Company entered into employment
agreements with Dennis C. Bearden, the Chief Executive Officer of the Company,
and Richard E. Penick, the Company's Chief Financial Officer. See "Management--
Employment Agreements with Messrs. Bearden and Penick."
CONTROL OF COMPANY
FS&Co. controls approximately 55.2% of the voting securities of the
Company. As a result, FS&Co. has the ability to control the Company's
management, policies and financing decisions and to elect a majority of the
Company's Board of Directors. There can be no assurance that any decisions
taken by FS&Co. will be in the interests of holders of the Exchange Preferred
Stock. See "Management" and "Security Ownership of Certain Beneficial Owners."
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YEAR 2000 COMPLIANCE
A significant percentage of the software that runs most computers relies on
two-digit date codes to perform computations and decision-making functions.
Commencing on January 1, 2000, these computer programs may fail from an
inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000. The Company has completed the identification of all
necessary internal software changes to ensure that it does not experience any
loss of critical business functionality due to the Year 2000 issue. The Company
has already completed an assessment of all internal software, hardware and
operating systems. The Company has improved its information system capabilities
by purchasing a new system that is Year 2000 compliant. The Company does not
believe that its systems will encounter any material "Year 2000" problems. The
new system is estimated to be in place by early 1999. The Company believes that
this conversion to a new operating system will minimize the business risk of
Year 2000 issues.
The Company also relies, directly and indirectly, on the external systems
of various independent business enterprises, such as its customers, suppliers,
creditors, financial organizations, and of governments, for the accurate
exchange of data and related information. The Company could be affected as a
result of any disruption in the operation of the various third-party enterprises
with which the Company interacts. The Company is in the process of implementing
a program to assess and monitor the progress of these third parties in resolving
Year 2000 issues, and to determine whether any Year 2000 issues encountered by a
third party would pose a business risk to the Company. The Company is currently
developing a survey to distribute to its vendors and customers to assess its
Year 2000 risk based on the Year 2000 issues of these third parties. The Company
expects the survey to be completed by November 30, 1998 and mailed to the third
parties shortly thereafter, with responses expected by March 31, 1999. The
Company does not exepect the cost of the survey procedure to be material. The
Company cannot provide any assurance that Year 2000 related systems issues of
third parties will be corrected in a timely manner or that the failure of these
third parties to correct these issues would not have a material adverse effect
on the Company.
The total cost of the new computer system is estimated to be approximately
$1.2 million. Of this amount, $1.0 million has already been expended, $750,000
of which was capitalized. The Company has also determined that if the new
system became inoperable or otherwise encountered a Year 2000 problem, it may
purchase an upgrade to the current system, which upgrade is Year 2000 compliant.
The Company estimates it would have to spend an additional $200,000 to install
and test the upgrade.
The costs and time estimates of the Year 2000 project are based on the
Company's best estimates. There can be no assurance that these estimates will be
achieved and that planned results will be achieved. Risk factors include, but
are not limited to, the retention of internal and external resources dedicated
to the project, the timely delivery of software corrections from external
vendors, and the successful completion of key business partners' Year 2000
projects.
CERTAIN TAX CONSIDERATIONS
In the case of a distribution on the Preferred Stock that is paid in the
form of additional shares of Preferred Stock ("Additional Preferred Shares,"
each, individually, an "Additional Preferred Share"), the fair market value of
the Additional Preferred Shares on the distribution date will be taxable for
U.S. federal income tax purposes in the same manner as a cash distribution on
the distribution date notwithstanding that the cash attributable to such
distribution will not be received by the holder until a subsequent period. In
addition, if the liquidation preference of an Additional Preferred Share exceeds
the issue price of such share (i.e., the fair market value of such share on the
distribution date) by more than a de minimis amount, then a holder thereof would
be required to treat such excess as a series of constructive distributions over
the term of the Additional Preferred Share taxable for U.S. federal income tax
purposes in the same manner as a cash distribution notwithstanding that the cash
attributable to such excess will not be received by the holder until a
subsequent period.
Actual and constructive distributions on the Exchange Preferred Stock
(which term "Exchange Preferred Stock" shall mean the Exchange Preferred Stock
and any Additional Preferred Shares that shall have been issued with respect
thereto) will be taxable for U.S. federal income tax purposes as ordinary
dividend income (and eligible for the dividends received deduction for certain
U.S. corporate holders) only to the extent paid out of current or accumulated
earnings and profits of the Company as determined for U.S. federal income tax
purposes and otherwise will be treated in the manner described under "Certain
U.S. Federal Income Tax Considerations--Taxation of the Exchange Preferred
Stock--Dividends and Dividends Received Deduction." If the Company does not
have any
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current or accumulated earnings and profits, distributions on the
Exchange Preferred Stock will constitute, first, tax-free returns on the capital
(to the extent of the holder's tax basis in the preferred in the Exchange
Preferred Stock) and then capital gain, and will not be eligible for the
dividends received deduction. There can be no assurance regarding the amount of
current and accumulated earnings and profits of the Company at the time of any
distribution on the Exchange Preferred Stock.
The exchange of Preferred Stock for Exchange Debentures will be a taxable
event, as described in "Certain U.S. Federal Income Tax Consequences--Taxation
of the Exchange Preferred Stock--Exchange of Preferred Stock for Exchange
Debentures."
CONSEQUENCES TO NON-TENDERING HOLDERS OF INITIAL PREFERRED STOCK AND
REQUIREMENTS FOR TRANSFER OF INITIAL PREFERRED STOCK
Upon consummation of the Exchange Offer, the Company will have no further
obligation to register the Initial Preferred Stock. Thereafter, any Holder of
Initial Preferred Stock who does not tender its Initial Preferred Stock in the
Exchange Offer, including any Holder which is an "affiliate" (as that term is
defined in Rule 405 of the Securities Act) of the Company which cannot tender
its Initial Preferred Stock in the Exchange Offer, will continue to hold
restricted securities which may not be offered, sold or otherwise transferred,
pledged or hypothecated except pursuant to Rule 144 and Rule 144A under the
Securities Act or pursuant to any other exemption from registration under the
Securities Act relating to the disposition of securities, provided that an
opinion of counsel is furnished to the Company that such an exemption is
available.
22
<PAGE>
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the Exchange Preferred Stock
offered in the Exchange Offer. In consideration for issuing the Exchange
Preferred Stock as contemplated in this Prospectus, the Company will receive in
exchange Initial Preferred Stock in like principal amount, the form and terms of
which are the same in all material respects as the form and terms of the
Exchange Preferred Stock except that the Exchange Preferred Stock has been
registered under the Securities Act. The Initial Preferred Stock surrendered in
exchange for Exchange Preferred Stock will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Preferred Stock will not result
in any increase in the indebtedness of the Company.
Net proceeds from the sale of the Initial Preferred Stock pursuant to the
Offering and the shares sold pursuant to the Private Placement were $28.0
million and $12.0 million, respectively. Such proceeds, together with the
proceeds of the Common Stock Investment of $68.3 million, the borrowing under
the Term Loan Facility of $100.0 million, and cash of the Company of $6.5
million, were used to (i) make cash payments to Continuing Stockholders and
option holders of $178.3 million and bonus payments for certain employees of
$1.0 million, (ii) pay all outstanding debt under the Company's existing credit
agreement and certain other indebtedness to affiliates of the Company of $20.5
million and (iii) pay related fees and expenses of $15.0 million. Indebtedness
that was repaid from the net proceeds of the sale of Initial Preferred Stock
pursuant to the Offering and the Series B Preferred Stock sold in the Private
Placement consisted of the following as of June 30, 1998: (a) $77,271 of
borrowings and accrued interest outstanding under the Company's credit agreement
with a maturity of September 22, 1999 that included a term loan that bore
interest at a base rate plus 0.75%; (b) approximately $11.5 million of
borrowings and accrued interest outstanding under the Company's credit agreement
that included a revolving line of credit of approximately $11.0 million with
maturity of October 31, 1998 that bore interest at a eurodollar rate plus 1.5%
and a term loan of approximately $500,000 with a maturity of May 31, 2002 that
bore interest at a eurodollar rate plus 1.75%; (c) approximately $3.3 million of
borrowings and accrued interest outstanding pursuant to the Company's
indebtedness to Dennis C. Bearden, the Chief Executive Officer of the Company,
that included term loans, all of which bore interest at a rate of 10%, with
various maturity dates of June 30, 1999, December 31, 1998, October 31, 1999 and
January 31, 2000; and (d) approximately $5.6 million of borrowings and accrued
interest pursuant to the Company's indebtedness to Donald R. Hodina, President
of Nationwide Division (or an entity controlled by or affiliated with Mr.
Hodina) that included two term loans that bore interest at 9% and 10%, with
maturity dates of July 11, 2004 and July 1, 2000, respectively. See "Summary--
The Recapitalization."
DIVIDEND POLICY
The Company does not intend to pay cash dividends with respect to its
capital stock in the foreseeable future. The Company intends to pay dividends on
the Exchange Preferred Stock by issuance of additional shares of Exchange
Preferred Stock on each Dividend Payment Date occurring on or prior to July 1,
2003. Management anticipates that all earnings and other cash resources of the
Company, if any, will be retained for the operation and expansion of its
business and for general corporate purposes. The payment of any future dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, its earnings, financial condition, results of
operations, level of indebtedness, capital requirements, general business
conditions and contractual restrictions on payment of dividends, if any, as well
as such other factors as the Board of Directors may deem relevant. The Company
will be prohibited by the terms of the New Credit Facility from paying cash
dividends on its capital stock and may in the future enter into loan or other
agreements or issue debt securities or preferred stock that restrict the payment
of cash dividends on its capital stock.
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on an
actual basis and on an as adjusted basis to give effect to the Recapitalization
as if it had occurred on June 30, 1998. This table should be read in conjunction
with "Pro Forma Financial Statements" and the notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
JUNE 30, 1998 ADJUSTMENTS JUNE 30, 1998
---------------- ----------------- -----------------
(dollars in thousands)
<S> <C> <C> <C>
Debt:
Notes payable, long-term debt and accrued interest $ 20,509 $ (20,509)(a) $ --
New Credit Facility...................................... -- 100,000 (b) 100,000
-------- ---------- ---------
Total debt............................................... 20,509 79,491 100,000
-------- ---------- ---------
Mandatorily redeemable PIK preferred stock,
$0.001 par value, no shares authorized, issued and
outstanding, actual; 2,000,000 shares authorized
Series A, 280,000 shares issued and outstanding,
as adjusted(c)......................................... -- 25,246 25,246(d)
Series B, 120,000 shares issued and outstanding,
as adjusted(c)........................................ -- 11,981 11,981(e)
-------- ---------- ---------
Stockholders' equity (deficit):
Common stock, $0.001 par value, 15,000,000
shares authorized, 10,000,000 shares issued and
outstanding, actual; 15,000,000 shares authorized,
5,324,503 shares issued and outstanding, as
adjusted(f)............................................. 10 (5)(g) 5
Additional paid-in-capital............................... 11,918 59,238 (h) 71,156
Treasury stock, at cost.................................. (500) 500 (i) --
Retained earnings (deficit).............................. 20,178 (178,235)(j) (158,057)
-------- --------- ---------
Total stockholders' equity (deficit).................... 31,606 (118,502) (86,896)
-------- --------- ---------
Total capitalization.................................... $ 52,115 $ (1,784) $ 50,331
======== ========= =========
</TABLE>
_______________
(a) Reflects the repayment of Company debt and accrued interest in connection
with the Recapitalization.
(b) Reflects the proceeds from New Credit Facility.
(c) The mandatorily redeemable PIK preferred stock provides that, on or prior to
July 1, 2003, dividends on such preferred stock may be paid in additional
shares of such preferred stock and the Company intends to pay dividends in
additional shares during such time.
(d) Reflects the net proceeds from the Offering.
(e) Reflects the net proceeds from the Private Placement.
(f) Does not reflect a 2.30068:1 stock split which was effected immediately
following the Recapitalization.
(g) Reflects the par value of the 7,561,355 shares of common stock converted
into the right to receive cash in the Recapitalization and the issuance of
2,969,820 shares of common stock purchased in connection with the Common
Stock Investment.
(h) Reflects the following adjustments (amounts in thousands):
<TABLE>
<S> <C>
Additional paid-in capital related to the conversion of common stock in
the Recapitalization................................................. $ (9,088)
Common Stock Investment................................................. $ 68,326
--------
Total................................................................ $ 59,238
========
</TABLE>
(i) Reflects the elimination of treasury stock.
24
<PAGE>
<TABLE>
<S> <C>
(j) Reflects the following adjustments (amounts in thousands):
Payment upon conversion of certain shares and stock options.... $ (169,236)
Transaction costs.............................................. $ (7,499)
Other costs.................................................... (1,000)
Cancellation of existing treasury stock........................ (500)
----------
Total...................................................... $ (178,235)
==========
</TABLE>
25
<PAGE>
THE EXCHANGE OFFER
PURPOSES OF THE EXCHANGE OFFER
The Initial Preferred Stock was issued and sold by the Company on July 8,
1998 to Salomon Brothers Inc (the "Initial Purchaser"), who subsequently resold
the Initial Preferred Stock to "qualified institutional buyers" (in reliance on
Rule 144A under the Securities Act). In connection with the issuance and sale
of the Initial Preferred Stock, the Company and the Initial Purchaser entered
into the Registration Rights Agreement pursuant to which the Company agreed to
use its best efforts to cause a registration statement with respect to the
Exchange Offer to become effective within 180 days of July 8, 1998, the date of
issuance of the Initial Preferred Stock. However, in the event that (i)
applicable interpretations of the staff of the Commission do not permit the
Company to effect such a Registered Statement, (ii) for any other reason the
Exchange Offer Registration Statement is not declared effective within 180 days
after the date of the original issuance of the Initial Preferred Stock or the
Registered Exchange Offer is not consummated within 210 days after the original
issuance of the Initial Preferred Stock, (iii) under certain circumstances, if
the Initial Purchaser so requests with respect to Securities not eligible to be
exchanged for Exchange Securities in the Registered Exchange Offer or (iv) under
certain circumstances, any holder of Securities (other than the Initial
Purchaser) is not eligible to participate in the Registered Exchange Offer or
does not receive freely tradeable Exchange Securities in the Registered Exchange
Offer other than by reason of such holder being an affiliate of the Company (it
being understood that the requirement that a Participating Broker-Dealer deliver
the prospectus contained in the Exchange Offer Registration Statement in
connection with sales of Exchange Securities shall not result in such Exchange
Securities being not "freely tradeable"), the Company will, at its cost, (a) as
promptly as practicable, file a Shelf Registration Statement covering resales of
the Securities or the Exchange Securities, as the case may be, (b) use its best
efforts to cause the Shelf Registration Statement to be declared effective under
the Securities Act and (c) use its best efforts to keep the Shelf Registration
Statement effective until two years after the later of (x) the Issue Date (or
until one year after such date if such Shelf Registration Statement is filed at
the request of the Initial Purchaser) or (y) the last date on which any
Affiliate of the Company was a beneficial owner of any Securities.
The Exchange Offer is being made by the Company to satisfy its obligations
pursuant to the Registration Rights Agreement. The form and terms of the
Exchange Preferred Stock are the same as the form and terms of the Initial
Preferred Stock in all material respects except that the Exchange Preferred
Stock has been registered under the Securities Act and hence does not include
certain rights to registration thereunder and does not contain transfer
restrictions. Once the Exchange Offer is consummated, the Company will have no
further obligations to register any of the Initial Preferred Stock not tendered
by the Holders for exchange. See "Risk Factors--Consequences to Non-Tendering
Holders of Initial Preferred Stock." A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
Based on interpretations by the staff of the Commission set forth in
several no-action letters issued to third parties, the Company believes that
Exchange Preferred Stock issued pursuant to the Exchange Offer in exchange for
Initial Preferred Stock may be offered for resale, resold and otherwise
transferred by holders thereof without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Preferred Stock is acquired in the ordinary course of such holders'
business and such holders have no such arrangement with any person to
participate in the distribution of such Exchange Preferred Stock. However, the
Company does not intend to request the Commission to consider, and the
Commission has not considered, the Exchange Offer in a no-action letter and
there can be no assurance that the Commission would make a similar determination
with respect to the Exchange Offer. However, any Holder who is an "affiliate"
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing the Exchange Preferred Stock (i) cannot rely on the
interpretation by the staff of the Commission set forth in the above referenced
no-action letters, (ii) cannot tender its Initial Preferred Stock in the
Exchange Offer, and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of the Initial Preferred Stock, unless such sale or transfer is made
pursuant to an exemption from such requirements. See "Risk Factors--
Consequences to Non-Tendering Holders of Initial Preferred Stock."
In addition, each broker-dealer that receives Exchange Preferred Stock for
its own account in exchange for Initial Preferred Stock, where such Initial
Preferred Stock was acquired by such broker-dealer as a result of market-
26
<PAGE>
making activities or other trading activities and not acquired directly from the
Company, must acknowledge that it will deliver a copy of this Prospectus in
connection with any resale of such Exchange Preferred Stock. See "Plan of
Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to
resell, resale or other transfer of Exchange Preferred Stock.
The holders of the Series B Preferred Stock, or, if issued, the Exchange
Debentures issuable in exchange therefor are not entitled to the benefits of the
Registration Rights Agreement. However, in connection with the Private
Placement, the Company entered into the Private Registration Agreement, which
provides, among other things, that the Company will, upon the request of each of
Mr. Bearden and FS&Co., file and use its best efforts to cause to become
effective registration statements for the Series B Preferred Stock, or, if
issued, Exchange Debentures issuable in exchange therefor. The Private
Registration Agreement also provides that (i) the Company will bear all costs
and expenses associated with filing the Private Registration Statements and
causing it to become effective and (ii) the Company will not file the Private
Registration Statements until any exchange offer registration statement or
resale shelf registration statement required by the Registration Rights
Agreement have ceased to be effective and are no longer required to be
effective. See "Certain Transactions--Private Placement and Registration
Rights."
TERMS OF THE EXCHANGE OFFER
General
Upon the terms and subject to the conditions of the Exchange Offer set
forth in this Prospectus and in the Letter of Transmittal, the Company will
accept any and all Initial Preferred Stock validly tendered and not withdrawn
prior to 5:00 p.m., New York City time, on the Expiration Date. The Company
will issue one share of Exchange Preferred Stock in exchange for one share of
Initial Preferred Stock accepted in the Exchange Offer. Holders may tender some
or all of their Initial Preferred Stock pursuant to the Exchange Offer.
As of July 8, 1998, there were 280,000 shares of Initial Preferred Stock
outstanding and one registered Holder of Initial Preferred Stock. This
Prospectus, together with the Letter of Transmittal, is being sent to such
registered Holder as of , 1998.
In connection with the issuance of the Initial Preferred Stock, the Company
arranged for the Initial Preferred Stock to be issued and transferable in book-
entry form through the facilities of DTC, acting as depository. The Exchange
Preferred Stock also will be issued and transferable in book-entry form through
DTC. See "Description of Exchange Preferred Stock--Book-Entry System."
The Company shall be deemed to have accepted validly tendered Initial
Preferred Stock when, as and if the Company has given oral or written notice
thereof to the Exchange Agent. The Exchange Agent will act as agent for the
tendering Holders of Initial Preferred Stock for the purpose of receiving the
Exchange Preferred Stock from the Company.
If any tendered Initial Preferred Stock is not accepted for exchange
because of an invalid tender, the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Initial Preferred
Stock will be returned, without expense, to the tendering Holder thereof as
promptly as practicable after the Expiration Date.
Holders of Initial Preferred Stock who tender in the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Initial Preferred Stock pursuant to the Exchange Offer. The Company
will pay the expenses, other than certain applicable taxes, of the Exchange
Offer. See "--Fees and Expenses."
27
<PAGE>
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean , 1998, unless the
Company in its sole discretion, extends the Exchange Offer, in which case the
term "Expiration Date" shall mean the latest date to which the Exchange Offer is
extended.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent and the record Holders of Initial Preferred Stock of any
extension by oral or written notice, each prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled expiration date.
Such notice may state that the Company is extending the Exchange Offer for a
specified period of time or on a daily basis until 5:00 p.m., New York City
time, on the date on which a specified percentage of Initial Preferred Stock is
tendered.
The Company reserves the right to delay accepting any Initial Preferred
Stock, to extend the Exchange Offer, to amend the Exchange Offer or to terminate
the Exchange Offer and not accept Initial Preferred Stock not previously
accepted if any of the conditions set forth herein under "--Conditions" shall
have occurred and shall not have been waived by the Company by giving oral or
written notice of such delay, extension, amendment or termination to the
Exchange Agent. Any such delay in acceptance, extension, amendment or
termination will be followed as promptly as practicable by oral or written
notice thereof. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the Holders of such
amendment and the Company will extend the Exchange Offer for a period of five to
10 business days, depending upon the significance of the amendment and the
manner of disclosure to Holders of the Initial Preferred Stock, if the Exchange
Offer would otherwise expire during such five to 10 business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any extension, amendment or termination of the Exchange Offer,
the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
ACCRUED DIVIDENDS ON THE EXCHANGE PREFERRED STOCK AND THE INITIAL PREFERRED
STOCK
Dividends on the Exchange Preferred Stock and the Initial Preferred Stock
will accrue at a rate per share of 13 1/4% per annum of the Liquidation
Preference thereof. Dividends will be payable in cash, except that on each
Dividend Payment Date occurring on or prior to July 1, 2003, dividends may be
paid, at the Company's option, by the issuance of additional shares of Exchange
Preferred Stock (including fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends. It is not anticipated that
the Company will pay any dividends in cash for any period ending on or prior to
July 1, 2003. Holders whose Initial Preferred Stock is accepted for exchange
will receive accrued dividends thereon to, but excluding, the date of issuance
of the Exchange Preferred Stock. Such dividends will be paid with the first
dividend payment on the Exchange Preferred Stock. Dividends on the Initial
Preferred Stock accepted for exchange will cease to accrue upon cancellation of
the Initial Preferred Stock and issuance of the Exchange Preferred Stock.
Holders of Initial Preferred Stock whose Initial Preferred Stock is not
exchanged will receive the accrued dividend payable on January 1, 1999.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by Instruction 4 of the Letter of Transmittal, and mail
or otherwise deliver such Letter of Transmittal or such facsimile, together with
the Initial Preferred Stock and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Initial Preferred
Stock by causing DTC to transfer such Initial Preferred Stock into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of Initial Preferred Stock may be effected through book-entry transfer
into the Exchange Agent's account at DTC, the Letter
28
<PAGE>
of Transmittal (or facsimile thereof), with any required signature guarantees
and any other required documents, must, in any case, be transmitted to and
received or confirmed by the Exchange Agent at its address set forth in "--
Exchange Agent" below prior to 5:00 p.m., New York City time, on the Expiration
Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a Holder will constitute an agreement between such Holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth below. Holders may also request their respective brokers, dealers,
commercial banks, trust companies or nominees to effect the above transactions
for such Holders.
The method of delivery of Initial Preferred Stock and the Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holders. Instead of delivery by mail, it is
recommended that Holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. No Letter
of Transmittal or Initial Preferred Stock should be sent to the Company.
Only a Holder of Initial Preferred Stock may tender such Initial Preferred
Stock in the Exchange Offer. The term "Holder" with respect to the Exchange
Offer means any person in whose name Initial Preferred Stock is registered on
the books of the Company or any other person who has obtained a properly
completed bond power from the registered Holder.
ANY BENEFICIAL HOLDER WHOSE INITIAL PREFERRED STOCK IS REGISTERED IN THE
NAME OF ITS BROKER, DEALER, COMMERCIAL BANK, TRUST COMPANY OR OTHER NOMINEE AND
WHO WISHES TO TENDER SHOULD CONTACT SUCH REGISTERED HOLDER PROMPTLY AND INSTRUCT
SUCH REGISTERED HOLDER TO CONSENT AND/OR TENDER ON ITS BEHALF. IF SUCH
BENEFICIAL HOLDER WISHES TO TENDER ON ITS OWN BEHALF, SUCH BENEFICIAL HOLDER
MUST, PRIOR TO COMPLETING AND EXECUTING THE LETTER OF TRANSMITTAL AND DELIVERING
ITS INITIAL PREFERRED STOCK, EITHER MAKE APPROPRIATE ARRANGEMENTS TO REGISTER
OWNERSHIP OF THE INITIAL PREFERRED STOCK IN SUCH HOLDER'S NAME OR OBTAIN A
PROPERLY COMPLETED BOND POWER FROM THE REGISTERED HOLDER. THE TRANSFER OF
RECORD OWNERSHIP MAY TAKE CONSIDERABLE TIME.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Initial Preferred Stock tendered pursuant thereto is tendered (i) by
a registered Holder who has not completed the box entitled "Special Payment
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by an "Eligible Guarantor
Institution" within the meaning of Rule 17Ad-15 under the Securities Exchange
Act of 1934, as amended, which is a member of one of the following recognized
signature guarantee programs: (i) the Securities Transfer Agents Medallion
Program (STAMP), (ii) the New York Stock Exchange Medallion Signature Program
(MSP) or (iii) the Stock Exchange Medallion Program (SEMP) (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Initial Preferred Stock listed therein, such Initial
Preferred Stock must be endorsed or accompanied by appropriate bond powers
signed as the name of the registered Holder or Holders appears on the Initial
Preferred Stock.
If the Letter of Transmittal or any Initial Preferred Stock or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of tendered Initial Preferred Stock and withdrawal of
tendered Initial Preferred Stock will be determined by the Company in its sole
discretion, which determination will be final and binding. The Company reserves
the absolute right to reject any and all Initial Preferred Stock not properly
tendered or any Initial Preferred Stock the Company's acceptance
29
<PAGE>
of which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Initial Preferred Stock. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Initial Preferred Stock must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of Initial Preferred Stock, nor shall any of them incur any liability
for failure to give such notification. Tenders of Initial Preferred Stock will
not be deemed to have been made until such irregularities have been cured or
waived. Any Initial Preferred Stock received by the Exchange Agent that is not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering Holders
of Initial Preferred Stock, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Initial Preferred Stock that remains outstanding
subsequent to the Expiration Date or, as set forth under "--Conditions," to
terminate the Exchange Offer and, to the extent permitted by applicable law,
purchase Initial Preferred Stock in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each Holder will represent to the Company that, among other
things, the Exchange Preferred Stock acquired pursuant to the Exchange Offer is
being obtained in the ordinary course of such Holder's business, that such
Holder has no arrangement with any person to participate in the distribution of
such Exchange Preferred Stock, and that such Holder is not an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company. If the Holder is
a broker-dealer that will receive Exchange Preferred Stock for its own account
in exchange for Initial Preferred Stock that was acquired as a result of market-
making activities or other trading activities and not acquired directly from the
Company, such Holder by tendering will acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Stock. See
"Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Initial Preferred Stock and (i) whose
Initial Preferred Stock is not immediately available, or (ii) who cannot deliver
their Initial Preferred Stock, the Letter of Transmittal or any other required
documents to the Exchange Agent prior to the Expiration Date, may effect a
tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder of the Initial Preferred Stock, the certificate
number or numbers of such Initial Preferred Stock and the principal amount of
Initial Preferred Stock tendered, stating that the tender is being made thereby
and guaranteeing that, within three New York Stock Exchange trading days after
the Expiration Date, the Letter of Transmittal (or facsimile thereof) together
with the certificate(s) representing the Initial Preferred Stock to be tendered
in proper form for transfer (or a confirmation of a book-entry transfer into the
Exchange Agent's account at DTC of Initial Preferred Stock delivered
electronically) and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Initial Preferred Stock in proper form for transfer (or confirmation of a book-
entry transfer into the Exchange Agent's account at DTC of Initial Preferred
Stock delivered electronically) and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request of the Exchange Agent, a Notice of Guaranteed Delivery will be sent
to Holders who wish to tender their Initial Preferred Stock according to the
guaranteed delivery procedures set forth above.
30
<PAGE>
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Initial Preferred Stock may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. To withdraw a tender of Initial Preferred Stock in the
Exchange Offer, a written or facsimile transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having deposited the Initial Preferred
Stock to be withdrawn (the "Depositor"), (ii) identify the Initial Preferred
Stock to be withdrawn (including the certificate number or numbers and number of
shares of such Initial Preferred Stock), (iii) be signed by the Holder in the
same manner as the original signature on the Letter of Transmittal by which such
Initial Preferred Stock was tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Initial Preferred Stock register the transfer of
such Initial Preferred Stock into the name of the person withdrawing the tender,
and (iv) specify the name in which any such Initial Preferred Stock is to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company whose determination shall be final and binding on
all parties. Any Initial Preferred Stock so withdrawn will be deemed not to have
been validly tendered for purposes of the Exchange Offer and no Exchange
Preferred Stock will be issued with respect thereto unless the Initial Preferred
Stock so withdrawn is validly retendered. Any Initial Preferred Stock which has
been tendered but which is not accepted for payment will be returned to the
Holder thereof without cost to such Holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Initial Preferred Stock may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time prior
to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange Exchange Preferred Stock for,
any Initial Preferred Stock not theretofore accepted for exchange, and may
terminate or amend the Exchange Offer as provided herein before the acceptance
of such Initial Preferred Stock, if any of the following conditions exist:
(a) the Exchange Offer, or the making of any exchange by a Holder, violates
applicable law or any applicable interpretation of the Commission; or
(b) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer which, in
the sole judgment of the Company, might impair the ability of the Company to
proceed with the Exchange Offer; or
(c) there shall have been adopted or enacted any law, statute, rule or
regulation which, in the sole judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer.
If any such conditions exist, the Company may (i) refuse to accept any
Initial Preferred Stock and return all tendered Initial Preferred Stock to
exchanging Holders, (ii) extend the Exchange Offer and retain all Initial
Preferred Stock tendered prior to the expiration of the Exchange Offer, subject,
however, to the rights of Holders to withdraw such Initial Preferred Stock (see
"--Withdrawal of Tenders") or (iii) waive certain of such conditions with
respect to the Exchange Offer and accept all properly tendered Initial Preferred
Stock which has not been withdrawn or revoked. If such waiver constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver in a manner reasonably calculated to inform Holders of Initial Preferred
Stock of such waiver.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of any
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
31
<PAGE>
In addition to the foregoing conditions, if, because of any change in
applicable law or applicable interpretations thereof by the Commission, the
Company is not permitted to complete the Exchange Offer, then the Company shall
file a Shelf Registration Statement. Thereafter, the Company's obligation to
consummate the Exchange Offer shall be terminated.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Overnight Courier and By Hand after
4:30 p.m.:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 Cooper Station 770 Broadway, 13th Floor
New York, New York 10276 New York, New York 10003
Attention: Corporate Trust Services
By Hand before 4:30 p.m.: By Facsimile:
United States Trust Company of New York (212) 780-0592
111 Broadway Attention: Customer Service
New York, New York 10006
Attention: Lower Level Confirm by telephone:
Corporate Trust Window (800) 548-6565
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the Prospectus and related documents to the beneficial owners of the
Initial Preferred Stock, and in handling or forwarding tenders for exchange.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company, are estimated in the aggregate to be approximately
$200,000, and include fees and expenses of the Exchange Agent and Transfer Agent
and accounting and legal fees.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Initial Preferred Stock pursuant to the Exchange Offer. If, however,
certificates representing Exchange Preferred Stock or Initial Preferred Stock
for shares not tendered or accepted for exchange are to be delivered to, or are
to be registered or issued in the name of, any person other than the registered
Holder of the Initial Preferred Stock tendered, or if tendered Initial Preferred
Stock is registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Initial Preferred Stock pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering Holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering Holder.
32
<PAGE>
ACCOUNTING TREATMENT
The Exchange Preferred Stock will be recorded at the same carrying value as
the Initial Preferred Stock, which is face value as reflected in the Company's
accounting records on the date of the exchange. Accordingly, no gain or loss
for accounting purposes should be recognized upon consummation of the Exchange
Offer. The issuance costs incurred in connection with the Exchange Offer will
be offset against original proceeds and accreted to the redemption value of the
Exchange Preferred Stock through retained earnings through the mandatory
redemption date.
33
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following selected historical financial data for each of the three
years and the period ended December 31, 1997 are derived from the audited
consolidated financial statements of the Company. The selected financial data
for the years ended December 31, 1993 and 1994 and for the six month periods
ended June 30, 1997 and June 30, 1998 are derived from the unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for the fair presentation of the financial position and the results of
operations for these periods. Operating results for the six months ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1998. The selected pro forma financial data
for the year ended December 31, 1997 and the six months ended June 30, 1998 and
June 30, 1997 are derived from the pro forma financial statements included
elsewhere in this Offering Memorandum and give effect to the Recapitalization,
the Reorganization (as defined), the Common Control Mergers (as defined), and
the Nationwide Acquisition (as defined) as if they had occurred at the beginning
of the period presented with respect to the operating and other financial data,
and as of June 30, 1998 with respect to balance sheet data. The selected pro
forma financial data does not necessarily represent what the Company's financial
position and results of operations would have been if these transactions had
actually been completed as of the dates indicated, and is not intended to
project the Company's financial position or results of operations for any future
period. The information contained in this table should be read in conjunction
with the Company's audited consolidated financial statements and notes thereto
at December 31, 1996 and December 31, 1997 and for each of the three years in
the period ended December 31, 1997, the unaudited consolidated financial
statements at June 30, 1998 and for the three months ended June 30, 1997 and
1998 and the pro forma consolidated financial statements and notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(a)
-------- -------- --------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C>
Net sales....................... $39,657 $56,873 $80,115 $103,113 $146,166 $166,011
Cost of sales................... 29,516 42,215 59,201 75,552 105,636 120,300
------- ------- ------- -------- -------- --------
Gross profit.................... 10,141 14,659 20,915 27,561 40,530 45,711
Operating expenses:
Selling, general and
administrative expenses..... 7,832 11,225 15,256 17,271 22,264 26,041
Stock based compensation
charges(c).................. -- -- -- -- 6,969 6,969
------- ------- ------- -------- -------- --------
Total operating expenses........ 7,832 11,225 15,256 17,271 29,233 33,010
------- ------- ------- -------- -------- --------
Operating income................ 2,309 3,434 5,659 10,290 11,297 12,701
Interest expense(d)............. 263 461 790 865 1,147 9,263
------- ------- ------- -------- -------- --------
Income before income taxes
and minority interest.......... 2,046 2,973 4,869 9,425 10,150 3,438
Provision for income taxes(e)... 602 705 1,359 2,798 6,370 4,056
------- ------- ------- -------- -------- --------
Income before minority
interest....................... 1,444 2,268 3,510 6,627 3,780 (618)
Minority interest in
earnings of subsidiaries....... 321 482 682 1,237 848 --
------- ------- ------- -------- -------- --------
Net income...................... $ 1,123 $ 1,786 $ 2,829 $ 5,390 $ 2,932 $ (618)
======= ======= ======= ======== ======== ========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------
PRO
FORMA
1997 1998 1998(b)
-------- -------- ------------
OPERATING DATA:
<S> <C> <C> <C>
Net sales....................... $58,761 $94,182 $ 94,182
Cost of sales................... 42,468 68,598 68,598
------- ------- --------
Gross profit.................... 16,293 25,584 25,584
Operating expenses:
Selling, general and
administrative expenses.... 9,097 14,182 14,182
Stock based compensation
charges(c)................. 6,343 -- --
------- ------- --------
Total operating expenses........ 15,440 14,182 14,182
------- ------- --------
Operating income................ 853 11,402 11,402
Interest expense(d)............. 323 719 4,631
------- ------- --------
Income before income taxes
and minority interest.......... 530 10,683 6,771
Provision for income taxes(e)... 2,139 4,145 2,580
------- ------- --------
Income before minority
interest....................... (1,609) 6,538 4,191
Minority interest in
earnings of subsidiaries....... 848 -- --
------- ------- --------
Net income...................... $(2,457) $ 6,538 $ 4,191
======= ======= ========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
PRO
FORMA
1993 1994 1995 1996 1997 1997(a)
-------- ------ ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
OTHER FINANCIAL DATA:
EBITDA(f)....................... $ 2,475 $ 3,705 $ 6,031 $ 10,723 $ 12,066 $ 13,685
Adj. EBITDA(g).................. $ 2,475 $ 3,705 $ 6,031 $ 10,723 $ 19,035 $ 20,654
Adj. EBITDA margin(h)........... 6.2% 6.5% 7.5% 10.4% 13.0% 12.4%
Depreciation &
amortization(i)................ $ 166 $ 271 $ 372 $ 433 $ 769 $ 984
Capital expenditures............ $ 525 $ 524 $ 461 $ 513 $ 1,534 $ 1,686
Ratio of Adj. EBITDA to
interest expense............... 9.4x 8.0x 7.6x 12.4x 16.6x 2.2x
Ratio of total debt to Adj
EBITDA......................... 1.4x 1.9x 1.6x 1.1x 1.0x --
Ratio of earnings to fixed
charges(j)..................... 6.5x 5.5x 5.6x 8.7x 7.1x 1.3x
Ratio of earnings to fixed
charges and preferred stock
dividends(k)................... -- -- -- -- -- 0.7x
OTHER DATA:
Distribution centers............ 9 13 17 20 29 --
Comparable center sales
growth(l)...................... 23.0% 26.7% 28.2% 21.0% 20.8% --
Active customers(m)............. N/A N/A 13,436 16,659 24,521 --
CASH FLOW DATA:
Net cash provided by (used in)
operating activities............ $ (264) $(2,529) $ (589) $ 785 $ 6,304 --
Net cash provided by (used in)
investing activities............ (520) (436) (458) (493) (9,575) --
Net cash provided by (used in)
financing activities............ 1,563 4,185 1,088 2,083 4,946 --
BALANCE SHEET DATA:
Working capital................. $ 5,222 $ 8,799 $ 9,413 $ 14,456 $ 25,617 --
Operating working capital(n).... 5,128 9,271 13,778 20,065 29,487 --
Total assets.................... 12,353 19,630 22,981 32,936 57,254 --
Total debt...................... 3,526 6,993 9,385 12,253 18,997 --
Stockholders' equity............ 3,267 5,053 6,578 11,035 25,568 --
(deficit)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------
PRO
FORMA
1997 1998 1998(b)
------ ------ ---------
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(f).................................. $ 1,099 $11,878 $ 11,878
Adj. EBITDA(g)............................. $ 7,442 $11,878 $ 11,878
Adj. EBITDA margin(h)...................... 12.7% 12.6% 12.6%
Depreciation & amortization(i)............. $ 247 $ 476 $ 476
Capital expenditures....................... $ 984 $ 500 $ 500
Ratio of Adj. EBITDA to
interest expense.......................... 23.0x 16.5x 2.6x
Ratio of total debt to Adj
EBITDA.................................... -- -- --
Ratio of earnings to fixed
charges(j)................................ 2.0x 11.0x 2.4x
Ratio of earnings to fixed
charges and preferred stock
dividends(k).............................. -- -- 1.2x
OTHER DATA:
Distribution centers....................... 20 30 --
Comparable center sales growth(l).......... -- -- --
Active customers(m)........................ -- -- --
CASH FLOW DATA:
Net cash provided by (used in) operating
activities................................. $(4,851) $(2,464) --
Net cash provided by (used in) investing
activities................................. (302) (460) --
Net cash provided by (used in) financing
activities................................. 2,498 629 --
BALANCE SHEET DATA:
Working capital............................ -- $30,007 $ 37,293
Operating working capital(n)............... -- 38,967 37,293
Total assets............................... -- 69,512 69,591
Total debt................................. -- 19,976 100,000
Stockholders' equity....................... -- 31,606 (86,896)
(deficit)
</TABLE>
______________________
(a) Pro forma for the Recapitalization, the Reorganization (as defined) and the
Nationwide Acquisition (as defined) as if they had occurred on January 1,
1997 with respect to the operating and other financial data.
(b) Pro forma for the Recapitalization as if it had occurred on January 1, 1998
with respect to the operating and other financial data, and as of June 30,
1998 with respect to the balance sheet.
(c) Reflects (i) charges of $6.3 million for the difference between the fair
market value of stock exchanged by minority stockholders in connection with
the Reorganization and the recorded basis of minority stockholder interests
consisting of amounts paid by such stockholders for their stock in the
Company's subsidiaries and their allocated earnings reflected as charges to
minority interest in earnings of subsidiaries at June 30, 1997 and (ii) with
respect to stock options granted in July 1997, charges of $0.6 million
representing the difference between the fair market value of Common Stock
and the exercise price of the related options at the respective date of
grant.
(d) Interest expense includes amortization of deferred financing fees.
(e) As part of the Common Control Mergers (as defined) the Company acquired
certain operations that were not previously subject to federal income taxes.
Income from these operations subsequent to June 30, 1997 transaction are
subject to federal income taxes.
35
<PAGE>
(f) EBITDA represents net income before depreciation and amortization, interest
expense and income tax expense. EBITDA is not a measure of performance under
generally accepted accounting principles, and should not be considered as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles, or as a measure of profitability or
liquidity. The Company has included a measurement based on EBITDA because
it is one way in which the Company monitors its performance and because it
is commonly used by certain investors and analysts to (i) analyze and
compare companies on the basis of operating performance, leverage and
liquidity and (ii) determine a company's ability to service debt. EBITDA
should not be considered as an alternative to, or more meaningful than,
income from operations or cash flow as an indication of the Company's
operating performance, nor does it represent funds available for
management's discretionary use. EBITDA presented by the Company may not be
comparable to EBITDA defined and presented by other companies.
(g) Adjusted EBITDA represents net income before depreciation and amortization,
interest expense, income tax expense and the stock based compensation
charge. Adjusted EBITDA is not a measure of performance under generally
accepted accounting principles, and should not be considered as a substitute
for net income, cash flows from operating activities and other income or
cash flow statement data prepared in accordance with generally accepted
accounting principles, or as a measure of profitability or liquidity. The
Company has included a measurement based on Adjusted EBITDA because it is
one way in which the Company monitors its performance and because it is
commonly used by certain investors and analysts to (i) analyze and compare
companies on the basis of operating performance, leverage and liquidity and
(ii) determine a company's ability to service debt. In addition, certain
covenants in the Certificate of Designation are based upon a concept similar
to Adjusted EBITDA. Adjusted EBITDA should not be considered as an
alternative to, or more meaningful than, income from operations or cash flow
as an indication of the Company's operating performance, nor does it
represent funds available for management's discretionary use. Adjusted
EBITDA presented by the Company may not be comparable to Adjusted EBITDA
defined and presented by other companies.
(h) Represents ratio of Adjusted EBITDA to net sales.
(i) The pro forma data include amortization of deferred financing fees
associated with the Recapitalization.
(j) For the purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before income taxes and fixed charges. Fixed
charges consist of interest on indebtedness, the amortization of debt issue
costs and that portion of operating rental expense the Company believes to
be representative of the interest factor.
(k) For the purpose of determining the ratio of earnings to fixed charges and
preferred stock dividends, earnings consist of earnings before income taxes
and fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issue costs and that portion of operating rental
expense the Company believes to be representative of the interest factor.
Preferred Stock dividends consist of amounts to be paid-in-kind and
accretion of the carrying value of the Preferred Stock, which have been
"grossed up" to a pre-income tax basis to provide comparability to other
components of the ratio.
(l) Does not include centers acquired through the Nationwide Acquisition.
(m) Includes those customers who have placed at least two orders over the
previous 12 month period.
(n) Operating working capital represents current assets, excluding cash, less
current liabilities, excluding the current portion of long-term debt and
note payable.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's consolidated historical results
of operations and financial condition should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto included
elsewhere in this Offering Memorandum. The following discussion and analysis
covers periods before completion of the Recapitalization. See "Risk Factors"
and Pro Forma Consolidated Financial Statements for a further discussion
relating to the effect that the transactions described herein may have on the
Company.
RECENT DEVELOPMENTS AND OUTLOOK
The Company is a leading distributor of maintenance, repair and operations
("MRO") supplies to the $2 billion multifamily apartment market. Century offers
a broad selection of high quality maintenance and repair items, with prompt,
free delivery provided through the Company's extensive distribution network.
The Company currently supplies over 4,100 name brand and private label items,
including plumbing, hardware, electrical, HVAC and lighting products, to over
25,000 active customers in the United States.
Century has reported increased annual net sales, operating income and
Adjusted EBITDA in every year since its inception. Over the past five years,
net sales have increased from $39.7 million in 1993 to $146.2 million in 1997,
representing a compound annual growth rate of 38.6%. Century has achieved this
growth through increasing sales at its existing distribution centers, by opening
new distribution centers and through the acquisition of Nationwide Apartment
Supply, Inc. Over the same time period, Century increased operating income from
$2.3 million in 1993 to $11.3 million in 1997. Since 1993, annual comparable
center sales growth has ranged between 20.8% and 28.2%. In addition, net sales
from centers opened prior to 1993 have increased from $36.0 million in 1993 to
$77.7 million in 1997. The Company believes that it has increased sales and
gained market share from local and regional MRO providers, as the Company is
able to provide a broader product line and higher level of service than most of
these competitors. As part of its strategy of expanding into new geographic
markets, the Company has opened 14 new distribution centers over the past five
years. These centers contributed, in total, over $48.4 million to Century's
1997 net sales. In July 1997, the Company acquired Nationwide, which added 11
distribution centers principally in the midwestern United States, three of which
were consolidated into existing Century centers. Since the acquisition in July
1997, Nationwide has contributed $18.9 million in net sales. Net sales and
operating income for 1997, assuming the Nationwide acquisition had occurred on
January 1, 1997, totaled $166.0 million and $12.7 million, respectively,
reflecting annual net sales of $38.9 million and operating income of $3.5
million for Nationwide in 1997. See the Combined Financial Statements of
Nationwide Apartment Supply, Inc. contained elsewhere in this Prospectus and "--
Summary Historical and Pro Forma Financial Information" for certain cash flow
information.
From 1993 to 1997, the Company's Adjusted EBITDA increased from $2.5
million to $19.0 million, reflecting an improvement in Adjusted EBITDA margin
from 6.2% to 13.0% over the same period on an increasing sales base. The
increase in Adjusted EBITDA margin has primarily been driven by operating
efficiencies realized as revenue growth at the Company's distribution centers
has outpaced growth in the centers' operating costs and by the Company's ability
to obtain better pricing from its suppliers as its purchase volume has
increased. Historically, a typical center breaks even within three years of
opening, and operating margins continue to improve as the center's revenue
grows.
For the six months ended June 30, 1998, the Company reported net sales,
operating income and adjusted EBITDA of $94.2 million, $11.4 million and $11.9
million, respectively, representing increases of 22.2%, 1,237% and 34.5%,
respectively, over the six months ended June 30, 1997, pro forma for the
Nationwide Acquisition. During the first six months of 1998, the Company opened
one new distribution center in Fort Worth, Texas. The Company plans on opening
at least two additional centers in the remainder of 1998.
On June 30, 1997, the Company acquired all of the outstanding minority
shareholder interests in each of the Company's subsidiaries in exchange for
common stock of the Company (the "Reorganization"). The exchanges were
completed at fair market value and resulted in the Company issuing 1,681,324
shares of common stock to the minority shareholders and recording compensation
expense of $6.3 million.
37
<PAGE>
On June 30, 1997, the Company purchased all of the assets of the general
maintenance supply operations of Century Airconditioning Supply, Inc. ("CAC"),
which were located in San Antonio and Austin, Texas (such acquired assets to be
called "SA/A"), with 1,702,703 shares of the Company's common stock. The number
of shares was determined based on the fair value of the operations acquired
divided by the fair value per share of common stock of the Company. Also on
June 30, 1997, the Company sold one of its subsidiaries, Air Management, Inc.
("Air Management"), which is in the heating and air conditioning business, to
CAC for $215,000. The sales price was based on the fair value of the subsidiary
sold. The transactions (the "Common Control Mergers") were conducted between
the Company and CAC, which are under common control. Therefore the transactions
were recorded at historical cost in a manner similar to pooling of interests.
As part of the Common Control Mergers, the operations acquired were not
previously subject to federal income taxes. Income from these operations
subsequent to June 30, 1997 transaction are subject to federal income taxes.
On July 8, 1998, the Company consummated the Recapitalization. The
Recapitalization consisted of (i) the merger of Century Acquisition Corporation,
an entity formed by affiliates of Freeman Spogli & Co. LLC ("FS&Co.") with and
into the Company, with the Company as the surviving entity, (ii) a $68.3 million
investment by FS&Co., William C. Johnson, a director of the Company, and The
Parthenon Group, in cash for common stock of the Company (the "Common Stock
Investment") with the Current Stockholders retaining common stock with a value
of $54.2 million, (iii) the $12.0 million Private Placement, (iv) the $28.0
million Offering and (v) the $125.0 million New Credit Facility. The
transactions constituting the Recapitalization resulted in no change in the
basis of the Company's assets and liabilities because less than "substantially
all" of the common stock of the Company was acquired. See "Summary--
Recapitalization."
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, certain income
and expense items expressed in dollars and as a percentage of the Company's net
sales.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- -------------------
1995 1996 1997 1997 1998
-------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Net sales.......................................... $ 80,115 $ 103,113 $ 146,166 $ 58,761 $ 94,182
Cost of sales...................................... 59,201 75,552 105,636 42,468 68,598
-------- --------- --------- -------- --------
Gross profit..................................... 20,915 27,561 40,530 16,293 25,584
Selling, general and administrative expenses....... 15,256 17,271 22,264 9,097 14,182
Stock compensation charges......................... -- -- 6,969 6,343 --
-------- --------- --------- -------- --------
Total operating expenses......................... 15,256 17,271 29,233 15,440 14,182
-------- --------- --------- -------- --------
Operating income................................... $ 5,659 $ 10,290 $ 11,297 $ 853 $ 11,402
======== ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- -------------------
1995 1996 1997 1997 1998
-------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 73.9 73.3 72.3 72.3 72.8
-------- --------- ---------- ------- --------
Gross profit..................................... 26.1 26.7 27.7 27.7 27.2
Selling, general and administrative expenses....... 19.0 16.7 15.2 15.5 15.1
Stock compensation charges......................... -- -- 4.8 10.8 --
-------- --------- ---------- -------- --------
Total operating expenses........................... 19.0 16.7 20.0 26.3 15.1
-------- --------- --------- -------- --------
Operating income................................... 7.1% 10.0% 7.7% 1.4% 12.1%
======== ========= ========= ======== ========
</TABLE>
38
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales for the first six months of 1998 were $94.2 million, an increase
of $35.4 million or 60.3% over the first six months of 1997. This increase in
net sales was primarily due to comparable center growth, the acquisition of
Nationwide and the opening of a new distribution center. The Nationwide
Acquisition added 11 new centers (three of which were consolidated into existing
centers in November 1997) and contributed $18.2 million to incremental net sales
in the first six months of 1998. Additionally, a new center in Fort Worth,
Texas was opened in the first quarter 1998.
The Company's gross profit for the first six months of 1998 was $25.6
million, an increase of $9.3 million or 57.0% over the first six months of 1997.
As a percentage of net sales, the Company's gross profit decreased to 27.2% in
the first six months of 1998 from 27.7% in the first six months of 1997. This
decrease in gross profit as a percentage of net sales was due to the increase in
sales of HVAC products over the prior period, which have a lower margin that the
Company's other products.
Selling, general and administrative expense, consisting primarily of
payroll, occupancy related and vehicle base expenses totaled $14.2 million in
the first six months of 1998, an increase of $5.1 million or 55.9% over the
first six months of 1997. Of this, $2.8 million was attributable to the
Nationwide Acquisition. As a percentage of net sales, selling, general and
administrative expense decreased to 15.1% in the first six months of 1998 from
15.5% in the first six months of 1997. This decrease was primarily driven by
improved efficiencies realized after the Nationwide purchase and by the
continued leveraging of the Company's infrastructure as sales per warehouse
increase.
Interest expense for the first six months of 1998 was $0.7 million, an
increase of $0.4 million or 122.6% from the first six months of 1997, primarily
due to the additional debt incurred in the purchase of Nationwide. Following
the Recapitalization, the Company will have substantially higher interest
expense. See "--Liquidity and Capital Resources" and "Pro Forma Consolidated
Financial Statements."
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales for 1997 were $146.2 million, an increase of $43.1 million or
41.8% over 1996. This increase in net sales was primarily due to comparable
center growth, the acquisition of Nationwide and the opening of new distribution
centers. Net sales from centers opened before 1996 increased $20.7 million or
20.8% from 1996 to 1997 due to increases in market share. The Nationwide
Acquisition added 11 new centers (three of which were consolidated into existing
centers in November 1997) and contributed $18.9 million to net sales in 1997.
Additionally, a total of four new centers were opened in 1996 and 1997, which
contributed an incremental $3.1 million in net sales in 1997.
The Company's gross profit for 1997 was $40.5 million, an increase of $13.0
million or 47.1% over 1996. As a percentage of net sales, the Company's gross
profit increased to 27.7% in 1997 from 26.7% in 1996. The Company has been able
to improve its gross profit margin through lower material cost and increased
purchase discounts. This improvement was offset to some extent by the
acquisition of Nationwide, which historically has had lower gross margins than
Century.
Selling, general and administrative expense, consisting primarily of
payroll, occupancy related and vehicle base expenses totaled $22.3 million in
1997, an increase of $5.0 million or 28.9% over 1996. Of this amount, $3.0
million was attributable to the Nationwide Acquisition. As a percentage of net
sales, selling, general and administrative expense decreased to 15.2% in 1997
from 16.8% in 1996. This decrease was primarily driven by improved efficiencies
realized after the Nationwide purchase and by the continued leveraging of the
Company's infrastructure as sales per warehouse increase.
Stock based compensation charges in 1997 reflected (i) charges of $6.3
million for the difference between the fair market value of stock exchanged by
minority stockholders in connection with the Reorganization and the recorded
basis of minority stockholder interests consisting of amounts paid by such
stockholders for their stock in the Company's subsidiaries and their allocated
earnings reflected as charges to minority interest in earnings of subsidiaries
and (ii) with respect to stock options granted in 1997, charges of $0.6 million
representing the
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difference between the fair market value of Common Stock and the exercise
price of the related options at the respective date of grant.
Interest expense for 1997 was $1.1 million, an increase of $0.3 million or
32.7% from 1996, primarily due to the additional debt incurred in the purchase
of Nationwide. Following the Recapitalization, the Company will have
substantially higher interest expense. See "--Liquidity and Capital Resources"
and "Pro Forma Consolidated Financial Statements."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales for 1996 were $103.1 million, an increase of $23.0 million or
28.7% over 1995. The increase in net sales was primarily due to continued
market penetration and new center openings. Comparable center sales increased
21.0% from 1995 to 1996, due to increased market share. In addition, new
centers were opened in three markets in 1996.
The Company's gross profit for 1996 was $27.6 million, an increase of $6.6
million or 31.8% over 1995. As a percentage of net sales, gross profit increased
to 26.7% in 1996 from 26.1% in 1995. The increase in the Company's gross profit
margin was primarily attributable to greater purchasing efficiencies.
Selling, general and administrative expense for 1996 was $17.3 million, an
increase of $2.0 million or 13.2% over 1995. This increase was primarily due to
new center openings. As a percentage of net sales, selling, general and
administrative expense decreased to 16.7% in 1996 from 19.0% in 1995, due to the
continued leveraging of the Company's existing infrastructure.
Interest expense for 1996 was $0.9 million, an increase of $0.1 million or
9.5% from 1995. This increase was primarily a result of slightly higher overall
levels of borrowing in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements have been the funding of its
continued distribution center expansion program, inventory requirements and the
development and implementation of customized information systems. From 1995 to
1997, the Company opened eight new distribution centers. The Company has
financed its growth through a combination of internally generated funds and
borrowings.
In fiscal 1997, net cash provided by operating activities was $6.3 million,
increasing from $0.8 million in fiscal 1996 due primarily to increasing sales
volume. Net cash used for investing activities in fiscal 1997 was $9.6 million
and was comprised of capital expenditures and Nationwide Acquisition expenses,
partially offset by sales of property. The Company currently anticipates that
its capital expenditures for 1998 and 1999 will be $1.5 million and $2.0
million, respectively. Net cash provided by financing activities in fiscal 1997
was $4.9 million and was comprised primarily of net borrowings.
In the first six months of 1998, net cash used in operating activities was
$2.5 million, decreasing from $4.9 million net cash used in the first six months
of 1997 due primarily to increasing sales volume. Net cash used for investing
activities in the first six months of 1998 was $0.5 million and was comprised of
capital expenditures and was partially offset by sales of property. Net cash
provided by financing activities in the first six months of 1998 was $0.6
million.
Inventories were $29.8 million as of June 30, 1998 and $23.9 million at the
end of fiscal 1997. In order to meet the needs of its customers, the Company
must maintain inventories sufficient to permit same day or next day filling of
most orders. The Company anticipates that its inventory levels will continue to
increase primarily as a result of higher sales volumes and new center openings.
Trade accounts receivable, net of allowances were $24.6 million at June 30, 1998
and $15.0 million at the end of fiscal 1997. The Company generally offers 30-
day credit terms to its customers. The Company's working capital requirements
are typically higher in the second and third quarters to meet seasonal demand.
This is due primarily to the fact that more people move during the summer months
when school is out, causing apartment managers to purchase more supplies to make
apartments ready for
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new occupants. Also, hot summer months translate into a higher volume of HVAC
sales due to the need for air conditioning parts.
The Company believes that, based on current levels of operations and
anticipated growth, its cash from operations, together with other available
sources of liquidity, including borrowings under the Revolving Credit Facility,
will be sufficient to fund its debt service obligations and implement its growth
strategy over the next several years. The Company has outstanding indebtedness
consisting of borrowings of $100.0 million under the Term Loan Facility. In
addition to its operating cash flow, the Company has access to a total of $25.0
million through the Revolving Credit Facility. The Tranche A Term Facility will
mature on the fifth anniversary of initial borrowing, and the Tranche B Term
Facility will mature on the seventh anniversary of initial borrowing. Annual
required principal payments on the Term Loan Facility prior to the third
anniversary of initial borrowing will range from $3.6 million to $7.6 million,
and will be $12.6 million, $14.6 million, $23.0 million and $34.0 million in the
fourth through seventh years, respectively. The Revolving Credit Facility will
mature on the fifth anniversary of initial borrowing. The interest rate under
the New Credit Facility is variable and based, at the option of the Company,
upon either a eurodollar rate plus 2.5% (for the Revolving Credit Facility and
the Tranche A Term Facility) and 2.75% (for the Tranche B Term Facility) per
annum or a base rate plus 1.5% (for the Revolving Credit Facility and the
Tranche A Term Facility) and 1.75% (for the Tranche B Term Facility) per
annum. If the Company achieves performance goals as agreed upon, rates under
the Tranche A Term Facility and the Revolving Credit Facility will be reduced in
increments as agreed. The Company also covenanted to enter into specified
interest rate protection arrangements, including interest rate swaps, to reduce
the Company's exposure to fluctuations in the rates of interest payable under
the New Credit Facility. In mid-July, 1998, the Company entered into such
interest rate swap transactions with respect to $50.0 million of borrowings
under the Term Loan Facility. At October 22, 1998 the interest rate for the
Revolving Credit Facility was 10.5%, the Tranche A Facility was 7.6875% and the
Tranche B Facility was 8.0625%. A commitment fee of 0.5% per annum will be
charged on the unused portion of the new Credit Facility. The loans under the
New Credit Facility are secured by a first priority security interest in
substantially all tangible and intangible assets of the Company and its
subsidiaries (including the capital stock of the subsidiaries). See "Description
of New Credit Facility."
In connection with the Recapitalization, the Company issued 280,000 shares
of its Initial Preferred Stock with an aggregate liquidation preference of $28
million, and 120,000 shares of preferred stock issued pursuant to the Private
Placement, with an aggregate liquidation preference of $12.0 million. At the
election of the Company, dividends on the Initial Preferred Stock or the
Exchange Preferred Stock, as the case may be, may be paid in kind until July 1,
2003 and thereafter must be paid in cash. The New Credit Facility currently
prohibits the payment of cash dividends on the Exchange Preferred Stock. The
Exchange Preferred Stock is mandatorily redeemable upon a change of control and
on July 1, 2010. See "Description of the Exchange Preferred Stock."
The Company is a holding company and relies on dividends and other
distributions from its subsidiaries as its primary source of liquidity. The
Company does not have and in the future may not have any assets other than the
capital stock of its subsidiaries. The ability of subsidiaries of the Company
to make payments to the Company when required may be restricted by law and
restricted or prohibited under the terms of the New Credit Facility and future
indebtedness of the Company. No assurance can be made that subsidiaries of the
Company will be able to pay cash dividends or make other distributions to the
Company. See "Risk Factors--Ability to Make Distributions on Exchange Preferred
Stock" and "--Holding Company Structure."
YEAR 2000 COMPLIANCE
A significant percentage of the software that runs most computers relies on
two-digit date codes to perform computations and decision-making functions.
Commencing on January 1, 2000, these computer programs may fail from an
inability to interpret date codes properly, misinterpreting "00" as the year
1900 rather than 2000. The Company has completed the identification of all
necessary internal software changes to ensure that it does not experience any
loss of critical business functionality due to the Year 2000 issue. The Company
has already completed an assessment of all internal software, hardware and
operating systems. The Company has improved its information system capabilities
by purchasing a new system that is Year 2000 compliant. The Company does not
believe that its systems will encounter any material "Year 2000" problems. The
new system is estimated to be in place by early 1999. The Company believes that
this conversion to a new operating system will minimize the business risk of
Year 2000 issues.
The Company also relies, directly and indirectly, on the external systems
of various independent business enterprises, such as its customers, suppliers,
creditors, financial organizations, and of governments, for the accurate
exchange of data and related information. The Company could be affected as a
result of any disruption in the operation of the various third-party enterprises
with which the Company interacts. The Company is in the process of implementing
a program to assess and monitor the progress of these third parties in resolving
Year 2000 issues, and to determine whether any Year 2000 issues encountered by a
third party would pose a business risk to the Company. The Company is currently
developing a survey to distribute to its vendors and customers to assess its
Year 2000 risk based on the Year 2000 issues of these third parties. The
Company expects the survey to be completed by November 30, 1998 and mailed to
the third parties shortly thereafter, with responses expected by March 31, 1999.
The Company does not expect the cost of the survey procedure to be material.
The Company cannot assure that Year 2000 related systems issues of third parties
will be corrected in a timely manner or that the failure of these third parties
to correct these issues would not have a material adverse effect on the Company.
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The total cost of the new computer system is estimated to be approximately
$1.2 million. Of this amount, $1.0 million has already been expended, $750,000
of which was capitalized. The Company has also determined that if the new system
became inoperable or otherwise encountered a Year 2000 problem, it may purchase
an upgrade to the current system, which upgrade is Year 2000 compliant. The
Company estimates it would have to spend an additional $200,000 to install and
test the upgrade.
The costs and time estimates of the Year 2000 project are based on the
Company's best estimates. There can be no assurance that these estimates will
be achieved and that planned results will be achieved. Risk factors include,
but are not limited to, the retention of internal and external resources
dedicated to the project, the timely delivery of software corrections from
external vendors, and the successful completion of key business partners' Year
2000 projects.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 129 Disclosure of
Information about Capital Structure was issued in February 1997 and was adopted
as of December 26, 1997. SFAS No. 130 Reporting Comprehensive Income and SFAS
No. 131 Disclosures about Segments of an Enterprise and Related Information were
issued in June 1997. The Company will adopt SFAS No. 130 and SFAS No. 131 in
fiscal 1998 and anticipates that such adoption will not materially affect the
Company's financial statements.
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<PAGE>
BUSINESS
GENERAL
Century Maintenance Supply, Inc. ("Century" or the "Company") is a leading
distributor of maintenance, repair, and operations ("MRO") supplies to the $2
billion multifamily apartment market segment of the estimated $10 billion
domestic MRO market. The Company offers a broad selection of high quality MRO
items, with prompt, free delivery provided through the Company's extensive
distribution network. Century currently supplies over 4,100 name brand and
private label stock-keeping units ("SKUs"), including plumbing, hardware,
electrical, heating, ventilation and air conditioning ("HVAC") and lighting
products, to over 25,000 active customer accounts. The Company markets its
products to individual apartment maintenance managers as well as to larger
property management companies which own and/or manage multiple apartment
complexes. Century provides free same-day or next-day service on virtually all
orders by delivering its products via Company-operated trucks from 30
distribution centers which are strategically located in major metropolitan
markets throughout the United States. Since its inception in 1988, the Company
has reported increased annual net sales, operating income and Adjusted EBITDA.
From 1993 to 1997 the Company has realized compound annual sales growth of
38.6%, increased operating income from $2.3 million in 1993 to $11.3 million in
1997 and improved Adjusted EBITDA margins from 6.2% in 1993 to 13.0% in 1997.
See footnotes (e) and (f) to "--Summary Historical and Pro Forma Financial
Information" for information with respect to EBITDA and Adjusted EBITDA, and
"--Summary Historical and Pro Forma Financial Information" for certain cash flow
information.
In July 1997, the Company acquired Nationwide Apartment Supply, Inc.
("Nationwide"), an operator of 11 distribution centers located primarily in the
midwestern United States. The Nationwide Acquisition has expanded the Company's
geographic reach, generated efficiencies through the consolidation of three
distribution centers and provided the potential for purchasing synergies and
margin improvements, as well as with what it believes is a complementary
management team. For the twelve months ended June 30, 1997, Nationwide
generated $35.0 million of annual sales, operating income of $2.5 million and
$2.8 million of EBITDA. Pro forma for the Nationwide Acquisition, the Company's
1997 net sales, operating income and Adjusted EBITDA were $166.0 million, $12.7
million and $20.7 million, respectively. See the Combined Financial Statements
of Nationwide Apartment Supply, Inc. contained elsewhere in this Prospectus and
"--Summary Historical and Pro Forma Financial Information" for EBITDA and
Adjusted EBITDA information, and for certain cash flow information.
The Company is incorporated in the state of Delaware. Its principal
executive offices are located at 9100 Winkler Drive, Houston, Texas 77017 and
its telephone number is (713) 947-6703.
BUSINESS STRATEGY
The central focus of the Company's business strategy is to provide the
highest level of customer service in the industry. The Company has historically
focused on the multifamily apartment segment of the MRO market, specifically on
two or three story, garden style apartment complexes with 75 or more units
located in major metropolitan markets. The Company believes that such apartment
complexes have more frequent maintenance requirements and generate higher
average invoice amounts than complexes with fewer units. The Company's business
strategy is based upon (i) developing and maintaining strong and enduring
customer relationships through a strong local presence, (ii) controlling the
distribution of its products to provide reliable same-day or next-day delivery,
(iii) maintaining superior fill rates in order to satisfy customer needs, and
(iv) enhancing its ability to service and secure relationships with national
accounts, including large, nationally-focused property owners and management
companies. In addition, the Company continues to realize operating efficiencies
by centralizing key corporate functions and integrating new distribution
centers.
DEVELOP AND MAINTAIN STRONG CUSTOMER RELATIONSHIPS THROUGH STRONG LOCAL
PRESENCE. Century maintains high levels of customer service through its local
outside salesforce which maintains frequent personal customer contact. The
outside salesforce is complemented by an inside salesforce which is primarily
responsible for receiving customer orders and providing technical support. In
addition, Century's products are delivered through its Company-operated fleet of
trucks, by a driver with whom the customer is typically familiar and who can
address the customer's specific needs or requests. The personalized interaction
that results from this strong local presence
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<PAGE>
helps the Company build and maintain a loyal customer base. Century reinforces
its customer loyalty by providing value-added services, such as educational
classes and training for its customers held at most of the Company's
distribution centers. In addition, the Company participates in over 80 apartment
associations, thereby enhancing its understanding of and presence in local
markets.
CONTROL OF DISTRIBUTION. Through its extensive network of local
distribution centers and Company-operated delivery fleet, Century is able to
control the entire distribution process. In this manner, the Company strives to
distinguish itself from many of its competitors and maintain high levels of
customer satisfaction. The Company limits the number of different parties
handling a product, which minimizes faulty deliveries and damage while reducing
delivery time. The Company guarantees same-day or next-day delivery of its
products in virtually all of its markets. Century's distribution system allows
for quicker and less costly delivery of large and heavy items, for which United
Parcel Service and similar services are not as competitively priced.
MAINTAIN HIGH FILL RATES. By carefully managing levels of inventory at
each distribution center and maintaining up to date information on customer
buying patterns, the Company estimates it is able to achieve a fill rate in
excess of 97%. The Company continually monitors the demand for all products and
adjusts inventory levels accordingly to maintain appropriate stock levels at
each distribution center in order to meet customer needs. In addition, each
distribution center is able to offer an additional 100 SKUs in order to meet
specific local needs. Maintaining high fill rates reduces the risk of losing
customers to competition and reinforces customer loyalty.
SERVICE NATIONAL ACCOUNTS. The consolidation of the apartment market has
created a new class of national customers who demand the high quality service,
broad product line, competitive pricing and national distribution capability
which Century offers. Century's high level of service and extensive network of
distribution centers has enabled the Company to develop supply relationships
with national apartment management companies and group purchasing organizations
("GPOs"). In 1995, the Company established a national salesforce to complement
its local salesforce by focusing on servicing these national customers. Of the
largest 50 property management companies, 46 are active customers of Century.
Furthermore, the Company is a preferred supplier to Buyers Access Group, a major
GPO. Sales to the Company's top five national accounts (including GPOs)
increased from 9.1% of overall sales in 1995 to 15.0% in 1997. With its core
base of national accounts and extensive network of distribution centers, Century
believes that it is better positioned to capitalize on the consolidation trends
in the industry than are smaller local and regional suppliers. The Company
plans to open additional distribution centers to expand its national presence.
See "--Growth Strategy."
MARKET OVERVIEW
The Company operates in what the Company estimates to be the $10 billion
MRO industry, which includes such end-users as apartments, hotels/ motels,
nursing homes, prisons, military installations, and schools and universities.
The Company currently markets substantially all of its products to the $2
billion multifamily apartment segment of this industry focusing specifically on
markets with at least 60,000 units in apartment complexes containing more than
75 units. The Company estimates that there are 45 such markets in the United
States, of which the Company services 30 such markets.
The MRO market is highly fragmented and has been traditionally served by a
variety of distribution channels including: numerous local or regional broad-
line suppliers, specialty and industrial suppliers, mail order catalog
companies, retail home centers, and traditional hardware stores. The apartment
MRO market is also highly fragmented with approximately 70-80% of the
distributors being local or regional and producing less than what the Company
estimates to be $5 million in sales. Over the past ten years, the apartment MRO
market has shifted its purchasing from broad-line suppliers and retailers
serving a broad range of end-users and specialized suppliers serving a discrete
product segment of this market, such as plumbing, HVAC or electrical products,
to distributors focused on providing a high level of customer service and a
product mix tailored to meet the specific needs of the apartment MRO market.
The property management industry is consolidating. Over the past few
years, the top 50 national apartment management companies have increased their
share of apartment units managed. In addition, property managers are joining
national GPOs, such as Buyers Access Group, to gain the increased buying power
that large volume purchasing offers. As a result of these trends, property
management companies and GPOs are increasingly
44
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purchasing MRO products from national suppliers who provide broad product
selection, convenient ordering, reliable delivery and other value-added
services.
The apartment MRO market is stable and non-cyclical, as maintenance work is
required regardless of economic conditions. Maintenance managers must keep
their apartments in good repair to retain existing tenants and attract new ones
(e.g., a leaky faucet must be repaired and a vacant apartment must be
refurbished). The apartment MRO industry has been growing over the past few
years, primarily due to increased construction of new apartment buildings and
increased standard amenities in the typical apartment unit. These new features
include microwave ovens, washers/dryers, miniblinds and individual water
heaters. These trends provide increased opportunity for incremental sales for
the apartment MRO suppliers.
Labor represents a significantly larger component than supplies of the MRO
budget for a typical apartment complex. Consequently, while competitive pricing
is an important criterion for selecting a distributor, maintenance managers
value convenient ordering, reliable, prompt delivery, extensive product
selection and other value-added services that allow them to use their budgeted
man-hours most efficiently.
GROWTH STRATEGY
The Company's growth strategy is based on the following elements: (i)
continuing comparable-center sales growth; (ii) entering new geographic markets;
and (iii) actively developing strategies to enter new end-user markets.
CONTINUING COMPARABLE-CENTER SALES GROWTH. Century's strategy for
comparable-center sales growth is focused on: (i) expanding the customer base
served by existing distribution centers and (ii) gaining a larger portion of
each existing customer's MRO dollar, primarily through the selective addition of
SKUs. In each year since 1993, the Company has realized comparable center sales
growth rates ranging from 20.8% to 28.2%.
Century's comparable-center growth is primarily driven by the relationship-
building efforts of its outside salesforce, which regularly calls on prospective
customers. Once the outside salesforce makes a successful sales call, Century's
management believes that its combination of service, reliable same day/next day
delivery, high fill rate and competitive pricing allows it to gain market share
and increase its loyal customer base. Moreover, as the consolidation of the
Company's customer base continues, Century expects to supply additional
properties built or acquired by existing customers and capture a larger share
from the many local and regional competitors which currently comprise 70-80% of
the total apartment MRO market. In addition, the Company expects comparable
center sales will grow due to market growth caused by the increase in
construction of new apartment buildings and the higher standard of amenities in
the typical apartment unit.
Century's management believes that by continuing to provide superior
service to its existing customer base, it is capturing a growing portion of each
customer's MRO dollar. Century has been successful in introducing new products
into existing markets. In 1997, the Company introduced approximately 150 new
products, which contributed more than $3 million to net sales.
ENTERING NEW GEOGRAPHIC MARKETS. The Company plans to open new
distribution centers in carefully selected markets. These target markets
typically contain more than 60,000 apartment units in complexes of more than 75
units. From 1993 to 1997, the Company opened 14 new distribution centers,
generating an aggregate of $48.4 million in sales in 1997. The Company's goal
is to add at least 10 new distribution centers by the end of the year 2000. In
addition, the Company plans to extend the range of its distribution centers
through mail-order and line-haul delivery methods to locations that do not meet
the Company's criteria for a local distribution center. Line-haul delivery is a
distribution method in which freight lines deliver aggregated customer orders to
a location beyond the local delivery range, at which point the orders are
subsequently transferred to local third-party delivery services. The Company
primarily intends to expand into new markets through internal growth, but may
make strategic acquisitions from time to time. The Company is not presently
contemplating any material acquisition opportunities.
NEW END-USER MARKETS. The Company believes substantial growth
opportunities exist by targeting new end-user markets, which it estimates have
$8 billion in yearly sales volume. Potential new markets include high rise
apartment buildings, hotels/motels, nursing homes, prisons, military
installations, and schools and universities. The Company believes that these
new end-user markets have demands similar to those of the apartment MRO market
and can be served by the Company's present distribution channel with the
addition of certain SKUs. The Company is in the investigative and planning
stages with respect to its entry into certain of these end user markets.
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PRODUCT OFFERINGS
Century currently offers over 4,100 cataloged SKUs, providing a full range
of MRO supplies to its customers. Century continually monitors its product
offering to ensure its customers' needs are met. The Company offers high
quality name brand and private label products in the following core categories:
(i) plumbing, (ii) hardware, (iii) HVAC equipment and parts, (iv) lighting, (v)
electrical, (vi) appliances and parts, (vii) janitorial, and (viii) pool items.
Century manages its product offering to maintain turn and fill rates equal to or
higher than its principal competitors.
Century's product offering includes several private branded products which
the Company believes provide it with a distinct competitive advantage in terms
of tailored products and favorable pricing. These products, which include Sun
King(R) pool products, Boss(R) janitorial supplies, Rio(R) ceiling fans, and
DuroGuard(R) air conditioning units, accounted for 7.8% of sales in 1997. Sales
of private branded products have doubled in the past two years. The Company
plans to continue its substantial development of these products over the next
few years. Specifically, in 1999, Century anticipates it will introduce
Aspen(R) brand plumbing fixtures, and Tacoma(R) brand floor tiles.
The Company currently distributes user-friendly catalogs with approximately
4,100 cataloged items. Historically, the Company has added approximately 150
SKUs per year to its catalogs. These products are usually recommended by local
salespeople and then reviewed by a panel at Century's headquarters. Local
distribution center managers have the flexibility to offer selected non-catalog
items at their individual distribution centers. For example, Century's Denver
distribution center stocks snow shovels and ice melt.
The Company believes that its 4,100 catalogued SKUs represent those items
that are most likely to meet the everyday and ongoing needs of the apartment MRO
manager in the Company's target market. The Company's core products represent
the basic continuing requirements of the apartment maintenance person which
change little from year to year. Consequently, the Company attempts to minimize
its exposure to product obsolescence.
For the periods presented, the approximate percentages of the Company's net
sales by product category were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------
PRODUCT CATEGORY 1995 1996 1997
- ---------------------------------------- ------ ------ -----
<S> <C> <C> <C>
Plumbing................................ 26.3% 23.4% 23.6%
HVAC Equipment and Parts................ 28.4 25.5 20.9
Hardware................................ 18.6 19.1 20.7
Lighting................................ 10.6 10.2 10.9
Appliances and Parts.................... 4.6 7.5 9.3
Electrical.............................. 5.0 4.6 4.3
Janitorial.............................. 3.5 3.9 3.8
Pool.................................... 2.9 3.2 2.9
Other................................... 0.1 2.6 3.6
----- ----- -----
100% 100% 100%
===== ===== =====
</TABLE>
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<PAGE>
CUSTOMERS
The Company's customers include local and regional apartment properties as
well as larger property management companies. The Company maintains over 25,000
active accounts, an increase of more than 12,000 over the past three years.
Century defines an active account as a property that generates two or more
orders within a twelve month period.
Century's management believes its customer satisfaction is illustrated by
the recurring revenues generated from its major accounts. In 1997, sales to
four of the Company's top five customers increased by more than 30% over the
prior year.
The consolidation of the large apartment management companies is changing
the way business is conducted in the apartment MRO market. The large apartment
management companies determine overall maintenance budgets and grant preferred
provider status to suppliers with competitive pricing, exceptional quality, and
a national presence. Once a budget has been approved by a national management
company, local maintenance managers are primarily responsible for making the
actual MRO repair decisions and purchases.
Many property management companies have joined GPOs such as Buyers Access
to replicate the purchasing advantages of the larger property managers. Buyers
Access requires vendors to have a national presence in addition to a broad
product selection, competitive pricing, and a sophisticated billing system.
Century is a preferred provider to Buyers Access and eight out of the 10 largest
apartment management companies.
Management believes that the Company's business platform is transferable to
other end-users with similar products and operating efficiencies that are found
in the apartment MRO market, including the lodging, health care, government
institutions and educational facilities segments of the MRO market.
SALES AND MARKETING
Century's marketing and sales strategy is based on providing the best
possible quality service to its customers. The Company's combination of inside
and outside salesforces provides it with what it believes to be a competitive
advantage over competitors that take orders at a centralized location.
Outside Sales Staff. Century employs 116 commission-based local outside
sales personnel, who are based at the Company's distribution centers and are
responsible for maintaining close customer relationships and generating new
business through regular visits. Each local outside salesperson typically makes
15-20 sales visits per day. The outside salesforce generally does not take
customer orders, allowing it to focus on its core function. In addition, the
outside salesforce provides customers with information on products and
promotions, provides value-added services such as assistance with inventory
management and training issues, and serves as the focal point for customer
feedback.
Inside Salesforce. The Company employs 84 inside salespeople who are based
locally or regionally and are primarily responsible for receiving customer
orders and providing technical support. Additionally, the inside salespeople
provide customers information on pricing and promotions as well as installation
procedures and other critical characteristics which help them determine which
products are best suited to their specific needs. The Company encourages
customers to place all orders with the inside sales staff in order to allow the
outside sales staff to focus on building customer relationships. Providing a
local/regional inside salesforce reinforces customer relations as customers
usually place orders with the same group of salespeople, who are familiar with
the customers' needs and order history.
National Sales Force. The Company employs seven salespeople who are
responsible for fostering and maintaining relationships with national property
management companies and GPOs. The national sales force negotiates contract
terms, including pricing and minimum purchase requirements.
The Catalogs. The Century Maintenance Catalog(R) and the Century
Maintenance Supply A/C and Heating Parts Catalog(R) include over 4,100 SKUs and
are annually distributed to approximately 50,000 active and prospective
47
<PAGE>
customers. The catalogs are complete with drawings (of most products),
specifications and pricing which facilitate the ordering process and help the
customer select the appropriate product.
Educational Classes. Century provides educational classes to its customers
at most of its distribution centers. Classes are offered in the areas of basic
electrical systems, A/C and heating, appliance repair, refrigeration control
circuits, pool chemistry and EPA refrigerant recovery. Century has tested and
EPA certified over 20,000 technicians on refrigerant recovery. The Company
charges a nominal fee to cover the cost of the EPA classes, and the other
classes are offered free of charge.
Sales Terms. The Company's sales terms are generally net 30 days for
customers meeting its credit requirements.
COMPETITION
The Company believes that the principal competitive factors in the
distribution of repair and maintenance products to the apartment housing market
and similar markets are customer service, the quality of products offered,
reliability of delivery, product pricing and sales relationships. The Company
believes it competes favorably with respect to these factors.
The Company competes in each of its regional markets with a number of
suppliers, including such national firms as Wilmar Industries ("Wilmar") and
Maintenance Warehouse/America Corp. ("Maintenance Warehouse"). Wilmar is the
Company's most direct competitor in terms of product line and method of
distribution, while Maintenance Warehouse is primarily a mail-order company.
The Company believes that it distinguishes itself from these national
competitors with its local sales focus and direct delivery from its local
distribution centers. Management also believes that the Company's strategies
build a high degree of customer loyalty through its strong local market
presence. In addition, the Company competes with local or regional broad-line
suppliers, specialty and industrial suppliers, other mail order catalog
companies, retail home centers, and traditional hardware stores.
DISTRIBUTION
The Company delivers over 90% of its sales using its own fleet of trucks,
the most of any major competitor. Each truck is driven by an employee who has a
working knowledge of the distribution center's products and customers. The
Company operates its own fleet of trucks in order to maintain complete control
of the delivery process, an approach that the Company's management believes
makes it the most reliable in the industry. Management believes the additional
cost Century spends on operating its trucks is minimal considering the value-
added service it provides its customers. Delivery is free for orders of $50.00
or more. Furthermore, the industry trend toward increased order size will
benefit companies like Century which operate their own fleet of trucks since
each delivery can carry more items at little or no additional cost.
Typically, orders are placed via 1-800 or local telephone calls to one of
the Company's inside salespeople located in the nearest call center. The inside
salespeople confirm the availability of the product ordered and then enter
customer orders into the fully-computerized order processing system. In many
locations, orders placed before 10:00 a.m. are guaranteed to be delivered on the
same day. Orders placed before 5:00 p.m. are virtually always received by the
customer on the following day.
Additionally, Century ships 5% of its sales through mail order and 2% of
its sales through its line-haul delivery method.
OPERATIONS
In managing its inventory, Century seeks to maintain a steady balance
between providing the customer optimal service and limiting costs. Century has
several mechanisms in place to track, measure, replenish and optimize the use of
inventory in all Company locations, including monthly tracking, physical counts,
and cycle counting. In 1997, the Company estimates that it maintained an
average fill rate of over 97% while achieving an inventory turnover of 5.6x.
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Century's distribution centers are monitored monthly by the finance,
operations, and purchasing departments at corporate headquarters. Each center
is measured on deliveries, credits, expenses, customer contact, total sales,
inventory and surplus inventory dollars, and the percentage of non-catalog and
"dead" stock product. In addition, locations are graded on sales/inventory
ratios and inventory turnover. Furthermore, beginning in 1995, Century
instituted a cycle count program. All Century locations are required to
physically count from 50 - 100 items four days per week, or approximately 200
days per year. The Nationwide distribution centers will implement a cycle
counting program upon conversion to the new MIS system. See "--MIS System."
SUPPLIERS AND PURCHASING
Century currently purchases products from approximately 600 vendors. In
1997, no Company vendor accounted for more than 5% of purchases in 1997, and the
top ten vendors accounted for less than 35% of total purchases.
The Company's use of volume purchasing has enabled it to benefit from
favorable pricing and payment terms in the past. The benefit the Company
derives from volume-based terms is expected to increase as a result of increased
sales volume and from the implementation of a new centralized purchasing system,
expected to be completed in early 1999.
The Company's management believes it has good relationships with its
vendors and, to date, has not experienced any difficulty obtaining products in
sufficient quantities at competitive prices.
MIS SYSTEM
Century's management and information system is a comprehensive sales,
order-entry, inventory and reporting system. The current hardware and software
configuration is applied on a regional basis, to accommodate local and regional
market conditions, and to achieve desired processing response times and
ultimately enhance service levels. Presently, each regional reporting area has
its own distinct database and network.
The capabilities of the Century system allow the Company to analyze
historical customer buying patterns, in addition to managing the sales, credit
and collections, order-entry and financial reporting functions. Optimal
inventory levels are calculated real-time on a per SKU basis.
Century is in the midst of installing a new fully integrated and
centralized system, which will provide all of the capabilities of the old
system, as well as integrate the whole Company together on one database and
network. The new system is expected to increase profitability through the
centralization of the purchasing, credit and collections functions. The
Company's system will include a second server, providing backup processing
capability. Together with the new operating software, Century will have the
additional capabilities of a Windows-based environment, more flexible invoicing
and the ability to consolidate multiple purchase orders from each distribution
center and group them by product category and vendor. As of May 1, 1998, the
new system had been installed in four of the centers, with the remaining centers
scheduled to be converted over the next ten months. Full implementation should
be complete in early 1999. The design and implementation of this new system is
a complex project. Unanticipated problems may delay implementation of the
system or cause it to perform below anticipated service levels. Failure to
implement the transition to the new system expeditiously could hamper
administrative efficiencies the Company expects to gain as described above.
FACILITIES
The Company currently operates in 30 different geographic markets, each
with a distribution center ranging in size from 9,798 to 38,000 square feet.
The Company leases all of its distribution centers, with lease expiration dates
ranging from March 1999 to May 2003. Management believes significant
additional capacity can be added at minimal cost to most of the locations
utilizing available contiguous space. Century is in the process of constructing
a new headquarters in Houston, Texas, approximately 20 miles from its existing
headquarters which it expects to complete in late 1998. The new 114,000 square
foot facility will allow the Company to centralize corporate functions such as
purchasing, receivables, accounting, national sales, and catalog production.
The existing
49
<PAGE>
Houston distribution center will move into this new facility when it is
completed. The project began mid-1997 and is expected to be completed in late
1998.
GOVERNMENT REGULATION AND ENVIRONMENTAL MATTERS
The Company and its customers and are subject to Federal and state
regulation in the United States, as well as regulation by foreign governments,
and the Company cannot predict the extent to which future legislative and
regulatory developments concerning its practices and products may affect the
Company. The Company is also subject to numerous federal, state and local laws
and regulations relating to such matters as safe working conditions, fire hazard
control and the handling and disposal of hazardous or infectious materials or
substances and emissions of air pollutants. The Company leases properties which
are subject to environmental laws and regulations. There can be no assurance
that the Company will not be required to incur significant costs to comply with
such laws and regulations in the future or that such laws or regulations will
not have a material adverse effect upon the Company's business, financial
condition or results of operations. The Company believes it is currently in
material compliance with all applicable laws and regulations.
LEGAL PROCEEDINGS
The Company is party to lawsuits and other proceedings, including suits
relating to product liability and patent infringement. While the results of
such lawsuits and other proceedings cannot be predicted with certainty,
management does not expect that ultimate liabilities, if any, will have a
material adverse effect on the financial position or results of operations of
the Company.
TRADEMARKS
The Company is not able to register the trademarks "Century Maintenance
Supply" or "Century" with the United States Patent and Trademark Office because
a third party owns a federal registration for the mark "Century." The Company,
at this time, is not prevented from using the Century name; however, it is
possible that this third party could bring an infringement action against the
Company for the use of the name. If an infringement action were successful, it
is possible that the Company would be prohibited from using the Century name on
a regional, or possibly national, basis.
EMPLOYEES
As of June 30, 1998, the Company employed 614 full-time employees and 11
part-time employees. None of the Company's employees are represented by unions
and the Company considers its employee relations to be good.
50
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following individuals are the executive officers and directors of the
Company:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Dennis C. Bearden 48 Chief Executive Officer and Director
Charles L. Littlepage 36 Chief Operating Officer and Director
Richard E. Penick 42 Chief Financial Officer and Director
Don R. Hodina 44 President of Nationwide Division
Mark J. Doran 34 Director
William C. Johnson 58 Director
Jon D. Ralph 34 Director
J. Frederick Simmons 43 Director
Ronald P. Spogli 50 Director
Dennis C. Bearden is Chief Executive Officer and director of the Company.
Mr. Bearden has held these positions since the Company's inception in 1988. Mr.
Bearden entered the multifamily apartment market in 1973 by forming Century
Airconditioning Supply, which sold air conditioning components to apartment
communities in the Houston area.
Charles L. Littlepage is Chief Operating Officer and became a director of
the Company after the Recapitalization. Mr. Littlepage has been with the
Company since February 1988 and was named Chief Operating Officer in September
1997. Mr. Littlepage also served as the national purchasing director from
January 1995 to September 1997 and Austin branch manager from February 1988 to
September 1997. In addition, he was on the Executive Committee for the Austin
Apartment Association and served as a board member for both the Texas and Austin
Apartment Associations. Prior to joining the Company, Mr. Littlepage served as
a manufacturer's representative from 1980 to 1988.
Richard E. Penick is Chief Financial Officer, a position he has held since
joining the Company in September 1992, and became a director of the Company
after the Recapitalization. Prior to joining the Company, Mr. Penick was a
principal for the accounting firm of Penick and Penick. He has provided
accounting and other professional services to Mr. Bearden and the Company since
1977. Mr. Penick is a Certified Public Accountant.
Don R. Hodina is President of Nationwide Division of the Company. Mr.
Hodina has been with the Company since July 1997 following the acquisition of
the Nationwide Apartment Supply. Mr. Hodina served as President of Nationwide
since its inception in 1992. In 1985, Mr. Hodina formed Maintenance
Headquarters in Indianapolis which became Nationwide Apartment Supply in 1992.
Mark J. Doran became a director of the Company in connection with the
Recapitalization. Mr. Doran joined an affiliate of FS&Co. in 1988 and became a
Principal in January 1998, where his responsibilities include analyzing
potential investments and participating in strategic and financial initiatives
as they relate to portfolio companies. Prior to joining FS&Co., Mr. Doran spent
two years at Kidder, Peabody & Co. Incorporated where he served as a Corporate
Finance Analyst in the High Yield Bond Department. Mr. Doran is also a director
of AFC Enterprises, Inc. and Advance Stores Company, Incorporated.
William C. Johnson became a director of the Company in connection with the
Recapitalization. Mr. Johnson served as Chief Executive Officer of Grolier
Incorporated, a publishing and printing company, from March 1990 to December
1994, and served as Chairman of the Board and Chief Executive Officer of
Fingerhut Corporation, a retail catalog company, from 1982 to 1989. Mr. Johnson
has been a director of Brylane Inc., a retail catalog company, since 1994 and
served as its Vice Chairman from June 1995 to April 1998.
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<PAGE>
Jon D. Ralph became a director of the Company in connection with the
Recapitalization. Mr. Ralph joined an affiliate of FS&Co. in 1989 and became a
Principal in January 1998, where his responsibilities include analyzing
potential investments and participating in strategic and financial initiatives
as they relate to portfolio companies. Prior to joining FS&Co., Mr. Ralph spent
three years at Morgan Stanley & Co. Incorporated where he served as an Analyst
in the Investment Banking Division. Mr. Ralph is also a director of
EnviroSource, Inc., The Pantry, Inc., and Hudson Respiratory Care Inc.
J. Frederick Simmons became a director of the Company in connection with
the Recapitalization. Mr. Simmons joined an affiliate of FS&Co. in 1986 and
became a Principal in 1991, where his responsibilities include analyzing
potential investments and participating in strategic and financial initiatives
as they relate to portfolio companies. Mr. Simmons is also a director of
EnviroSource, Inc., Buttrey Food and Drug Stores Company, and Advance Stores
Company, Incorporated.
Ronald P. Spogli became a director of the Company in connection with the
Recapitalization. Mr. Spogli is a founding principal of an affiliate of FS&Co.,
which was founded in 1983, where his responsibilities include analyzing
potential investments and participating in strategic and financial initiatives
as they relate to portfolio companies. Mr. Spogli is the Chairman of the Board
and a director of EnviroSource, Inc. Mr. Spogli also serves on the Boards of
Directors of Calmar Inc., Buttrey Food and Drug Stores Company, AFC Enterprises,
Inc., Hudson Respiratory Care Inc. and Advance Stores Company, Incorporated.
Directors of the Company are elected annually and hold office until the
next annual meeting of stockholders and until their successors are duly elected
and qualified. The Board of Directors has no current or proposed committees.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and the three other most highly compensated executive
officers who earned salary and bonus in excess of $100,000 for services rendered
in all capacities to the Company and its subsidiaries for the fiscal year ended
December 31, 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) COMPENSATION(2)
- ------------------------------------- -------- --------- -------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Dennis C. Bearden.................... 1997 $ 125,000 $ -- -- $ 12,500
Chief Executive Officer
Charles L. Littlepage................ 1997 $ 93,004 $ -- -- $ 9,320
Chief Operating Officer
Richard E. Penick.................... 1997 $ 95,000 $ -- -- $ 11,050
Chief Financial Officer
Don R. Hodina........................ 1997 $ 111,027 $ -- -- $ 12,132
President of Nationwide Division
</TABLE>
_______________
(1) During 1997, no Named Executive Officer received perquisites and other
personal benefits, securities or property in an aggregate amount in excess
of the lesser of $50,000 or 10% of the total of such Officer's salary and
bonus nor did any such Officer receive any restricted stock award or stock
appreciation right.
(2) Represents the annual lease table value of company car and payments by the
Company under its 401(k) plan.
52
<PAGE>
EMPLOYMENT AGREEMENTS WITH MESSRS. BEARDEN AND PENICK
In connection with the Recapitalization, the Company entered into
employment agreements with Dennis C. Bearden and Richard E. Penick, and a
noncompete agreement with Mr. Bearden (which noncompete agreement also binds
Century Airconditioning Supply, Inc. and Air Management Supply, Inc. See
"Certain Transactions--Noncompete Agreement"). Mr. Bearden and Mr. Penick will
receive an annual base salary in the amount of $125,000 and $115,000,
respectively, as well as an annual cash bonus (either pursuant to a bonus or
incentive plan of the Company or otherwise) in an amount to be determined by the
Board (or a committee thereof) in its sole discretion. Pursuant to the
employment agreements, in the event that employment is terminated by the Company
without "cause" (as defined therein), or if the employee resigns for "good
reason" (as defined), the Company will be required to pay such employee's base
salary (and to continue certain benefits) for 24 months, and to pay a portion of
the employee's annual bonus, based on the previous year's bonus, accrued up to
the date of termination. In addition, in the event that employment is
terminated by the Company without "cause" or if the employee resigns for "good
reason," and a Change in Control (as defined) of the Company has occurred within
the two year period preceding such date of termination, then, in addition to the
obligations of the Company to continue such employee's benefits and to pay the
portion of the employee's annual bonus as described above, but in lieu of the
Company's obligation to continue to pay such employee's base salary for the 24-
month period following such date of termination, the Company shall be required
to pay to the employee, in a lump sum in cash within 30 days after the date of
such termination, an amount equal to two times the sum of the employee's base
salary (as in effect on the date of termination or such higher rate as may have
been in effect at any time during the 90 day period preceding the date of
termination) and the annual bonus paid to such employee for the Company's last
full fiscal year. The employment agreements also impose restrictions relating
to the disclosure of confidential information and prohibit the employee from
knowingly becoming involved in a conflict of interest with the Company.
COMPENSATION OF DIRECTORS
Directors of the Company receive no compensation as directors. Directors
are reimbursed for their reasonable expenses in attending meetings.
RETIREMENT PLAN
Employees of the Company may contribute to a 401(k) plan. Employees must
have 12 months of service and must have attained age 21 to be eligible to
participate in the 401(k) plan and may contribute a minimum of 2.0%, up to a
maximum of 15.0% of their annual compensation. The Company matches
contributions at a rate of 50.0% for contributions by the employee, up to 8.0%
of such employee's compensation. The Company contributed approximately
$170,000, $241,000 and $297,000 in 1995, 1996 and 1997, respectively, as
matching funds to the plan. No discretionary, lump-sum contributions were made
in 1995, 1996 and 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company determines the compensation of the
executive officers.
STOCK OPTION PLAN
Existing Options
In connection with the Recapitalization, the Company entered into
agreements with substantially all of the holders of outstanding options to
purchase common stock of the Company ("Existing Options") previously granted
under the Company's 1997 Stock Incentive Plan. Under these agreements, options
to purchase fewer than 1,500 shares of the Company's common stock (before the
stock split pursuant to the Recapitalization) were canceled for the right to
receive a cash payment per share equal to the difference between the cash merger
consideration of approximately $23 per share (the "Cash Merger Consideration")
and the exercise price per share (the "Cash Option Consideration"). For options
to purchase 1,500 or more shares of the Company's common stock, 50% were
retained by the holders and remain outstanding and were adjusted for the stock
split, and 50% were canceled for the right to receive the Cash Option
Consideration.
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<PAGE>
The following table contains information concerning the stock option grants
made to each of the Named Executive Officers named below for the year ended
December 31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
OF ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE PRICE TERM(1)
OPTIONS EMPLOYEES IN PER SHARE ($/ EXPIRATION ---------------------------
NAME GRANTED (#) FISCAL YEAR(%) SH) DATE (2) 5%($) 10%($)
- ----------------------- ----------- ------------- -------------- ---------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Charles L. Littlepage... 10,000 2.44% $4.00 7/1/00 6,305 13,240
Richard E. Penick....... 30,000 7.33% $4.00 7/1/00 18,915 39,720
Don R. Hodina........... 140,000 34.19% $7.00 7/11/00 154,473 324,380
</TABLE>
____________
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
three-year option term will be at the assumed 5% or 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the option
grants made to the executive officer.
(2) These options became vested and exercisable when granted.
No options were exercised by the Named Executive Officers for the fiscal
year ended December 31, 1997.
New Option Plan
In connection with the Recapitalization, the Company adopted a new stock
option plan (the "Option Plan"), permitting grants of options to purchase
approximately 13% of Century's common stock. The Option Plan and each
outstanding option thereunder are subject to termination in the event of a
change in control of Century, as more particularly described in the Option Plan.
In addition, all options granted pursuant to the Option Plan will terminate 30
days after termination of employment (unless termination was for cause, in which
event an option will terminate immediately) or 180 days in the event of
termination due to death or disability. The sale of shares received upon the
exercise of options are subject to rights of refusal first in favor of the
Company and then in favor of Mr. Bearden and FS&Co. on a pro rata basis. In
addition, any shares received upon exercise of an option are subject to a
repurchase right in favor of the Company at the greater of cost or book value
for a period of six months after termination of the optionee's employment
(provided, that if employment is terminated due to death or disability, such
shares shall be repurchased for fair market value as determined in good faith by
the Board). Shares received upon the exercise of options are subject to certain
obligations to sell at the request of FS&Co., should FS&Co. propose to sell all
or a substantial portion of its interest in the Company to a third-party buyer
(with the purchase terms for the optionee and FS&Co. to be identical), or should
the optionee's employment or other relationship with the Company terminate. Such
shares also possess certain co-sale rights in favor of the optionee should
FS&Co. propose to sell all or any portion of its interest in the Company to a
third-party buyer, upon the same terms as those offered by such buyer to FS&Co.
The rights of first refusal, repurchase rights and co-sale rights will terminate
upon the Company's initial public offering.
Options to purchase 5.0% of the initial outstanding shares of Century's
common stock ("Time Vesting Options"), which will be granted in 1.0% annual
increments, will vest over a three-year period from date of grant in equal
annual installments or, alternatively, granted options will vest in full upon a
sale of the Company. Time Vesting Options will terminate on the seven-year
anniversary of the grant date. These options will be granted at an exercise
price equal to the then estimated fair market value of the Company's common
stock (as determined by the Board). In addition, options to purchase 50,000
shares of the Company's common stock were granted to Mr. Johnson, who became a
director of the Company upon consummation of the Recapitalization, which options
were fully vested on the date of grant.
Options to purchase approximately 6.5% of the initial outstanding shares of
the Company's common stock at an exercise price of $10.00 per share
("Performance Options") will be earned in installments based upon
54
<PAGE>
satisfaction of financial performance targets over a four-year period. The
Performance Options will terminate on the seven-year anniversary of the grant
date.
In addition, options to purchase approximately 1.5% of the initial
outstanding shares of the Company's common stock at an exercise price of $10.00
per share ("Bearden Performance Options") have been granted to Mr. Bearden and
will be earned in installments based upon satisfaction of financial performance
targets over a three-year period. However, the Bearden Performance Options will
not become exercisable until one year after the vesting date, which is the same
date such options are earned (except in the event of a sale of the Company, in
which case the one year delay will become inapplicable), and will terminate on
the seven-year anniversary of the grant date.
The following table sets forth information concerning options granted to
each of the Named Executive Officers under the Option Plan:
INDIVIDUAL GRANTS
-----------------
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
OF ASSUMED ANNUAL RATES
NUMBER OF PERCENT OF OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE PRICE TERM(1)
OPTIONS EMPLOYEES IN PER SHARE ($/ EXPIRATION ---------------------------
NAME GRANTED (#) FISCAL YEAR(%) SH) DATE (2) 5%($) 10%($)
- ------------------------- ----------- ------------- -------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dennis C. Bearden........ 180,000(2) 19.0% $10.00 7/8/05 732,600 1,708,200
Richard E. Penick........ 48,000(3) 5.1% $10.00 7/9/05 195,360 455,520
Charles L. Littlepage.... 48,000(3) 5.1% $10.00 7/9/05 195,360 455,520
</TABLE>
____________
(1) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
seven-year option term will be at the assumed 5% or 10% levels or at any
other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the option
grants made to the option holder.
(2) Represents the Bearden Performance Options.
(3) All of these options are Performance Options.
Options representing the right to purchase an aggregate of 671,000 shares
of the Company's common stock have been granted under the Option Plan to
individuals other than the Named Executive Officers set forth in the table
above. All of these options are Performance Options.
55
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information, as of June 30, 1998,
with respect to the beneficial ownership of capital stock of the Company by (i)
each person who beneficially owns more than 5% of such shares, (ii) each of the
Named Executive Officers, (iii) each director of the Company and (iv) all Named
Executive Officers and directors of the Company as a group based on the
consummation of the Recapitalization.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENT OF SHARES OF PERCENT
NAME OF BENEFICIAL OWNER STOCK(1) CLASS PREFERRED STOCK OF CLASS
- ---------------------------------------- ---------------- ------ --------------- ------------
<S> <C> <C> <C> <C>
Freeman Spogli & Co. LLC(2).............. 6,757,618(4) 55.2% 40,000(6) 10.0%
Ronald P. Spogli(2)
J. Frederick Simmons(2)
Mark J. Doran(2)
Jon D. Ralph(2)
William C. Johnson(3).................... 125,000 1.0% -- --
Dennis C. Bearden(8)..................... 3,917,382(4) 32.0% 80,000(7) 20.0%
Charles L. Littlepage(8)................. 102,137(5) * -- --
Richard E. Penick(8)..................... 65,823(5) * -- --
Don R. Hodina(8)......................... 161,048(5) 1.3% -- --
All Named Executive Officers and......... 11,129,008 90.8% -- --
directors of the Company as a group (9
individuals)
</TABLE>
__________________
* Less than 1%.
(1) Reflects a stock split of 2.30068:1 which was effected concurrently with the
Recapitalization.
(2) Represents shares of common stock that will be held of record by FS Equity
Partners IV, L.P. ("FSEP IV"). As general partner of FSEP IV, FS Capital
Partners LLC ("FS Capital LLC") has the sole power to vote and dispose of
the shares owned by FSEP IV. Messrs. Spogli, Simmons, Doran and Ralph and
Bradford M. Freeman, William M. Wardlaw, John M. Roth, Charles P. Rullman
and Todd W. Halloran are the sole managing members of FS Capital LLC, and as
such may be deemed to be the beneficial owners of the shares of the common
stock and rights to acquire the common stock owned by FSEP IV. The business
address of Freeman Spogli & Co. LLC, FSEP IV, FS Capital LLC, and its sole
managing members is 11100 Santa Monica Boulevard, Suite 1900, Los Angeles,
California 90025.
(3) Includes an option to purchase 50,000 shares that is vested and exercisable.
(4) The shares held by FSEP IV do not include an option from Century
Airconditioning Supply, Inc. ("CAC") (an entity solely owned by Dennis C.
Bearden) to purchase 167,382 shares of common stock at a purchase price of
$10.00 per share. See "Certain Transactions--Payments Relating to the
Recapitalization."
(5) Shares of Common Stock for Charles L. Littlepage, Richard E. Penick and Don
R. Hodina represent shares that will be held of record plus any shares
issuable pursuant to options held by the person in question that may be
exercised within 60 days after the date of this Prospectus. Mr. Littlepage
holds options to purchase 11,503 shares of common stock of the Company
(after the stock split) at a purchase price of $1.74 per share; Mr. Penick
holds options to purchase 34,510 shares of common stock of the Company
(after the stock split) at a purchase price of $1.74 per share; and Mr.
Hodina holds options to purchase 161,048 shares of common stock of the
Company (after the stock split) at a purchase price of $3.04 per share. All
of these options are vested and exercisable.
(6) Represents Series B Preferred Stock purchased by FS&Co. in the Private
Placement.
(7) Represents Series B Preferred Stock purchased by Dennis C. Bearden in the
Private Placement.
(8) The business address of these individuals is Century Maintenance Supply,
Inc., 9100 Winkler Drive, Houston, Texas 77017.
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CERTAIN TRANSACTIONS
SHAREHOLDERS' AGREEMENT
Amended Shareholders' Agreement
The stockholders of the Company's common stock were party to a
shareholders' agreement with the Company and Mr. Bearden which was amended and
restated in connection with the Recapitalization (the "Amended Shareholders'
Agreement"). Under the Amended Shareholders' Agreement, all Continuing
Stockholders (other than Mr. Bearden) were granted "tag along" rights which
provide that if FS&Co. or Mr. Bearden sell all or any part of their shares of
the Company's common stock to a third party, the non-selling stockholders have
the right to sell up to the same percentage of their shares to that third party
on the same terms and conditions. The non-selling stockholders only have tag
along rights on a sale by Mr. Bearden if FS&Co. exercises its own tag along
rights. These rights terminate upon the Company's initial public offering.
Continuing Stockholders (other than Mr. Bearden) are subject to a "drag
along" obligation which provides that if FS&Co. wishes to sell all of its common
stock of the Company to a third party, FS&Co. may cause such Continuing
Stockholders to sell all of their capital stock (common or preferred) to such
third party on the same terms and conditions.
The Amended Shareholders' Agreement provides that no Continuing Stockholder
(other than Mr. Bearden) may sell any of its capital stock in the Company for a
period of two years after the Recapitalization; this limitation terminates upon
the Company's initial public offering. The Amended Shareholders' Agreement also
contains a right of first refusal first in favor of the Company, then in favor
of Mr. Bearden and FS&Co. on a pro rata basis, and then in favor of the
Company's other stockholders on a pro rata basis, as well as certain transfer
restrictions and obligations on termination (including repurchase rights upon
the death, divorce or termination of employment of a Continuing Stockholder that
operate in a manner substantially identical to the right of first refusal).
There are employees of the Company who hold Existing Options who do not
currently own any of the Company's common stock. See "Management--Stock Option
Plan." If these employees exercise their options, the shares received upon
exercise will become subject to the Amended Shareholders' Agreement.
New Shareholders' Agreement
In connection with the Recapitalization, FS&Co., Mr. Bearden and Century
Airconditioning Supply, Inc. ("CAC") entered into a new shareholders' agreement
(the "Shareholders' Agreement"). Under the Shareholders' Agreement, FS&Co. and
Mr. Bearden have the right to purchase their pro rata share of certain new
issuances of capital stock by the Company. These rights will terminate upon the
Company's initial public offering or once such party's percentage ownership in
the Company (calculated on a fully diluted basis) falls below 10%. In addition,
the Shareholders Agreement provides that if FS&Co. or Mr. Bearden sells all or
any part of their shares in the Company to a third party, the non-selling party
has the right to sell up to the same percentage of their shares to that third
party on the same terms and conditions. These rights terminate upon the
Company's initial public offering. If FS&Co. wishes to sell its entire interest
in the Company, it has the right to cause Mr. Bearden to sell all of his shares
of capital stock (common or preferred) to such third party on the same terms and
conditions. These rights terminate once FS&Co.'s percentage ownership in the
Company (calculated on a fully diluted basis) drops below 20% or drops below the
percentage then held by Mr. Bearden (provided that no effect shall be given to
any shares purchased by Mr. Bearden after the closing of the Recapitalization).
In the Shareholders' Agreement, FS&Co. will receive a right of first offer with
respect to proposed sales of capital stock of the Company by Mr. Bearden or CAC,
and CAC will transfer its securities of the Company to Mr. Bearden should Mr.
Bearden ever fail to control 100% of the outstanding capital stock of CAC. These
rights terminate in the same manner as FS&Co.'s drag along obligation described
above. In the Shareholders' Agreement, each of FS&Co. and Mr. Bearden agreed
not to pledge, hypothecate or otherwise encumber any capital stock of the
Company held by them, and also agreed not to transfer shares to a third party,
except for certain transfers to affiliates (or to a family trust established by
Mr. Bearden) or transfers by FS&Co. to its partners after the Company's initial
public offering. In addition, for a period of two years from the closing of the
Recapitalization, unless consented to by Mr. Bearden, FS&Co. will not sell its
capital stock in the Company to certain competitors of the Company; provided,
that in the event that the
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Company's actual operating cash flow during any 12 month period during such two
year period exceeds certain targets projected by management (as defined in the
Shareholders' Agreement), FS&Co. will then be allowed to sell its capital stock
to any potential acquiror, including such competitors. These restrictions upon
transfer terminate on the earlier of two years after consummation of the
Recapitalization or upon the Company's initial public offering; provided, that
FS&Co. and Mr. Bearden will remain subject to the lockup periods described
below.
The Shareholders' Agreement provides that the Board of Directors of the
Company shall initially consist of five members nominated by FS&Co. and three
members nominated by Mr. Bearden. See "Management--Directors and Executive
Officers." The members of the Board will include two independent directors if
necessary in connection with the Company's initial public offering, which
directors will be elected by a majority of the Board and reasonably acceptable
to Mr. Bearden. Notwithstanding the foregoing, the Shareholders' Agreement
provides that no action of the Company, which under Delaware law would have
required the prior approval of a majority of the Company's stockholders, will be
taken unless and until a meeting of the Company's Board of Directors will have
been held upon prior notice duly given in accordance with the bylaws of the
Company. The rights of FS&Co. and Mr. Bearden described in this paragraph will
terminate once such parties' percentage ownership in the Company (calculated on
a fully diluted basis) drops below 20% and 10%, respectively.
The Shareholders' Agreement provides that at any time beginning six months
after the Company's initial public offering, each of FS&Co. and Mr. Bearden
shall have the right to two demand registrations; provided, that to the extent
that either of FS&Co. or Mr. Bearden wishes to join in the other's demand
registration, then the parties shall participate together in such registration
on a pro rata basis. Following the Company's initial public offering, FS&Co.,
Mr. Bearden and the Company's other stockholders shall have customary piggyback
registration rights; provided, that such stockholders (other than Mr. Bearden)
may be excluded from any such offering, at the discretion of the underwriters
participating in such offering, if such underwriters determine that the
inclusion of such stockholders would adversely impact the relevant offering.
Each of the Company's stockholders (including FS&Co. and Mr. Bearden) agreed to
a lockup period of up to six months if imposed by an underwriter in connection
with the Company's initial public offering and for any other period requested by
an underwriter for any other offering. The Company will pay all customary fees
and expenses in connection with such registrations.
PAYMENTS RELATING TO THE RECAPITALIZATION
Executive officers of the Company who are also stockholders received
payments of an aggregate of approximately $155.5 million in connection with the
Recapitalization, including payments to the Named Executive Officers (Messrs.
Bearden, Littlepage, Penick and Hodina) in the amount of $152.2 million,
$1.4 million, $0.7 million and $1.1 million, respectively. All Continuing
Stockholders of the Company and Company option holders, including such executive
officers, received payments of approximately $178.3 million in connection with
the Recapitalization. FS&Co. received a transaction fee of $4.0 million.
In addition, under the Recapitalization FS&Co. received an option to
purchase 167,382 shares of the Company's common stock from Century
Airconditioning Supply, Inc. ("CAC") at a purchase price of $10.00 per share.
CAC, an entity entirely owned by Mr. Bearden, is currently a shareholder of the
Company. Mr. Johnson received a fully vested option to purchase 50,000 shares
of Common Stock at an exercise price of $10.00 per share in connection with the
Recapitalization. Approximately $3.3 million of borrowings and accrued interest
pursuant to the Company's indebtedness to Mr. Bearden and approximately $5.6
million of borrowings and accrued interest pursuant to the Company's
indebtedness to Mr. Hodina were repaid pursuant to the Recapitalization.
TRANSACTIONS WITH MANAGEMENT
The Company leases facilities in Phoenix, Dallas, San Antonio, Austin,
Tucson, and Newport News from Dennis C. Bearden, the Chief Executive Officer of
the Company, or an entity affiliated with or controlled by Mr. Bearden. Charles
L. Littlepage, the Chief Operating Officer of the Company, has a 10% interest in
a limited partnership that owns the Company's Austin facility. In addition, the
Company's new Houston headquarters is leased from an affiliate of Mr. Bearden.
The Company's Indianapolis facility is leased from an affiliate of Don R.
Hodina, President of Nationwide Division. All of these leases are at market
terms. Lease expense for leases with affiliates has been $0.1 million, $0.1
million and $0.5 million for fiscal 1995, 1996 and 1997, respectively. These
amounts do not include the lease expense for the Company's lease of the
Indianapolis facility or of its Kansas City facility. The Kansas City facility
was leased from an entity affiliated with or controlled by Mr. Bearden until
November 1997, when the Company moved the Kansas City facility to another
location. The Kansas City lease
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expense for fiscal 1995, 1996 and 1997 was $36,000, $51,000 and $40,000,
respectively. Lease expense for the Indianapolis facility for fiscal 1995, 1996
and 1997 was $48,000, $88,200, and $86,175, respectively. See "Business--
Facilities." In addition, the Company was a party to the Common Control Mergers.
See Note 8 to the Consolidated Financial Statements of the Company elsewhere in
this Offering Memorandum.
In connection with the Recapitalization, stock options with a value of
approximately $3.0 million (net of the exercise price) remain outstanding. Such
stock options, together with the common stock being retained by the Continuing
Stockholders, represents approximately 45.9% of the common stock of the Company
on a fully-diluted basis.
TRANSACTIONS WITH CENTURY AIRCONDITIONING SUPPLY
The Company makes convenience sales of inventory, at cost, to CAC and
purchases inventory, at cost, from CAC. In addition, CAC and the Company share
some administrative services, for which CAC pays the Company a management fee
equal to a percentage of CAC's sales. The Company's revenues attributable to
sales of inventory to CAC were $0.8 million, $0.9 million and $1.2 million for
fiscal 1995, 1996 and 1997, respectively. CAC paid management fees to the
Company (with respect to shared administrative services) of $0.1 million, $0.2
million and $0.3 million in 1995, 1996 and 1997, respectively.
NONCOMPETE AGREEMENT
Mr. Bearden is the sole shareholder of CAC, which in turn controls Air
Management Supply, Inc. ("Air Management"). Both CAC and Air Management compete
with the Company in certain sub-markets and with regard to certain products and
customers. In connection with the Recapitalization, Mr. Bearden, CAC and Air
Management entered into a noncompete agreement with the Company whereby they
agreed, for a period continuing until the earlier of ten years or the
termination of Mr. Bearden's employment agreement other than for "cause," and
subject to certain exceptions, not to compete with the Company, to preserve its
confidential information, not to recruit or employ employees of the Company, and
not to solicit customers or suppliers of the Company for competitors. In
particular, and subject to certain exceptions, Mr. Bearden, CAC and Air
Management are prohibited from selling maintenance supplies (which as defined
excludes HVAC, appliance parts and refrigeration parts) not only to apartments
but also to hotels, prisons, nursing homes, hospitals, military installations
and schools and universities. In addition, the Company agreed not to sell HVAC
in southeast Texas (as defined therein) if such sales would cause the aggregate
amount of HVAC sales by the Company for the immediately preceding 12 months to
exceed 12% of the Company's total sales in southeast Texas during the same
period.
PRIVATE PLACEMENT AND REGISTRATION RIGHTS
Mr. Bearden purchased 80,000 shares of the Series B Preferred Stock with a
$8.0 million aggregate liquidation preference and FS&Co. purchased 40,000 shares
of such Series B Preferred Stock with a $4.0 million aggregate liquidation
preference from the Company. In connection with the Private Placement, the
Company entered into an agreement (the "Private Registration Agreement") which
provides that the Company will, upon the request of each of Mr. Bearden (or
transferee of such shares) and FS&Co. (or its transferees), file and use its
best efforts to cause to become effective registration statements for the Series
B Preferred Stock, or, if issued, the Exchange Debentures issuable in exchange
therefor (the "Private Registration Statements"). The Private Registration
Agreement also provides that (i) the Company will bear all costs and expenses
associated with filing the Private Registration Statements and using its best
efforts to cause them to become effective and (ii) the Company will not file the
Private Registration Statements until any exchange offer registration statement
or resale shelf registration statement required by the Registration Rights
Agreement have ceased to be effective and are no longer required to be
effective. See "Summary--The Recapitalization" and "Plan of Distribution."
In addition, in the event that a Voting Rights Triggering Event (as defined
herein) occurs with respect to the Initial Preferred Stock or the Exchange
Preferred Stock issued in exchange therefor, or with respect to the Series B
Preferred Stock, the holders of the Initial Preferred Stock or the Exchange
Preferred Stock and the holders of the Series B Preferred Stock will vote
together as one class to elect the two additional directors provided for in the
Certificate of Designation. Because Mr. Bearden and FS&Co. own securities
representing 30% of such class,
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they may be able to exert significant influence on the results of any such
election. See "Description of Exchange Preferred Stock--Voting Rights."
DESCRIPTION OF NEW CREDIT FACILITY
On July 8, 1998, the Company entered into the New Credit Facility, which
consists of a $125.0 million in senior secured credit facility, consisting of a
$100.0 million term loan facility in two tranches, the $40.0 million Tranche A
Term Facility and the $60.0 million Tranche B Term Facility (the Tranche A Term
Facility and the Tranche B Term Facility collectively defined as the "Term Loan
Facility") and a $25.0 million revolving credit facility (the "Revolving Credit
Facility"). The Revolving Credit Facility has a letter of credit sublimit of up
to $7.5 million.
Use of Proceeds. The entire Term Loan Facility was drawn in connection
with the Recapitalization. The Revolving Credit Facility is available to the
Company and its subsidiaries (i) for working capital and general corporate
purposes of the Company, (ii) for certain permitted acquisitions, and (iii) for
issuing commercial and standby letters of credit.
Amortization, Maturity and Prepayment. The Term Loan Facility amortizes in
quarterly installments over five years for the Tranche A Term Facility and seven
years for the Tranche B Term Facility, and the Revolving Credit Facility matures
on the fifth anniversary of the closing of the Recapitalization. In addition,
borrowings under the New Credit Facility are required to be prepaid with (a) 75%
(or 50% upon satisfaction of a debt to adjusted EBITDA ratio) of the Company's
excess cash flow, (b) 100% of the net proceeds of issuances of debt obligations
of the Company and its subsidiaries, (c) 100% of the net cash proceeds from
asset dispositions of the Company and its subsidiaries, (d) 50% of the net
proceeds of issuances of equity of the Company and its subsidiaries, except that
if an equity issuance occurs other than as part of a Public Equity Offering of
the Company's common stock, then 100% of the net proceeds of such offering are
required to be applied to prepay the New Credit Facility, and (e) 100% of the
net proceeds from insurance recoveries over $1.0 million and condemnations,
after application of such insurance recoveries or condemnation proceeds to
repair the property involved. "Excess Cash Flow," for any period, means EBITDA
(as defined) for such period, less the sum of (a)(i) permitted capital
expenditures, (ii) taxes, (iii) consolidated interest expense, (iv) increases in
Adjusted Working Capital (as defined) for such period, (v) scheduled and
mandatory payments of debts, (vi) voluntary prepayments of the Term Loan
Facility, (vii) payments in connection with purchases of the Company's Capital
Stock; (viii) cash consideration paid for certain permitted acquisitions (but
excluding cash consideration funded by a borrowing under the Revolving Credit
Facility), and (ix) cash dividends paid on the Exchange Preferred Stock to the
extent permitted by the New Credit Facility, plus the sum of: (b)(i) decreases
in Adjusted Working Capital for such period, (ii) refunds of taxes paid in prior
periods, and (iii) proceeds of certain indebtedness.
Voluntary prepayments are permitted in whole or in part, at the option of
the Company, in minimum principal amounts as agreed, without premium or penalty,
subject to reimbursement of the Lenders' redeployment costs in the case of
prepayment of eurodollar borrowings other than on the last day of the relevant
interest period.
Interest and Commitment Fees. The interest rate under the New Credit
Facility is variable and based, at the option of the Company, upon either a
eurodollar rate plus 2.5% (for the Revolving Credit Facility and the Tranche A
Term Facility) and 2.75% (for the Tranche B Term Facility) per annum or a base
rate plus 1.5% (for the Revolving Credit Facility and the Tranche A Term
Facility) and 1.75% (for the Tranche B Term Facility) per annum. If the Company
achieves performance goals as agreed upon, rates under the Tranche A Term
Facility and the Revolving Credit Facility will be reduced in increments as
agreed. The Company also covenanted to enter into specified interest rate
protection arrangements, including interest rate swaps, to reduce the Company's
exposure to fluctuations in the rates of interest payable under the New Credit
Facility. In mid-July, 1998, the Company entered into such interest rate swap
transactions with respect to $50.0 million of borrowings under the Term Loan
Facility. A commitment fee of 0.5% per annum will be charged on the unused
portion of the New Credit Facility.
Collateral and Guarantees. The New Credit Facility is guaranteed by all
existing and subsequently acquired or organized domestic and, to the extent no
adverse tax consequences would result, foreign, subsidiaries of the Company.
The New Credit Facility is secured by a first priority security interest in
substantially all of the properties and assets of the Company and the Subsidiary
Guarantors now owned or acquired later (with customary
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exceptions), including a pledge by the Company of all of the Capital Stock of
the Company's existing and future direct and indirect subsidiaries; provided,
that such pledge shall be limited to 65% of the shares of any foreign subsidiary
to the extent a pledge of a greater percentage would result in adverse tax
consequences to the Company.
Covenants. The New Credit Facility contains covenants restricting the
ability of the Company and the Company's subsidiaries to, among others, (i)
incur additional debt, (ii) declare dividends or redeem or repurchase capital
stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans
and investments, (vi) make capital expenditures, (vii) engage in mergers,
acquisitions and asset sales and (viii) engage in transactions with affiliates.
The Company is also required to comply with financial covenants with respect to
(a) limits on annual aggregate capital expenditures, ranging from $2.0 million
in 1998 to $2.5 million in 2005 (with the right to carry over unspent amounts
for one year), (b) a fixed charge coverage ratio as of the end of any four
fiscal quarters of not less than 1.20 to 1.00 (beginning with the fiscal quarter
ending nearest to March 31, 1999), (c) a maximum leverage ratio decreasing from
4.25 to 1.00 for the third quarter of 1998 to 2.00 to 1.00 for the fourth
quarter of 2001 and thereafter, (d) a minimum EBITDA increasing from $23.0
million in fiscal year 1998 to $55.0 million in fiscal year 2004 and thereafter,
and (e) an interest coverage ratio increasing from 2.25 to 1.00 for the third
quarter of 1998 to 4.50 to 1.00 for the fourth quarter of 2001 and thereafter.
The Company is in compliance, as of October 23, 1998, with the material
provisions of the New Credit Facility.
Events of Default. Events of default under the New Credit Facility include,
but are not limited to, the following material events of default: (i) the
Company's failure to pay principal when due or interest after a grace period,
(ii) the Company's material breach of any covenant, representation or warranty
contained in the loan documents, (iii) customary cross-default provisions, (iv)
events of bankruptcy, insolvency or dissolution of the Company or its
subsidiaries, (v) the levy of certain judgments against the Company, its
subsidiaries, or their assets, (vi) the actual or asserted invalidity of
security documents or guarantees of the Company or its subsidiaries, (vii) a
change of control of the Company and (viii) failure to notify the lenders of any
event of default or material litigation, or failure to permit the lenders access
to the Company's financial records for examination thereof. If a default under
the New Credit Facility occurs and is neither cured nor waived, the lenders may
elect to accelerate the maturity of the Company's indebtedness thereunder.
The preceding discussion of certain of the provisions of the New
Credit Facility is not intended to be exhaustive and is qualified in its
entirety by reference to the provisions of the New Credit Facility. Copies of
the New Credit Facility are available upon request from the Company.
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DESCRIPTION OF THE EXCHANGE PREFERRED STOCK
The following is a summary of certain provisions of the Certificate of
Designation and the Exchange Preferred Stock. A copy of the Certificate of
Designation and the form of Exchange Preferred Stock is available upon request
to the Company at the address set forth under "Available Information." The
following summary of certain provisions of the Certificate of Designation does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Certificate of Designation. For
purposes of this Section, references to "the Company" shall mean Century
Maintenance Supply, Inc. excluding its subsidiaries. Other capitalized terms
used but not defined herein are defined in the Certificate of Designation.
GENERAL
The Company will issue up to 280,000 shares of its 13 1/4% Senior
Exchangeable PIK Preferred Stock due 2010, $.001 par value per share, designated
as "13 1/4% Senior Exchangeable PIK Preferred Stock due 2010" pursuant to the
Exchange Offer. Concurrently with the Offering, FS&Co. and Dennis C. Bearden,
Chief Executive Officer of the Company, purchased an aggregate of 120,000 shares
of 13 1/4% Series B Senior Exchangeable Preferred Stock in a private placement
(the "Private Placement"). The Series B Preferred Stock is not eligible for
exchange pursuant to this Exchange Offer. See "Certain Transactions--Private
Placement and Registration Rights." Except as otherwise described herein, the
terms of the Series B Preferred Stock are identical to the terms of the Exchange
Preferred Stock offered hereby, and the Exchange Preferred Stock to be offered
hereby and the Series B Preferred Stock will constitute a single class.
Subject to certain conditions, the Exchange Preferred Stock will be
exchangeable, in whole but not in part, for the Exchange Debentures at the sole
option of the Company at any time on or after the date of issuance of the
Exchange Preferred Stock. When issued, the Exchange Preferred Stock will be
validly issued, fully paid and nonassessable. The holders of the Exchange
Preferred Stock will have no preemptive or preferential right to purchase or
subscribe to stock, obligations, warrants, or other securities of the Company of
any class. The Exchange Preferred Stock is eligible for trading in the Portal
Market.
RANKING
The Exchange Preferred Stock will, with respect to dividend rights and
rights on liquidation, winding up and dissolution, rank (i) senior to all
classes of common stock of the Company and to each other class of capital stock
or series of preferred stock established hereafter by the Board of Directors the
terms of which do not expressly provide that it ranks senior to, or on a parity
with, the Exchange Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Company (collectively referred
to, together with all classes of common stock of the Company, as "Junior Stock")
and (ii) on a parity with each other class of capital stock or series of
preferred stock established hereafter by the Board of Directors, the terms of
which expressly provide that such class or series will rank on a parity with the
Exchange Preferred Stock as to dividend rights and rights on liquidation,
winding-up and dissolution (collectively referred to as "Parity Stock"). As of
June 30, 1998, the Company had issued and outstanding 12,250,000 shares of
Junior Stock and 120,000 shares of Parity Stock. Creditors of the Company will
have priority over the Exchange Preferred Stock with respect to claims on the
assets of the Company. In addition, creditors and stockholders of the Company's
subsidiaries will have priority over the Exchange Preferred Stock with respect
to claims on the assets of such subsidiaries.
While any shares of Exchange Preferred Stock are outstanding, the Company
may not authorize, create or increase the authorized amount of any class or
series of capital stock or preferred stock, the terms of which expressly provide
that such class or series will rank senior to the Exchange Preferred Stock as to
dividend rights and rights upon liquidation, winding-up and dissolution of the
Company (collectively referred to as "Senior Stock") or Parity Stock without the
consent of the holders of at least 66 2/3% in the aggregate of the outstanding
shares of Exchange Preferred Stock and Series B Preferred Stock, provided that
for the purposes of calculating such percentage, any shares of Exchange
Preferred Stock or Series B Preferred Stock held by the Company or any Affiliate
thereof shall not be counted to determine such consent. However, without the
consent of any holder of Exchange Preferred Stock, the Company may create
additional classes of stock or issue series of a stock that ranks
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junior to the Exchange Preferred Stock with respect, in each case, to the
payment of dividends and amounts upon liquidation, dissolution and winding up.
See "--Voting Rights."
A substantial portion of the Company's income is generated by its
subsidiaries. As a result, the Company will rely upon distributions or advances
from its subsidiaries to provide the funds necessary to pay cash dividends on
the Exchange Preferred Stock. The subsidiaries may be subject to limitations on
their ability to make distributions and advances to the Company. See "Risk
Factors--Ability to Make Distributions on Exchange Preferred Stock" and "Risk
Factors--Holding Company Structure."
DIVIDENDS
The holders of shares of Exchange Preferred Stock will be entitled to
receive, when, as and if dividends are declared by the Board of Directors out of
funds of the Company legally available therefor, cumulative preferential
dividends from the Issue Date of the Exchange Preferred Stock accruing at the
rate per share of 13 1/4% per annum, payable semi-annually in arrears on each of
January 1 and July 1 or, if any such date is not a Business Day, on the next
succeeding Business Day (each, a "Dividend Payment Date"), to the holders of
record as of the next preceding December 15 and June 15. Dividends will be
payable in cash, except that on each Dividend Payment Date occurring on or prior
to July 1, 2003, dividends may be paid, at the Company's option, by the issuance
of additional shares of Exchange Preferred Stock (including fractional shares)
having an aggregate Liquidation Preference equal to the amount of such
dividends. It is not anticipated that the Company will pay any dividends in cash
for any period ending on or prior to July 1, 2003. The issuance of such
additional shares of Exchange Preferred Stock will constitute "payment" of the
related dividend for all purposes of the Certificate of Designation. Dividends
payable on the Exchange Preferred Stock will be computed on the basis of a 360-
day year consisting of twelve 30-day months and will be deemed to accrue on a
daily basis. For a discussion of certain Federal income tax considerations
relevant to the payment of dividends on the Exchange Preferred Stock, see
"Certain U.S. Federal Income Tax Considerations."
Dividends on the Exchange Preferred Stock will accrue whether or not the
Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. The Certificate of
Designation will provide that the Company will take all actions required or
permitted under applicable law to permit the payment of dividends on the
Exchange Preferred Stock, including, without limitation, through the revaluation
of its assets in accordance with the DGCL, to make or keep funds legally
available for the payment of dividends.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Exchange
Preferred Stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Exchange Preferred Stock.
Except as provided in the next sentence, no dividend will be declared or
paid on any Parity Stock unless full cumulative dividends have been paid on the
Exchange Preferred Stock for all prior dividend periods. If accrued dividends
on the Exchange Preferred Stock for all prior dividend periods have not been
paid in full then any dividend declared on the Exchange Preferred Stock for any
dividend period and on any Parity Stock will be declared ratably in proportion
to accrued and unpaid dividends on the Exchange Preferred Stock and such Parity
Stock.
No full dividends may be declared or paid or funds set apart for the
payment of dividends on any Parity Stock for any period unless full cumulative
dividends shall have been or contemporaneously are declared and paid in full or
declared and, if payable in cash, a sum in cash set apart for such payment on
the Exchange Preferred Stock. If full dividends are not so paid, the Exchange
Preferred Stock will share dividends pro rata with the Parity Stock. No
dividends may be paid or set apart for such payment on Junior Stock (except
dividends on Junior Stock in additional shares of Junior Stock) and no Junior
Stock or Parity Stock may be repurchased, redeemed or otherwise retired nor may
funds be set apart for payment with respect thereto, if full cumulative
dividends have not been paid on the Exchange Preferred Stock.
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The payment of cash dividends on the Exchange Preferred Stock is currently
prohibited by the terms of the New Credit Facility (provided that payment of
cash dividends is permitted after July 1, 2003 subject to financial performance
tests).
OPTIONAL REDEMPTION
Except as set forth below, the Exchange Preferred Stock will not be
redeemable at the option of the Company prior to July 1, 2003. Thereafter, the
Exchange Preferred Stock will be redeemable, at the Company's option, in whole
or in part, at any time or from time to time, upon not less than 30 nor more
than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed in percentages
of the Liquidation Preference thereof), plus accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period), if redeemed during the 12-month period commencing on July 1 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
-----------
PERIOD PRICE
- ------ -----
<S> <C>
2003...................... 106.625%
2004...................... 105.300%
2005...................... 103.975%
2006...................... 102.650%
2007...................... 101.325%
2008 and thereafter....... 100.000%
</TABLE>
In addition, at any time prior to January 1, 2001, the Company may redeem
at its option (i) up to 50% or (ii) all but not less than all of the outstanding
shares of Exchange Preferred Stock with the net proceeds of any Public Equity
Offering by the Company at a redemption price (expressed as a percentage of the
Liquidation Preference thereof) of 113.25% plus accumulated and unpaid dividends
(including an amount in cash equal to a prorated dividend for any partial
dividend period). Any such redemption shall be made for a period of 90 days
following consummation of such Public Equity Offering upon not less than 30 nor
more than 60 days' notice.
EXCHANGE FOR EXCHANGE DEBENTURES
The Company may, at its sole option, subject to the conditions described in
this paragraph, exchange the Exchange Preferred Stock, in whole but not in part
(including in conjunction with a redemption of up to 50% of the outstanding
shares of Exchange Preferred Stock with the proceeds of a Public Equity Offering
by the Company pursuant to the second paragraph under "--Optional Redemption"
above), at any time, for Exchange Debentures; provided, however, that (i) on the
date of such exchange there are no accumulated and unpaid dividends on the
Exchange Preferred Stock (including the dividend payable on such date) that are
not paid contemporaneously with such exchange or other contractual impediments
to such exchange; (ii) such exchange is permitted under applicable law; (iii)
immediately after giving effect to such exchange, no Event of Default (as
defined in the Exchange Indenture) or Voting Rights Triggering Event (as defined
in the Certificate of Designation), as applicable, shall have occurred and be
continuing; and (iv) the Company shall have delivered to the Trustee under the
Exchange Indenture, an Opinion of Counsel with respect to the due authorization
and issuance of the Exchange Debentures, which conditions constitute all of the
material conditions to the Company's exchange of the Exchange Preferred Stock.
The exchange of the Exchange Preferred Stock for Exchange Debentures is
currently prohibited by the terms of the New Credit Facility.
Upon any exchange of Exchange Preferred Stock for Exchange Debentures as
described in this section, each holder of Exchange Preferred Stock will be
entitled to receive, subject to the second succeeding sentence, $1.00 principal
amount of Exchange Debentures for each $1.00 Liquidation Preference of Exchange
Preferred Stock so exchanged, and an amount in cash equal to a prorated dividend
for any partial dividend period. The Exchange Debentures will be issued in
registered form, without coupons. Exchange Debentures issued in exchange for
Exchange Preferred Stock will be issued in principal amounts of $1,000 and
integral multiples thereof to the extent possible, and will also be issued in
principal amounts less than $1,000 so that each holder of Exchange Preferred
Stock will receive certificates representing the entire amount of Exchange
Debentures to which such holder's shares of Exchange Preferred Stock entitle
such holder; provided, however, that the Company may pay cash in lieu of issuing
an Exchange Debenture in a principal amount less than $1,000.
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The Company will send a written notice of exchange by mail to each holder
of record of shares of Exchange Preferred Stock not fewer than 30 days nor more
than 60 days before the date fixed for any exchange; provided that, in the event
of any exchange which is intended to occur in conjunction with a Public Equity
Offering by (i) the Company may provide for an Exchange Date which relates to
the consummation of such Public Equity Offering and (ii) the Company shall have
the right to revoke such written notice in the event that such related Public
Equity Offering is terminated by mailing a subsequent written notice to such
holders within two business days following such termination. On and after the
Exchange Date, dividends will cease to accrue on the outstanding shares of
Exchange Preferred Stock, and all rights of the holders of Exchange Preferred
Stock (except the right to receive the Exchange Debentures, an amount in cash,
to the extent applicable, equal to the accumulated and unpaid dividends to the
Exchange Date and, if the Company so elects, cash in lieu of any Exchange
Debenture that is in a principal amount that is not an integral multiple of
$1,000) will terminate. The person entitled to receive the Exchange Debentures
issuable upon such exchange will be treated for all purposes as the registered
holder of such Exchange Debentures. See "Description of Exchange Debentures" and
"Certain U.S. Federal Income Tax Considerations--Exchange of Exchange Preferred
Stock for Exchange Debentures."
MANDATORY REDEMPTION
On July 1, 2010, the Company will be required to redeem (subject to the
legal availability of funds therefor) all outstanding shares of Exchange
Preferred Stock at a price in cash equal to the Liquidation Preference thereof,
plus accumulated and unpaid dividends (including an amount in cash equal to a
prorated dividend for any partial dividend period), if any, to the date of
redemption. The Company will not be required to make sinking fund payments with
respect to the Exchange Preferred Stock. The Certificate of Designation will
provide that the Company will take all actions required or permitted under
Delaware law to permit such redemption. Future indebtedness of the Company may
prohibit the Company from redeeming the Exchange Preferred Stock on its
mandatory redemption date.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, each holder of Exchange Preferred Stock will be entitled to be
paid, out of the assets of the Company available for distribution to
stockholders, an amount equal to the Liquidation Preference per share of
Exchange Preferred Stock held by such holder, plus accumulated and unpaid
dividends thereon to the date fixed for liquidation, dissolution or winding-up
before any distribution is made on any Junior Stock, including, without
limitation, common stock of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Exchange Preferred Stock and all other Parity Stock are not paid
in full, the holders of the Exchange Preferred Stock and the Parity Stock will
share equally and ratably in any distribution of assets of the Company in
proportion to the full liquidation preference and accumulated and unpaid
dividends to which each is entitled. After payment of the full amount of the
Liquidation Preference and accumulated and unpaid dividends to which they are
entitled, the holders of shares of Exchange Preferred Stock will not be entitled
to any further participation in any distribution of assets of the Company.
However, neither the sale, conveyance, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Company nor the consolidation or merger of the Company
with one or more entities shall be deemed to be a liquidation, dissolution or
winding-up of the Company.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Exchange
Preferred Stock, although such Liquidation Preference will be substantially in
excess of the par value of such shares of Exchange Preferred Stock. In
addition, the Company is not aware of any provision of Delaware law or any
controlling decision of the courts of the State of Delaware (the state of
incorporation of the Company) that requires a restriction upon the surplus of
the Company solely because the liquidation preference of the Exchange Preferred
Stock will exceed its par value. Consequently, there will be no restriction
upon any surplus of the Company solely because the liquidation preference of the
Exchange Preferred Stock will exceed the par value, and there will be no
remedies available to holders of the Exchange Preferred Stock before or after
the payment of any dividend, other than in connection with the liquidation of
the Company, solely by reason of the fact that such dividend would reduce the
surplus of the Company to an amount less than the difference between the
liquidation preference of the Exchange Preferred Stock and its par value.
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VOTING RIGHTS
The holders of Exchange Preferred Stock, except as otherwise required under
Delaware law or as provided in the Certificate of Designation, shall not be
entitled or permitted to vote on any matter required or permitted to be voted
upon by the stockholders of the Company.
The Certificate of Designation will provide that if (i) dividends on the
Exchange Preferred Stock are in arrears and unpaid (and, in the case of
dividends payable after July 1, 2003, are not paid in cash) for six or more
Dividend Periods (whether or not consecutive); (ii) the Company fails to redeem
the Exchange Preferred Stock on July 1, 2010, or fails to otherwise discharge
any redemption obligation with respect to the Exchange Preferred Stock; (iii)
the Company fails to make an offer to redeem all of the outstanding shares of
Exchange Preferred Stock following a Change of Control (whether or not the
Company is permitted to do so by the terms of the Credit Facility or any other
obligation of the Company), (iv) a breach or violation of any of the provisions
described under the caption "--Certain Covenants" occurs and the breach or
violation continues for a period of 30 days or more after the Company receives
notice thereof specifying the default from the holders of at least 25% of the
shares of Exchange Preferred Stock then outstanding; (v) the Company fails to
pay at final maturity (giving effect to any applicable grace period) the
principal amount of any Debt of the Company or any Subsidiary of the Company or
the stated maturity of any such Indebtedness of the Company or any Subsidiary of
the Company is accelerated because of a default and the total amount of such
Debt unpaid or accelerated exceeds $7.5 million, then the holders of the
outstanding shares of Exchange Preferred Stock, voting together as a class with
the holders of any other series of preferred stock upon which like rights have
been conferred and are exercisable, including the Series B Preferred Stock, will
be entitled to elect two additional members to the Board of Directors to serve
on the Board of Directors, and the number of members of the Board of Directors
will be immediately and automatically increased by two. Such voting rights of
the Exchange Preferred Stock will continue until such time as, in the case of a
dividend default, all dividends in arrears on the Exchange Preferred Stock are
paid in full in cash and, in all other cases, any failure, breach or default
giving rise to such voting rights is remedied or waived by the holders of at
least a majority of the shares of Exchange Preferred Stock then outstanding, at
which time the term of office of any directors elected pursuant to the
provisions of this paragraph (subject to the right of holders of any other
Exchange Preferred Stock to elect such directors) shall terminate. Each such
event described in clauses (i) through (v) above is referred to herein as a
"Voting Rights Triggering Event." In the event that a Voting Rights Triggering
Event occurs with respect to the Preferred Stock, the holders of the Exchange
Preferred Stock and the Series B Preferred Stock will vote together as one class
to elect the two additional directors provided for in the Certificate of
Designation. Because Mr. Bearden and FS&Co. own securities representing 30% of
such class, they may be able to exert significant influence on the results of
any such election.
The Certificate of Designation will also provide that the Company will not
authorize any class of Senior Stock or Parity Stock without the affirmative vote
or consent of holders of at least 66 2/3% of the shares of Exchange Preferred
Stock and Series B Preferred Stock then outstanding, voting or consenting, as
the case may be, as one class, provided that for the purposes of calculating
such percentage any shares of Exchange Preferred Stock or Series B Preferred
Stock held by the Company or any Affiliate thereof shall not be counted to
determine such consent. In addition, the Certificate of Designation will provide
that the Company may not authorize the issuance of any additional shares of
Exchange Preferred Stock (other than additional shares of Exchange Preferred
Stock to be issued as dividends on outstanding shares of Exchange Preferred
Stock) without the affirmative vote or consent of the holders of at least a
majority of the then outstanding shares of Exchange Preferred Stock and Series B
Preferred Stock, voting or consenting, as the case may be, as one class,
provided that for the purposes of calculating such percentage any shares of
Exchange Preferred Stock or Series B Preferred Stock held by the Company or any
Affiliate thereof shall not be counted to determine such consent. The
Certificate of Designation will also provide that, except as set forth above,
(a) the creation, authorization or issuance of any shares of Junior Stock,
Parity Stock or Senior Stock, including the designation of a series thereof
within the existing class of Exchange Preferred Stock, or (b) the increase or
decrease in the amount of authorized Capital Stock of any class, including any
preferred stock, shall not require the consent of the holders of Exchange
Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges or voting rights of shares of Exchange Preferred Stock.
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REDEMPTION AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange
Preferred Stock shall have the right to require the Company to redeem all or any
part of such holder's Exchange Preferred Stock pursuant to the offer described
below (the "Change of Control Offer") at a redemption price (the "Change of
Control Redemption Price") equal to 101% of the Liquidation Preference thereof,
plus accrued and unpaid dividends thereon, if any, to the redemption date
(including an amount in cash equal to a pro rated dividend for any partial
dividend period). The Certificate of Designation does not provide for waiver of
the covenant relating to the holder's right to require redemption of the
Exchange Preferred Stock upon the occurrence of a Change in Control. Approval
by the Company's Board of Directors will not prevent a transaction from
constituting a Change of Control if it otherwise falls within the definition
thereof.
Within 30 days following any Change of Control, the Company shall (a) cause
a notice of the Change of Control Offer to be sent at least once to the Dow
Jones News Service or similar business news service in the United States and (b)
send, by first-class mail, with a copy to the transfer agent, to each holder of
Exchange Preferred Stock, at such holder's address appearing in the Security
Register, a notice stating: (i) that a Change of Control has occurred and a
Change of Control Offer is being made pursuant to the covenant entitled
"Redemption at the Option of Holders Upon a Change of Control" and that all
Exchange Preferred Stock timely tendered will be accepted for payment; (ii) the
Change of Control Redemption Price and the redemption date, which shall be,
subject to any contrary requirements of applicable law, a business day no
earlier than 30 days nor later than 60 days from the date such notice is mailed;
(iii) the circumstances and relevant facts regarding the Change of Control
(including information with respect to pro forma historical income, cash flow
and capitalization after giving effect to the Change of Control); and (iv) the
procedures that holders of Exchange Preferred Stock must follow in order to
tender their Exchange Preferred Stock (or portions thereof) for payment, and the
procedures that holders of Exchange Preferred Stock must follow in order to
withdraw an election to tender Exchange Preferred Stock (or portions thereof)
for payment.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the redemption of Exchange Preferred Stock pursuant to a
Change of Control Offer. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of the covenant described
hereunder, the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
covenant described hereunder by virtue of such compliance.
The Change of Control redemption feature is a result of negotiations
between the Company and the Initial Purchaser. The Company has no present
intention to engage in a transaction involving a Change of Control, although it
is possible that the Company would decide to do so in the future. Subject to
certain covenants described below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Certificate of Designation, but that could increase the amount of debt
outstanding at such time or otherwise affect the Company's capital structure or
credit ratings.
The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of "all or
substantially all" of the Company's assets. Although there is a developing body
of case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of Exchange Preferred Stock to require the Company to redeem
such Exchange Preferred Stock as a result of a sale, transfer, assignment,
lease, conveyance or other disposition of less than all the assets of the
Company may be uncertain.
The Credit Facility prohibits the Company from purchasing or redeeming any
Exchange Preferred Stock tendered pursuant to a Change of Control Offer. The
Credit Facility also provides that the occurrence of certain of the events that
would constitute a Change of Control would constitute a default thereunder.
Other future debt of the Company may require repayment upon a Change of Control
and may prohibit the Company from repurchasing Exchange Preferred Stock.
Moreover, the exercise by holders of Exchange Preferred Stock of their right to
require the Company to redeem such Exchange Preferred Stock could cause a
default under existing or
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future debt of the Company, even if the Change of Control itself does not.
Finally, the Company's ability to pay cash to holders of Exchange Preferred
Stock upon a repurchase may be limited by the Company's then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases. The Company's failure to redeem
Exchange Preferred Stock in connection with a Change of Control would result in
a breach of the Certificate of Designation which might constitute a default
under debt of the Company then outstanding and could lead to the acceleration of
the indebtedness thereunder. In any such event, the subordination of the
Exchange Preferred Stock and the security granted in respect of the Credit
Facility would likely result in the Holders of the Exchange Preferred Stock
receiving less ratably than creditors of the Company.
CERTAIN COVENANTS
The sole remedy to Holders of Exchange Preferred Stock in the event of the
Company's failure to comply with any of the covenants described below and the
sole consequence of any such failure will be the voting rights described above.
Limitation on Debt. The Company shall not, and shall not permit any
Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after
giving pro forma effect to the application of the proceeds thereof, either (a)
after giving effect to the Incurrence of such Debt and the application of the
proceeds thereof, the Consolidated Interest Coverage Ratio would be greater than
2.00 to 1.00 or (b) such Debt is Permitted Debt.
The term "Permitted Debt" is defined to include the following:
(a) Debt of the Company under the Exchange Debentures;
(b)(i) Debt under the Credit Facility; provided that the aggregate
principal amount of all such Debt under the Credit Facility comprised of
(A) term loans at any one time outstanding shall not exceed $100.0 million
minus all principal amounts repaid in respect of such term loans and (B)
revolving credit loans or obligations at any one time outstanding shall not
exceed the greater of (x) $25.0 million or (y) the sum of the amounts equal
to (1) 60% of the net book value of the inventory of the Company and the
Restricted Subsidiaries and (2) 85% of the net book value of the accounts
receivable of the Company and the Restricted Subsidiaries, in each case as
of the most recent fiscal quarter ending at least 45 days prior to the date
of determination and (ii) Guarantees of Debt under the Credit Facility;
(c) Debt in respect of Capital Lease Obligations and Purchase Money
Debt; provided that (i) the aggregate principal amount of such Debt does
not exceed the Fair Market Value (on the date of the Incurrence thereof) of
the Property acquired, constructed or leased (including costs of
installation, taxes and delivery charges with respect to such acquisition,
construction or lease) and (ii) the aggregate principal amount of all Debt
Incurred and then outstanding pursuant to this clause (c) (together with
all Permitted Refinancing Debt Incurred in respect of Debt previously
Incurred pursuant to this clause (c) and then outstanding) does not exceed
$10.0 million;
(d) Debt of the Company owing to and held by any Wholly Owned
Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the
Company or any Wholly Owned Subsidiary; provided, however, that any
subsequent issue or transfer of Capital Stock or other event that results
in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary
or any subsequent transfer of any such Debt (except to the Company or a
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Debt by the issuer thereof;
(e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or
prior to the date on which such Wholly Owned Subsidiary was acquired by the
Company or otherwise became a Restricted Subsidiary (other than Debt
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
transactions pursuant to which such Wholly Owned Subsidiary became a
Subsidiary of the Company or was otherwise acquired by the Company);
provided that at the time such Wholly Owned Subsidiary was acquired by the
Company or otherwise became a
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Restricted Subsidiary and after giving pro forma effect to the Incurrence
of such Debt, the Company would have been able to Incur $1.00 of additional
Debt pursuant to clause (a) in the first paragraph of this covenant;
(f) Debt under Interest Rate Agreements entered into by the Company or
a Restricted Subsidiary for the purpose of limiting interest rate risk in
the ordinary course of the financial management of the Company or such
Restricted Subsidiary and not for speculative purposes, provided that the
obligations under such agreements are directly related to payment
obligations on Debt otherwise permitted by the terms of this covenant;
(g) Debt under Currency Exchange Protection Agreements entered into by
the Company or a Restricted Subsidiary for the purpose of limiting currency
exchange rate risks directly related to transactions entered into by the
Company or such Restricted Subsidiary in the ordinary course of business
and not for speculative purposes;
(h) Debt in connection with one or more standby letters of credit or
performance bonds issued for the account of the Company or a Restricted
Subsidiary in the ordinary course of business or pursuant to self-insurance
obligations and not in connection with the borrowing of money or the
obtaining of advances;
(i) Debt outstanding on the Issue Date not otherwise described in
clauses (b) through (h) above;
(j) Debt not otherwise described in clauses (a) through (i) above in
an aggregate principal amount outstanding at any one time not to exceed
$15.0 million; and
(k) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (a) of the first paragraph of this covenant and clauses
(c), (e) and (i) above, subject, in the case of clause (c) above, to the
limitations set forth in the proviso thereto.
Limitation on Restricted Payments. The Company shall not make, and shall
not permit any Restricted Subsidiary to make, directly or indirectly, any
Restricted Payment if at the time of, and after giving pro forma effect to, such
proposed Restricted Payment,
(a) a Voting Rights Triggering Event shall have occurred and be
continuing,
(b) the Company could not Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described
under "--Limitation on Debt" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of
any Restricted Payment, if made other than in cash, to be based upon Fair
Market Value) would exceed an amount equal to the sum of:
(i) 50% of the aggregate amount of Consolidated Net Income accrued
during the period (treated as one accounting period) from the beginning of
the fiscal quarter during which the Issue Date occurs to the end of the
most recent fiscal quarter ending at least 45 days prior to the date of
such Restricted Payment (or if the aggregate amount of Consolidated Net
Income for such period shall be a deficit, minus 100% of such deficit),
(ii) Capital Stock Sale Proceeds,
(iii) the amount by which Debt of the Company Incurred after the Issue
Date is reduced on the Company's balance sheet upon the conversion or
exchange (other than by the Company or a Subsidiary of the Company)
subsequent to the Issue Date of any Debt for Parity Stock or Junior Stock
(other than Disqualified Stock) of the Company (less the amount of any cash
or other Property distributed by the Company or any Restricted Subsidiary
upon such conversion or exchange),
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(iv) an amount equal to the sum of (A) the net reduction in
Investments in any Person other than the Company or a Restricted
Subsidiary resulting from dividends, repayments of loans or advances or
other transfers of Property, in each case to the Company or any Restricted
Subsidiary from such Person, to the extent such dividends, repayments or
transfers do not increase the amount of Permitted Investments permitted to
be made pursuant to clause (i) of the definition thereof and (B) the
portion (proportionate to the Company's equity interest in such
Unrestricted Subsidiary) of the Fair Market Value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the foregoing
sum shall not exceed, in the case of any Person, the amount of Investments
previously made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Person, and
(v) $5.0 million.
Notwithstanding the foregoing limitation, the Company may:
(a) pay dividends on its Capital Stock within 60 days of the
declaration thereof if, on said declaration date, such dividends could have
been paid in compliance with this covenant; provided, however, that at the
time of such payment of such dividend, no other Voting Rights Triggering
Event shall have occurred and be continuing (or result therefrom); provided
further, however, that such dividend shall be included in the calculation
of the amount of Restricted Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire
for value Capital Stock of the Company in exchange for, or in an amount not
in excess of the proceeds of the substantially concurrent sale of, Parity
Stock or Junior Stock of the Company (other than Disqualified Stock and
other than Capital Stock issued or sold to a Subsidiary of the Company or
an employee stock ownership plan or trust established by the Company or any
of its Subsidiaries for the benefit of their employees); provided, however,
that (i) such purchase, repurchase, redemption, legal defeasance,
acquisition or retirement shall be excluded in the calculation of the
amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds from
such exchange or sale shall be excluded from the calculation pursuant to
clause (c)(ii) above; and
(c) purchase, repurchase, redeem, legally defease, acquire or retire
for value shares of, or options to purchase shares of, common stock of the
Company from employees or former employees of the Company or its
Subsidiaries (or their estates or beneficiaries thereof) upon death,
disability, retirement or termination pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors, under which such individuals
purchase or sell, or are granted the option to purchase or sell, shares of
such common stock; provided, however, that (i) the aggregate amount of such
purchases, repurchases, redemptions, defeasances, acquisitions or
retirements shall not exceed $2.5 million in any year or $5.0 million
during the term of the Exchange Preferred Stock, except that (x) such
amounts shall be increased by the aggregate net amount of cash received by
the Company after the Issue Date from the sale of such shares to, or the
exercise of options to purchase such shares by, employees of the Company or
its Subsidiaries and (y) the Company may forgive or return Employee Notes
without regard to the limitation set forth in clause (c)(i) above and such
forgiveness or return shall not be treated as a Restricted Payment for
purposes of determining compliance with such clause (c)(i) and (ii) such
purchases, repurchases, defeasances, acquisitions or retirements (but not
forgiveness or return of Employee Notes) shall be included in the
calculation of the amount of Restricted Payments.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries.
The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted
Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any
shares of its Capital Stock, other than (i) directors' qualifying shares, and
(ii) to the Company or a Wholly Owned Subsidiary. Notwithstanding the
foregoing, the Company may dispose of 100% of the shares of Capital Stock of
another Restricted Subsidiary, provided that (A) the Net Available Cash received
by the Company from any such transaction is applied within twelve months from
the date of the receipt of such Net Available Cash to prepay, repay, legally
defease or purchase Debt of the Company or any Restricted Subsidiary (excluding,
in any such case, Disqualified Stock and Debt owed to the Company or an
Affiliate of the Company) or to reinvest in Additional Assets (including by
means of an
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Investment in Additional Assets by the Company or a Restricted Subsidiary with
Net Available Cash received by the Company); and (B) the Company receives
consideration at the time of such disposition at least equal to the Fair Market
Value of such Restricted Subsidiary and at least 75% of the consideration paid
to the Company in connection with such disposition is in the form of cash or
cash equivalents or the assumption by the purchaser of liabilities of the
Company or any other Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Exchange Preferred Stock) as a result of which
the Company and the other Restricted Subsidiaries are no longer obligated with
respect to such liability.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist any
consensual restriction on the right of any Restricted Subsidiary to (a) pay
dividends, in cash or otherwise, or make any other distributions on or in
respect of its Capital Stock, or pay any Debt or other obligation owed, to the
Company or any Restricted Subsidiary (except, with respect to restrictions on
dividends of non-cash Property, as permitted pursuant to clause (ii) of the next
sentence), (b) make any loans or advances to the Company or any Restricted
Subsidiary or (c) transfer any of its Property to the Company or any Restricted
Subsidiary. The foregoing limitations will not apply (i) with respect to
clauses (a), (b) and (c), to restrictions (A) in effect on the Issue Date, (B)
pursuant to the Credit Facility, (C) relating to Debt of a Restricted Subsidiary
and existing at the time it became a Restricted Subsidiary if such restriction
was not created in connection with or in anticipation of the transaction or
series of transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company or (D) which result from
the Refinancing of Debt Incurred pursuant to an agreement referred to in clause
(i)(A) or (C) above or in clause (ii)(A) or (B) below, provided such restriction
is no less favorable to the holders of the Exchange Preferred Stock than those
under the agreement evidencing the Debt so Refinanced, and (ii) with respect to
clause (c) only, to restrictions (A) encumbering Property at the time such
Property was acquired by the Company or any Restricted Subsidiary, so long as
such restriction relates solely to the Property so acquired and was not created
in connection with or in anticipation of such acquisition, (B) resulting from
customary provisions restricting subletting or assignment of leases or customary
provisions in other agreements that restrict assignment of such agreements or
rights thereunder or (C) customary restrictions contained in asset sale
agreements limiting the transfer of such Property pending the closing of such
sale.
Limitation on Transactions with Affiliates. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, conduct
any business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with, or
for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"),
unless (a) the terms of such Affiliate Transaction are (i) set forth in writing,
(ii) in the interest of the Company or such Restricted Subsidiary, as the case
may be, and (iii) no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained in a
comparable arm's-length transaction with a Person that is not an Affiliate of
the Company, (b) if such Affiliate Transaction involves aggregate payments or
value in excess of $2.5 million, the Board of Directors (including a majority of
the disinterested members of the Board of Directors) approves such Affiliate
Transaction and, in its good faith judgment, believes that such Affiliate
Transaction complies with clauses (a) (ii) and (iii) of this paragraph as
evidenced by a Board Resolution promptly delivered to the Trustee and (c) if
such Affiliate Transaction involves aggregate payments or value in excess of
$5.0 million, the Company obtains a written opinion from an Independent
Appraiser to the effect that the consideration to be paid or received in
connection with such Affiliate Transaction is fair, from a financial point of
view, to the Company or such Restricted Subsidiary, as the case may be.
Notwithstanding the foregoing limitation, the Company or any Restricted
Subsidiary may enter into or suffer to exist the following:
(i) any transaction or series of transactions between the Company and
one or more Restricted Subsidiaries or between two or more Restricted
Subsidiaries in the ordinary course of business; provided that no more than
5% of the total voting power of the Voting Stock (on a fully diluted basis)
of any such Restricted Subsidiary is owned by an Affiliate of the Company
(other than a Restricted Subsidiary);
(ii) any Restricted Payment permitted to be made pursuant to the
covenant described under "--Limitation on Restricted Payments";
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(iii) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of officers, directors
and employees of the Company or any of the Restricted Subsidiaries, so long
as the Board of Directors in good faith shall have approved the terms
thereof and deemed the services theretofore or thereafter to be performed
for such compensation to be fair consideration therefor;
(iv) loans and advances to employees made in the ordinary course of
business and consistent with the past practices of the Company or any
Restricted Subsidiary, as the case may be; provided that such loans and
advances do not exceed $1.0 million in the aggregate at any one time
outstanding;
(v) the payment of fees and expenses in connection with the
Recapitalization pursuant to written agreements in effect on the Issue
Date;
(vi) the sale of common stock of the Company for cash; provided, that
the Company may receive Employee Notes in an aggregate principal amount not
in excess of $1.0 million at any one time outstanding;
(vii) the payment of dividends in kind in respect of any preferred
stock issued in compliance with this covenant;
(viii) a proportionate split of, or a common stock dividend payable
on, the common stock of the Company;
(ix) payments under any real or personal property lease with an
Affiliate of the Company existing at the date of the issue of the Initial
Preferred Stock and any other real or personal property lease with an
Affiliate of the Company that is approved by a majority of the
disinterested members of the board of directors of the Company; and
(x) sales of inventory at a price no less than the price the Company
paid to purchase such inventory and in customary volumes to Century
Airconditioning Supply, Inc. ("CAC"), purchases of inventory at cost from
CAC, and the provision of administrative services to CAC.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors may designate any Subsidiary of the Company to be an Unrestricted
Subsidiary if (a) the Subsidiary to be so designated does not own any Capital
Stock or Debt of, or own or hold any Lien on any Property of, the Company or any
other Restricted Subsidiary, (b) the Subsidiary to be so designated is not
obligated under any Debt, Lien or other obligation that, if in default, would
result (with the passage of time or notice or otherwise) in a default on any
Debt of the Company or of any Restricted Subsidiary and (c) either (i) the
Subsidiary to be so designated has total assets of $1,000 or less or (ii) such
designation is effective immediately upon such entity becoming a Subsidiary of
the Company. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company will be classified as a Restricted
Subsidiary; provided, however, that such Subsidiary shall not be designated a
Restricted Subsidiary and shall be automatically classified as an Unrestricted
Subsidiary if the requirement set forth in the immediately following paragraph
will not be satisfied after giving pro forma effect to such classification.
Except as provided in the first sentence of this paragraph, no Restricted
Subsidiary may be redesignated as an Unrestricted Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, the Company could Incur at least $1.00 of additional Debt pursuant
to clause (a) of the first paragraph of the covenant described under "--
Limitation on Debt."
Any such designation or redesignation by the Board of Directors will be
evidenced a Board Resolution giving effect to such designation or redesignation.
Limitation on the Company's Business. The Company shall not, directly or
indirectly, engage in any business or activity other than the business currently
conducted by it and its Restricted Subsidiaries, and Related Businesses.
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MERGER, CONSOLIDATION AND SALE OF PROPERTY
The Company shall not merge, consolidate or amalgamate with or into any
other Person (other than a merger of a Wholly Owned Subsidiary into the Company)
or sell, transfer, assign, lease, convey or otherwise dispose of all or
substantially all its Property in any one transaction or series of transactions
unless: (a) the Company shall be the surviving Person (the "Surviving Person")
or the Surviving Person (if other than the Company) formed by such merger,
consolidation or amalgamation or to which such sale, transfer, assignment,
lease, conveyance or disposition is made shall be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia; (b) the Surviving Person (if other than the Company)
expressly assumes all obligations of the Company under the Exchange Preferred
Stock and the Certificate of Designation; (c) in the case of a sale, transfer,
assignment, lease, conveyance or other disposition of all or substantially all
the Property of the Company, such Property shall have been transferred as an
entirety or virtually as an entirety to one Person; (d) immediately before and
after giving effect to such transaction or series of transactions on a pro forma
basis (and treating, for purposes of this clause (d) and clauses (e) and (f)
below, any Debt which becomes, or is anticipated to become, an obligation of the
Surviving Person or any Restricted Subsidiary as a result of such transaction or
series of transactions as having been Incurred by the Surviving Person or such
Restricted Subsidiary at the time of such transaction or series of
transactions), no Voting Rights Triggering Event shall have occurred and be
continuing; (e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Company or the Surviving Person, as the
case may be, would be able to Incur at least $1.00 of additional Debt under
clause (a) of the first paragraph of the covenant described under "--Certain
Covenants--Limitation on Debt", determining compliance thereunder for this
purpose based upon the Consolidated Interest Expense, Consolidated Net Income
and EBITDA of the Company or the Surviving Person, as the case may be, and its
Restricted Subsidiaries; provided, however, that this clause (e) shall not apply
to a merger between the Company and a Wholly Owned Subsidiary of the Company
solely for the purpose of reincorporating the Company in another state of the
United States so long as the total amount of Indebtedness of the Company and its
Restricted Subsidiaries is not increased as a result thereof; and (f) the Board
of Directors shall adopt a Board Resolution and obtain an opinion of counsel,
each stating that such transaction in respect thereto comply with this covenant
and that all conditions precedent herein provided for relating to such
transaction have been satisfied.
SEC REPORTS
At any time after 60 days after the Issue Date, notwithstanding that the
Company may not be subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, the Company shall file with the Commission and provide
registered holders of Preferred Stock and, upon request, security analysts of
prospective holders of Preferred Stock with such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a U.S. corporation subject to such
sections, such information, documents and reports to be so filed and provided at
the times specified for the filing of such information, documents and reports
under such sections; provided, however, that the Company shall not be so
obligated to file such information, documents and reports with the Commission if
the Commission does not permit such filings.
BOOK-ENTRY SYSTEM
The Exchange Preferred Stock may be issued in the form of one or more
global securities (collectively, a "Global Security"). A Global Security will
be deposited with, or on behalf of, the DTC and registered in the name of the
DTC or its nominee. Except as set forth below, a Global Security may be
transferred, in whole and not in part, only to the DTC or another nominee of the
DTC. Investors may hold their beneficial interests in a Global Security
directly through the DTC if they have an account with the DTC or indirectly
through organizations which have accounts with the DTC.
Depository Procedures
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of Persons holding through it with the respective number of shares of
the Exchange Preferred Stock represented by such Global Security purchased by
such Persons in the Offering. Such accounts shall be designated by the Initial
Purchaser. Ownership
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of beneficial interests in a Global Security will be limited to Persons that
have accounts with DTC ("participants") or Persons that may hold interests
through participants. Any Person acquiring an interest in a Global Security
through an offshore transaction in reliance on Regulation S of the Securities
Act may hold such interest through Cedel or Euroclear. Ownership of beneficial
interests in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by DTC
(with respect to participants' interests) and such participants (with respect to
the owners of beneficial interests in such Global Security other than
participants). The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
Payments of dividends on Exchange Preferred Stock represented by a Global
Security will be made in immediately available funds to DTC or its nominee, as
the case may be, as the sole registered owner and the sole holder of the
Exchange Preferred Stock represented thereby for all purposes under the
Certificate of Designation. The Company has been advised by DTC that upon
receipt of any payment of principal of or interest on any Global Security,
DTC will immediately credit, on its book-entry registration and transfer system,
the accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the face amount of such Global Security as
shown on the records of DTC. Payments by participants to owners of beneficial
interests in a Global Security held through such participants will be governed
by standing instructions and customary practices as is now the case with
securities held for customer accounts registered in "street name" and will be
the sole responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated Exchange Preferred Stock only if (a) DTC notifies the Company
that it is unwilling or unable to continue as a depositary for such Global
Security or if at any time DTC ceases to be a clearing agency registered under
the Exchange Act, (b) the Company in its discretion at any time determines not
to have all the Exchange Preferred Stock represented by such Global Security or
(c) there shall have occurred and be continuing a Default or an Event of Default
with respect to the Exchange Preferred Stock represented by such Global
Security. Any Global Security that is exchangeable for certificated Exchange
Preferred Stock pursuant to the preceding sentence will be exchanged for
certificated Exchange Preferred Stock in authorized denominations and registered
in such names as DTC or any successor depositary holding such Global Security
may direct. Subject to the foregoing, a Global Security is not exchangeable,
except for a Global Security of like denomination to be registered in the name
of DTC or any successor depositary or its nominee. In the event that a Global
Security becomes exchangeable for certificated Exchange Preferred Stock, (a)
certificated Exchange Preferred Stock will be issued only in fully registered
form, (b) payment in respect of dividends and redemption payments on the
certificated Exchange Preferred Stock will be payable, and the transfer of the
certificated Exchange Preferred Stock will be registerable, at the office or
agency of the Company maintained for such purposes and (c) no service charge
will be made for any registration of transfer or exchange of the certificated
Exchange Preferred Stock, although the Company may require payment of a sum
sufficient to cover any tax or governmental charge imposed in connection
therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Exchange Preferred Stock represented by such Global Security for
all purposes under the Certificate of Designation and the Exchange Preferred
Stock. Except as set forth above, owners of beneficial interests in a Global
Security will not be entitled to have the Exchange Preferred Stock represented
by such Global Security registered in their names, will not receive or be
entitled to receive physical delivery of certificated Exchange Preferred Stock
in definitive form and will not be considered to be the owners or holders of any
Exchange Preferred Stock under such Global Security. Accordingly, each Person
owning a beneficial interest in a Global Security must rely on the procedures of
DTC or any successor depositary, and, if such Person is not a participant, on
the procedures of the participant through which such Person owns its interest,
to exercise any rights of a holder under the Certificate of Designation. The
Company understands that under existing industry practices, in the event that
the Company requests any action of holders or that an owner of a beneficial
interest in a Global Security desires to give or take any action which a holder
is entitled to give or take under the Certificate of Designation, DTC or any
successor depositary would authorize the participants holding the relevant
beneficial interest to give or take such
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action and such participants would authorize beneficial owners owning through
such participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchaser), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available
to others, such as banks, brokers, dealers and trust companies, that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Transfer
Agent or the Initial Purchaser will have any responsibility for the performance
by DTC or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Certificate of Designation. Reference is made to the Certificate of Designation
for the full definition of all such terms as well as any other capitalized terms
used herein for which no definition is provided.
"Additional Assets" means (a) any Property (other than cash, cash
equivalents and securities) to be owned by the Company or any Restricted
Subsidiary and used in a Related Business; or (b) Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary from any Person other than
an Affiliate of the Company; provided, however, that, in the case of clause (b),
such Restricted Subsidiary is primarily engaged in a Related Business.
"Affiliate" of any specified Person means (a) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (b) any other Person who is a director or
officer of (i) such specified Person, (ii) any Subsidiary of such specified
Person or (iii) any Person described in clause (a) above. For the purposes of
this definition, "control" when used with respect to any Person means the power
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means any sale, lease, transfer, issuance or other disposition
(or series of related sales, leases, transfers, issuances or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (a) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares) or
(b) any other assets of the Company or any Restricted Subsidiary outside of the
ordinary course of business of the Company or such Restricted Subsidiary (other
than, in the case of clauses (a) and (b) above, (i) any disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (ii) any disposition effected in
compliance with the first paragraph of the covenant described under "--Merger,
Consolidation and Sale of Property," (iii) any Sale and Leaseback Transaction
completed within 180 days following the original acquisition of the subject
assets where such Sale and Leaseback Transaction represents the intended
financing of Property acquired after the Issue Date and (iv) any disposition or
series of related dispositions of assets having a Fair Market Value and sale
price of less than $500,000.
"Attributable Debt" in respect of a Sale and Leaseback Transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with
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GAAP) of the obligation of the lessee for net rental payments during the
remaining term of the lease included in such Sale and Leaseback Transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended).
"Average Life" means, as of any date of determination, with respect to any
Debt or preferred stock, the quotient obtained by dividing (a) the sum of the
product of the numbers of years (rounded to the nearest one-twelfth of one year)
from the date of determination to the dates of each successive scheduled
principal payment of such Debt or redemption or similar payment with respect to
such preferred stock multiplied by the amount of such payment by (b) the sum of
all such payments.
"Board of Directors" means the Board of Directors of the Company, or any
committee thereof duly authorized to act on behalf of such Board.
"Capital Lease Obligations" means any obligation under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP; and the amount of Debt represented by such obligation shall be the
capitalized amount of such obligations determined in accordance with GAAP; and
the Stated Maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
"Capital Stock" means, with respect to any Person, any shares or other
equivalents (however designated) of corporate stock, partnership interests or
any other participations, rights, warrants, options or other interests in the
nature of an equity interest in such Person, including preferred stock, but
excluding any debt security convertible or exchangeable into such equity
interest.
"Capital Stock Sale Proceeds" means the aggregate cash proceeds received by
the Company from the issuance or sale (other than to a Subsidiary of the Company
or an employee stock ownership plan or trust established by the Company or any
of its Subsidiaries for the benefit of their employees) by the Company of any
class of its Parity Stock and Junior Stock (other than Disqualified Stock) after
the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees actually incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
"Change of Control" means the occurrence of any of the following events:
(a) prior to the first Public Equity Offering of common stock of the
Company, the Initial Control Group cease to be the "beneficial owners" (as
defined in Rule 13d-3 under the Exchange Act, except that a Person will be
deemed to have "beneficial ownership" of all shares that any such Person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of a majority of
the voting power of the Voting Stock of the Company, whether as a result of
the issuance of securities of the Company, any merger, consolidation,
liquidation or dissolution of the Company or the Company, any direct or
indirect transfer of securities by the Initial Control Group or otherwise
(for purposes of this clause (a), the Initial Control Group will be deemed
to beneficially own any Voting Stock of a corporation (the "specified
corporation") held by any other corporation (the "parent corporation") so
long as the Initial Control Group beneficially own, directly or indirectly,
in the aggregate a majority of the voting power of the Voting Stock of such
parent corporation); or
(b) after the first Public Equity Offering of common stock of the
Company, any "Person" or "group" (as such terms are used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provisions to
either of the foregoing), including any group acting for the purpose of
acquiring, holding, voting or disposing of securities within the meaning of
Rule 13d-5(b)(1) under the Exchange Act, other than any one or more of the
Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act, except that a Person will be deemed to have
"beneficial ownership" of all shares that any such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of 35% or more of the voting
power of the Voting Stock of the Company; provided, however, that the
Permitted Holders are the "beneficial owners" (as defined in
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Rule 13d-3 under the Exchange Act, except that a Person will be deemed to
have "beneficial ownership" of all shares that any such Person has the
right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, in the aggregate of a
lesser percentage of the total voting power of all classes of the Voting
Stock of the Company than such other Person or group (for purposes of this
clause (b), such Person or group shall be deemed to beneficially own any
Voting Stock of a specified corporation held by a parent corporation so
long as such Person or group beneficially owns, directly or indirectly, in
the aggregate a majority of the voting power of the Voting Stock of such
parent corporation); or
(c) the sale, transfer, assignment, lease, conveyance or other
disposition, directly or indirectly, of all or substantially all the assets
of the Company and the Restricted Subsidiaries, considered as a whole
(other than a disposition of such assets as an entirety or virtually as an
entirety to a Wholly Owned Subsidiary or one or more Permitted Holders)
shall have occurred, or the Company merges, consolidates or amalgamates
with or into any other Person (other than one or more Permitted Holders) or
any other Person (other than one or more Permitted Holders) merges,
consolidates or amalgamates with or into the Company, in any such event
pursuant to a transaction in which the outstanding Voting Stock of the
Company is reclassified into or exchanged for cash, securities or other
Property, other than any such transaction where (i) the outstanding Voting
Stock of the Company is reclassified into or exchanged for Voting Stock of
the surviving corporation and (ii) the holders of the Voting Stock of the
Company immediately prior to such transaction own, directly or indirectly,
not less than a majority of the Voting Stock of the surviving corporation
immediately after such transaction and in substantially the same proportion
as before the transaction; or
(d) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election or appointment by the
applicable board or whose nomination for election by the shareholders of
the Company or the Company was approved by a vote of 66 2/3% of the
applicable directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of
the members of such board then in office; or
(e) the shareholders of the Company shall have approved any plan of
liquidation or dissolution of the Company.
Approval by the Company's Board of Directors will not prevent a transaction
from constituting a Change of Control if it otherwise falls within the
definition hereof.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Interest Coverage Ratio" means, as of any date of
determination, the ratio of (a) the aggregate amount of EBITDA for the most
recent four consecutive fiscal quarters ending at least 45 days prior to such
determination date to (b) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (i) if the Company or any Restricted
Subsidiary has Incurred any Debt (other than Debt incurred in the ordinary
course of business pursuant to revolving credit facilities) since the beginning
of such period that remains outstanding or if the transaction giving rise to the
need to calculate the Consolidated Interest Coverage Ratio is an Incurrence of
Debt, or both, Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Debt as if such Debt had been
Incurred on the first day of such period and the discharge of any other Debt
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Debt as if such discharge had occurred on the first day of such period, (ii)
if since the beginning of such period the Company or any Restricted Subsidiary
shall have repaid, repurchased, legally defeased or otherwise discharged any
Debt with Capital Stock Sale Proceeds, Consolidated Interest Expense for such
period shall be calculated after giving effect on a pro forma basis to such
discharge as if such discharge had occurred on the first day of such period,
(iii) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Sale or if the transaction giving rise to
the need to calculate the Consolidated Interest Coverage Ratio is an Asset Sale,
or both, EBITDA for such period shall be reduced by an amount equal to the
EBITDA (if positive) directly attributable
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to the Property which is the subject of such Asset Sale for such period, or
increased by an amount equal to the EBITDA (if negative) directly attributable
thereto for such period, in either case as if such Asset Sale had occurred on
the first day of such period and Consolidated Interest Expense for such period
shall be reduced by an amount equal to the Consolidated Interest Expense
directly attributable to any Debt of the Company or any Restricted Subsidiary
repaid, repurchased, defeased or otherwise discharged with respect to the
Company and its continuing Restricted Subsidiaries in connection with such Asset
Sale, as if such Asset Sale had occurred on the first day of such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, by an amount equal to
the Consolidated Interest Expense for such period directly attributable to the
Debt of such Restricted Subsidiary to the extent to the Company and its
continuing Restricted Subsidiaries are no longer liable for such Debt after such
sale), (iv) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or
an acquisition of Property, including any acquisition of Property occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Debt) as if
such Investment or acquisition occurred on the first day of such period, (v) if
since the beginning of such period any Person (that subsequently became a
Restricted Subsidiary or was merged with or into the Company or any Restricted
Subsidiary since the beginning of such period) shall have made any Asset Sale,
Investment or acquisition of Property that would have required an adjustment
pursuant to clause (iii) or (iv) above if made by the Company or a Restricted
Subsidiary during such period, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto as if such
Asset Sale, Investment or acquisition occurred on the first day of such period,
and (vi) if since the beginning of such period the Company or any Restricted
Subsidiary shall have permanently reduced or repaid the amount owing under the
Credit Facility or shall have reduced or repaid Debt with a maturity in excess
of one year Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such reduction or repayment as if
such reduction or repayment had occurred on the first day of such period. For
purposes of this definition, pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company and as
further contemplated by the definition of the term "pro forma." If any Debt
bears a floating rate of interest and is being given pro forma effect, the
interest expense on such Debt shall be calculated as if the rate in effect on
the date of determination had been the applicable rate for the entire period
(taking into account any Interest Rate Agreement applicable to such Debt if such
Interest Rate Agreement has a remaining term in excess of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
Incurred by the Company or its Restricted Subsidiaries, (a) interest expense
attributable to capital leases, (b) amortization of debt discount and debt
issuance cost, including commitment fees, other than with respect to Debt
Incurred in connection with the Recapitalization, (c) capitalized interest, (d)
non-cash interest expense (other than interest, if any, that is paid in kind on
the Exchange Debentures, if issued), (e) commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers' acceptance
financing, (f) net costs associated with Hedging Obligations (including
amortization of fees), (g) Disqualified Dividends other than Disqualified
Dividends paid with shares of Parity Stock or Junior Stock of the Company which
is not Disqualified Stock, (h) preferred stock dividends in respect of all
preferred stock of Restricted Subsidiaries held by Persons other than the
Company or a Wholly Owned Subsidiary, (i) interest Incurred in connection with
Investments in discontinued operations, (j) interest accruing on any Debt of any
other Person to the extent such Debt is Guaranteed by the Company or any
Restricted Subsidiary and (k) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Debt Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income (a) any net income (loss)
of any Person (other than the Company) if such Person is not a Restricted
Subsidiary, except that (i) subject to the exclusion contained in clause (d)
below, the Company's equity in the net income of any such Person for such period
shall be included in such Consolidated Net Income up to the aggregate amount of
cash distributed by such Person during such period to the Company or a
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to a Restricted Subsidiary, to the
limitations contained in clause (c) below) and (ii) the Company's equity in a
net loss of any such Person other than an
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Unrestricted Subsidiary for such period shall be included in determining such
Consolidated Net Income, (b) for the purposes of the covenant described under
"--Certain Covenants--Limitation on Restricted Payments" only, any net income
(loss) of any Person acquired by the Company or any of its consolidated
Subsidiaries in a pooling of interests transaction for any period prior to the
date of such acquisition, (c) any net income (but not loss) of any Restricted
Subsidiary if such Restricted Subsidiary is subject to consensual restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions, directly or indirectly, to the Company, except that subject to
the exclusion contained in clause (d) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash distributed by
such Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in the case
of a dividend or other distribution to another Restricted Subsidiary, to the
limitation contained in this clause), (d) any gain (or, for purposes of the
covenants described under "--Certain Covenants--Limitation on Debt" and "--
Merger, Consolidation and Sale of Property" only, loss) realized upon the sale
or other disposition of any Property of the Company or any of its consolidated
Subsidiaries (including pursuant to any Sale and Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business, provided,
that any tax benefit or tax liability resulting therefrom shall be excluded from
such Consolidated Net Income, (e) any extraordinary gain or loss, or any non-
recurring cost or expense relating the Recapitalization provided, that any tax
benefit or tax liability resulting therefrom shall be excluded from such
Consolidated Net Income, (f) the cumulative effect of a change in accounting
principles; and (g) any non-cash compensation expense realized as a result of
the grant, vesting or exercise of performance shares, stock options or other
stock awards to officers, directors and employees of the Company or any
Restricted Subsidiary; and (h) bonuses paid to employees in connection with the
Recapitalization up to $1.0 million in the aggregate. Notwithstanding the
foregoing, for the purposes of the covenant described under "--Certain
Covenants--Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (c)(iv) thereof.
"Credit Facility" means, with respect to the Company or any Restricted
Subsidiary, one or more debt or commercial paper facilities with banks or other
institutional lenders (including the New Credit Facility) providing for
revolving credit loans, term loans, receivables or inventory financing
(including through the sale of receivables or inventory to such lenders or to
special purpose, bankruptcy remote entities formed to borrow from such lenders
against such receivables or inventory) or trade letters of credit, in each case
together with any amendments, supplements, modifications (including by any
extension of the maturity thereof), refinancings or replacements thereof by a
lender or syndicate of lenders in one or more successive transactions (including
any such transaction that changes the amount available thereunder, replaces such
agreement or document, or provides for other agents or lenders).
"Currency Exchange Protection Agreement" means, in respect of a Person, any
foreign exchange contract, currency swap agreement, currency option or other
similar agreement or arrangement designed to protect such Person against
fluctuations in currency exchange rates.
"Debt" means, with respect to any Person on any date of determination
(without duplication), (a) the principal of and premium (if any) in respect of
(i) debt of such Person for money borrowed and (ii) debt evidenced by notes,
debentures, bonds or other similar instruments for the payment of which such
Person is responsible or liable; (b) all Capital Lease Obligations of such
Person and all Attributable Debt in respect of Sale and Leaseback Transactions
entered into by such Person; (c) all obligations of such Person issued or
assumed as the deferred purchase price of Property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (d) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (a) through (c)
above) entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon or, if and to the extent drawn
upon, such drawing is reimbursed no later than the third Business Day following
receipt by such Person of a demand for reimbursement following payment on the
letter of credit); (e) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, any
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preferred stock (but excluding, in each case, any accrued dividends); (f) all
obligations of the type referred to in clauses (a) through (e) of other Persons
and all dividends of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or indirectly, as obligor,
guarantor or otherwise, including by means of any Guarantee; (g) all obligations
of the type referred to in clauses (a) through (f) of other Persons secured by
any Lien on any Property of such Person (whether or not such obligation is
assumed by such Person), the amount of such obligation being deemed to be the
lesser of the value of such Property or the amount of the obligation so secured;
and (h) to the extent not otherwise included in this definition, Hedging
Obligations of such Person. The amount of Debt of any Person at any date shall
be the outstanding balance at such date of all unconditional obligations as
described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date; provided that the amount outstanding at any time of any Debt issued with
original issue discount is the face amount of such Debt less the remaining
unamortized portion of the original issue discount of such Debt at such time as
determined in accordance with GAAP.
"Disqualified Dividends" means, for any dividend with respect to
Disqualified Stock, the quotient of the dividend divided by the difference
between one and the maximum statutory federal income tax rate (expressed as a
decimal number between 1 and 0) then applicable to the issuer of such
Disqualified Stock.
"Disqualified Stock" means, with respect to any Person, Redeemable Stock of
such Person (other than the Exchange Preferred Stock) as to which (i) the
maturity, (ii) mandatory redemption or (iii) redemption, repurchase, conversion
or exchange at the option of the holder thereof occurs, or may occur, on or
prior to the first anniversary of the Stated Maturity of the Exchange Preferred
Stock; provided, however, that Redeemable Stock of such Person that would not
otherwise be characterized as Disqualified Stock under this definition shall not
constitute Disqualified Stock (a) if such Redeemable Stock is convertible or
exchangeable into Debt or Disqualified Stock solely at the option of the issuer
thereof or (b) solely as a result of provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Redeemable Stock
upon the occurrence of a "change of control" occurring prior to the first
anniversary of the Stated Maturity of the Exchange Preferred Stock, if (x) such
repurchase obligation may not be triggered in respect of such Redeemable Stock
unless a corresponding obligation also arises with respect to the Exchange
Preferred Stock and (y) no such repurchase or redemption is permitted to be
consummated unless and until such Person shall have satisfied all repurchase or
redemption obligations with respect to any required purchase offer made with
respect to the Exchange Preferred Stock.
"EBITDA" means, for any period, an amount equal to, for the Company and its
consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for
such period, plus the following to the extent reducing Consolidated Net Income
for such period: (i) the provision for taxes based on income or profits or
utilized in computing net loss, (ii) Consolidated Interest Expense, (iii)
depreciation, (iv) amortization expense and (v) any other non-cash items (other
than any such non-cash item to the extent that it represents an accrual of or
reserve for cash expenditures in any future period), minus (b) all non-cash
items increasing Consolidated Net Income for such period (other than any such
non-cash item to the extent that it will result in the receipt of cash payments
in any future period). Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would not be prohibited at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
any consensual restriction applicable to such Restricted Subsidiary.
"Employee Notes" means promissory notes of employees of the Company or any
of its Subsidiaries payable to the Company and received in connection with the
substantially concurrent purchase of common stock of the Company by such
employees.
"Exchange Act" means the Securities Exchange Act of 1934.
"Fair Market Value" means, with respect to any Property, the price which
could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under undue
pressure or compulsion to complete the transaction. Fair Market Value will be
determined, except as otherwise provided, (a) if such Property has a Fair Market
Value equal to or less than $2.5 million, by any Officer
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of the Company or (b) if such Property has a Fair Market Value in excess of $2.5
million, by a majority of the Board of Directors and evidenced by a Board
Resolution, dated within 30 days of the relevant transaction.
"GAAP" means United States generally accepted accounting principles as in
effect on the Issue Date, including those set forth (a) in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of
Certified Public Accountants, (b) in the statements and pronouncements of the
Financial Accounting Standards Board, (c) in such other statements by such other
entity as approved by a significant segment of the accounting profession and (d)
the rules and regulations of the Commission governing the inclusion of financial
statements (including pro forma financial statements) in periodic reports
required to be filed pursuant to Section 13 of the Exchange Act, including
opinions and pronouncements in staff accounting bulletins and similar written
statements from the accounting staff of the Commission.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (a) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Debt of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (b) entered into for the purpose of assuring in any
other manner the obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligation" of any Person means any obligation of such Person
pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement
or any other similar agreement or arrangement.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by merger, conversion, exchange or otherwise), extend,
assume, Guarantee or become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
obligation on the balance sheet of such Person (and "Incurrence" and "Incurred"
shall have meanings correlative to the foregoing); provided, however, that a
change in GAAP that results in an obligation of such Person that exists at such
time, and is not theretofore classified as Debt, becoming Debt shall not be
deemed an Incurrence of such Debt; provided further, however, that solely for
purposes of determining compliance with "--Certain Covenants--Limitation on
Debt," amortization of debt discount shall not be deemed to be the Incurrence of
Debt, provided that in the case of Debt sold at a discount, the amount of such
Debt Incurred shall at all times be the aggregate principal amount at Stated
Maturity.
"Independent Appraiser" means an investment banking firm of national
standing or any third party appraiser of national standing, provided that such
firm or appraiser is not an Affiliate of the Company.
"Initial Control Group" means Dennis C. Bearden (or his heirs or trusts for
the benefit of his heirs), the members of the Board of Directors of the Company
immediately following the consummation of the Recapitalization and Freeman
Spogli & Co. Incorporated or any successor entity thereof controlled by the
principals of Freeman Spogli & Co. LLC or any entity controlled by, or under
common control with, Freeman Spogli & Co. LLC.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or other
similar agreement designed to protect against fluctuations in interest rates.
"Investment" by any Person means any direct or indirect loan (other than
advances to customers in the ordinary course of business that are recorded as
accounts receivable on the balance sheet of such Person), advance or other
extension of credit or capital contribution (by means of transfers of cash or
other Property to others or payments for Property or services for the account or
use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation
of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or
other securities or evidence of Debt issued by, any other Person. For purposes
of the covenants described under "--Certain Covenants--Limitation on Restricted
Payments," "--Designation of Restricted and Unrestricted Subsidiaries" and
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the definition of "Restricted Payment" and "Investment" shall include the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the Fair Market Value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (a) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (b) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the Fair Market Value of the net assets of such
Subsidiary at the time of such redesignation. In determining the amount of any
Investment made by transfer of any Property other than cash, such property shall
be valued at its Fair Market Value at the time of such Investment.
"Issue Date" means the date on which the Exchange Preferred Stock is
initially issued.
"Lien" means, with respect to any Property of any Person, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including any Capital Lease
Obligation, conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing or any Sale and
Leaseback Transaction).
"Moody's" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"Net Available Cash" from any Asset Sale or other transaction subject to
the covenant described under "--Certain Covenants--Limitation on Issuance or
Sale of Capital Stock of Restricted Subsidiaries" means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Debt or other obligations relating to the
Property that is the subject of such transaction or received in any other non-
cash form), in each case net of (a) all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all Federal, state,
provincial, foreign and local taxes required to be accrued as a liability under
GAAP, as a consequence of such transaction, (b) all payments made on any Debt
which is secured by any Property subject to such transaction, in accordance with
the terms of any Lien upon or other security agreement of any kind with respect
to such Property, or which must by its terms, or in order to obtain a necessary
consent to such transaction, or by applicable law, be repaid out of the proceeds
from such transaction, (c) all distributions and other payments required to be
made to minority interest holders in Subsidiaries or joint ventures as a result
of such transaction and (d) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP, against any liabilities associated
with the Property disposed in such transaction and retained by the Company or
any Restricted Subsidiary after such transaction.
"Officer" means the Chief Executive Officer, the President, the Chief
Financial Officer or any Executive Vice President of the Company.
"Officers' Certificate" means a certificate signed by two Officers of the
Company, at least one of whom shall be the principal executive officer or
principal financial officer of the Company, and delivered to the Transfer Agent.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Transfer Agent. The counsel may be an employee of or counsel
to the Company or the Trustee.
"Permitted Holders" means the Continuing Stockholders, any member of the
senior management of the Company or any of its Subsidiaries (or trusts for the
benefit of his or her immediate family), the directors of the Company
immediately following the consummation of the Recapitalization, and Freeman
Spogli & Co. LLC or any successor entity thereof controlled by the principals of
Freeman Spogli & Co. LLC or any entity controlled by, or under common control
with, Freeman Spogli & Co. LLC.
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"Permitted Investment" means any Investment by the Company or a Restricted
Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the
making of such Investment, become a Restricted Subsidiary; provided that the
primary business of such Restricted Subsidiary is a Related Business; (b) any
Person if as a result of such Investment such Person is merged or consolidated
with or into, or transfers or conveys all or substantially all its Property to,
the Company or a Restricted Subsidiary; provided that such Person's primary
business is a Related Business; (c) Temporary Cash Investments; (d) receivables
owing to the Company or a Restricted Subsidiary, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or such Restricted Subsidiary deems
reasonable under the circumstances; (e) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (f) (i) loans and advances to employees made in the ordinary
course of business consistent with past practices of the Company or such
Restricted Subsidiary, as the case may be; provided that such loans and advances
do not exceed $1.0 million at any one time outstanding and (ii) loans and
advances to, or the receipt of Employee Notes from, employees of the Company or
any of its Subsidiaries made or received in connection with the substantially
concurrent purchase of common stock of the Company by such employees; provided
that the aggregate principal amount of such loans, advances and notes payable
shall not exceed $1.0 million at any one time outstanding; (g) stock,
obligations or other securities received in settlement of debts created in the
ordinary course of business and owing to the Company or a Restricted Subsidiary
or in satisfaction of judgments; (h) any Person to the extent such Investment
represents the non-cash portion of the consideration received in connection with
a disposition of assets; and (i) Investments in Persons engaged in a Related
Business not to exceed $20.0 million at any one time outstanding (it being
agreed that an Investment shall cease to be outstanding to the extent of
dividends, repayments of loans or advances or other transfers of Property
received by the Company or any Restricted Subsidiary from such Persons, provided
that such amounts do not increase the amount of Restricted Payments which the
Company and the Restricted Subsidiaries may make pursuant to clause (c)(iv)(A)
of the covenant described under "Certain Covenants--Limitation on Restricted
Payments").
"Permitted Refinancing Debt" means any Debt that Refinances any other Debt,
including any successive Refinancings, so long as (a) such Debt is in an
aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) not in excess of the sum of (i) the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding of the Debt being Refinanced and (ii) an amount
necessary to pay any fees and expenses, including premiums and defeasance costs,
related to such Refinancing, (b) the Average Life of such Debt is equal to or
greater than the Average Life of the Debt being Refinanced and (c) the Stated
Maturity of such Debt is no earlier than the Stated Maturity of the Debt being
Refinanced; provided, however, that Permitted Refinancing Debt shall not include
(x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the
Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted
Subsidiary.
"Person" means any individual, corporation, company (including any limited
liability company), partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"preferred stock" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to the payment of
dividends, or as to the distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of any other class of
Capital Stock issued by such Person.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms hereof, a calculation performed in accordance with
Article 11 of Regulation S-X promulgated under the Securities Act, as
interpreted in good faith by the Board of Directors after consultation with the
independent certified public accountants of the Company, or otherwise a
calculation made in good faith by the Board of Directors after consultation with
the independent certified public accountants of the Company, as the case may be.
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"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including Capital Stock in, and other securities of, any other
Person.
"Public Equity Offering" means an underwritten public offering of common
stock of the Company pursuant to an effective registration statement under the
Securities Act.
"Purchase Money Debt" means Debt (a) consisting of the deferred purchase
price of property, conditional sale obligations, obligations under any title
retention agreement, other purchase money obligations and obligations in respect
of industrial revenue bonds, in each case where the maturity of such Debt does
not exceed the anticipated useful life of the asset being financed, or (b)
Incurred to finance the acquisition or construction by the Company or a
Restricted Subsidiary of such asset, including remodeling thereof and additions
and improvements thereto; provided, however, that such Debt is Incurred within
180 days after such acquisition of such asset by the Company or a Restricted
Subsidiary or completion of such construction, remodeling, addition or
improvement, as the case may be.
"Redeemable Stock" means, with respect to any Person, any Capital Stock
(other than the Exchange Preferred Stock) that by its terms (or by the terms of
any security into which it is convertible or for which it is exchangeable, in
either case at the option of the holder thereof) or otherwise (a) matures or is
mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b)
is or may become redeemable or repurchaseable at the option of the holder
thereof, in whole or in part, or (c) is convertible or exchangeable, in either
case at the option of the holder thereof, for Debt or Disqualified Stock.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Debt, in
exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.
"Related Business" means any business that is related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Restricted Payment" means (a) any dividend or distribution (whether made
in cash, securities or other Property) declared or paid on or with respect to
any shares of Parity Stock or Junior Stock of the Company or any Capital Stock
of any Restricted Subsidiary (including any payment in connection with any
merger or consolidation with or into the Company or any Restricted Subsidiary),
except for any dividend or distribution which is made solely to the Company or a
Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned
Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro
rata basis or on a basis that results in the receipt by the Company or a
Restricted Subsidiary of dividends or distributions of greater value than it
would receive on a pro rata basis) or any dividend or distribution payable
solely in shares of Junior Stock (other than Disqualified Stock) of the Company;
(b) the purchase, repurchase, redemption, acquisition or retirement for value of
any Parity Stock or Junior Stock of the Company or any Capital Stock of any
Affiliate of the Company (other than from the Company or a Restricted
Subsidiary) or any securities exchangeable for or convertible into any such
Parity Stock, Junior Stock or Capital Stock, including the exercise of any
option to exchange any such Parity Stock, Junior Stock or Capital Stock (other
than for or into Capital Stock that is not Disqualified Stock); or (c) any
Investment (other than Permitted Investments) in any Person. For purposes of the
Exchange Debentures and Exchange Indenture, the definition of "Restricted
Payment" shall include (a) through (c) above and (d) the purchase, repurchase
redemption, acquisition or retirement for value, prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment, of any
Subordinated Obligation (other than the purchase, repurchase or other
acquisition of any Subordinated Obligation purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final maturity,
in each case due within one year of the date of acquisition.)
"Restricted Subsidiary" means (a) any Subsidiary of the Company unless such
Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or
required pursuant to the covenant described under "--Certain Covenants--
Designation of Restricted and Unrestricted Subsidiaries" and (b) an Unrestricted
Subsidiary which is redesignated as a Restricted Subsidiary as permitted
pursuant to the covenant described under "--Certain Covenants--Designation of
Restricted and Unrestricted Subsidiaries."
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"S&P" means Standard & Poor's Ratings Service or any successor to the
rating agency business thereof.
"Sale and Leaseback Transaction" means any arrangement relating to Property
now owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such Property to another Person and the Company or a Restricted
Subsidiary leases it from such Person.
"Securities Act" means the Securities Act of 1933.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subsidiary" means, in respect of any Person, any corporation, company,
association, partnership, joint venture or other business entity of which more
than 50% of the total voting power of shares of Capital Stock or other interests
(including partnership interests) entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled directly or indirectly, by (a) such
Person, (b) such Person and one or more Subsidiaries of such Person or (c) one
or more Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (a) Investments in
U.S. Government Obligations; (b) Investments in time deposit accounts,
certificates of deposit and money market deposits maturing within 90 days of the
date of acquisition thereof issued by a bank or trust company which is organized
under the laws of the United States of America or any state thereof having
capital, surplus and undivided profits aggregating in excess of $500.0 million
and whose long-term debt is rated "A-3" or "A-" or higher according to Moody's
or S&P (or such similar equivalent rating by at least one "nationally recognized
statistical rating organization" (as defined in Rule 436 under the Securities
Act)); (c) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (a) entered into with a
bank meeting the qualifications described in clause (b) above; (d) Investments
in commercial paper, maturing not more than 90 days after the date of
acquisition, issued by a corporation (other than an Affiliate of The Company)
organized and in existence under the laws of the United States of America with a
rating at the time as of which any Investment therein is made of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P (or such
similar equivalent rating by at least one "nationally recognized statistical
rating organization" (as defined in Rule 436 under the Securities Act)); (e)
direct obligations (or certificates representing an ownership interest in such
obligations) of any state of the United States of America (including any agency
or instrumentality thereof) for the payment of which the full faith and credit
of such state is pledged and which are not callable or redeemable at the
issuer's option, provided that (i) the long-term debt of such state is rated "A-
3" or "A-" or higher according to Moody's or S&P (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act)) and (ii) such obligations
mature within 180 days of the date of acquisition thereof; and (f) investments
in money market funds which invest substantially all their assets in securities
of the types described in clauses (a) through (e) above.
"Unrestricted Subsidiary" means (a) any Subsidiary of the Company in
existence on the Issue Date that is not a Restricted Subsidiary; (b) any
Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company
that is designated after the Issue Date as an Unrestricted Subsidiary as
permitted or required pursuant to the covenant described under "--Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries" and not
thereafter redesignated as a Restricted Subsidiary as permitted pursuant
thereto.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
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"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof.
"Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all
the Voting Stock of which (except directors' qualifying shares) is at such time
owned, directly or indirectly, by the Company and its other Wholly Owned
Subsidiaries.
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DESCRIPTION OF THE EXCHANGE DEBENTURES
The Exchange Debentures, if issued, will be issued under an indenture (the
"Exchange Indenture"), between the Company and a financial institution with a
combined capital and surplus of at least $100.0 million, as Trustee (the
"Trustee"). The following is a summary of certain provisions of the Exchange
Indenture and the Exchange Debentures. A copy of the form of the Exchange
Indenture and the form of the Exchange Debentures are available upon request to
the Company at the Company's address set forth under "Available Information."
The following summary of certain provisions of the Exchange Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Exchange Indenture, including those
terms made a part thereof by the Trust Indenture Act of 1939, as amended. For
purposes of this Section, references to "the Company" shall mean Century
Maintenance Supply, Inc. excluding its subsidiaries. Certain other capitalized
terms used but not defined in the following summary are set forth under "--
Description of the Exchange Preferred Stock--Certain Definitions." Other
capitalized terms used but not defined herein and not otherwise defined under "-
- -Description of the Exchange Preferred Stock--Certain Definitions" are defined
in the Exchange Indenture. The terms of the New Credit Facility limit the
Company's ability to issue the Exchange Debentures. See "Description of New
Credit Facility."
The Exchange Debentures will mature on July 1, 2010 and will be limited in
aggregate principal amount to the liquidation preference of the Preferred Stock,
plus without duplication, accumulated and unpaid dividends on the Exchange Date
of the Preferred Stock for Exchange Debentures (plus any additional Exchange
Debentures issued in lieu of cash interest as described herein). Future
indebtedness of the Company may prohibit the Company from making payments on the
Exchange Debentures at maturity. The Exchange Debentures will be issued only in
fully registered form, without coupons, in denominations of $1,000 and any
integral multiple of $1,000 other than as described in "Description of the
Exchange Preferred Stock--Exchange for Exchange Debentures" or with respect to
additional Exchange Debentures issued in lieu of cash interest as described
herein.
The Exchange Debentures will bear interest at the rate of 13 1/4% per annum
from the most recent date on which interest has been paid or, if no interest has
been paid from the Exchange Date, payable semiannually in cash (or, on or prior
to July 1, 2003, in additional Exchange Debentures, at the option of Company) in
arrears on each January 1 and July 1, beginning on the first such date after the
Exchange Date, to the Persons who are registered holders of the Exchange
Debentures at the close of business on the preceding December 15 or June 15 as
the case may be. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, and premium, if any, and interest on, the Exchange Debentures
will be payable and the Exchange Debentures will be exchangeable and
transferable, at an office or agency of the Company, one of which will be
maintained for such purpose in The City of New York (which initially will be the
corporate trust office of the Trustee); provided, however, that payment of
interest may be made at the option of the Company by check mailed to the Person
entitled thereto as shown on the Security Register. No service charge will be
made for any registration of transfer or exchange of Exchange Debentures, except
for any tax or other governmental charge that may be imposed in connection
therewith.
OPTIONAL REDEMPTION
Except as set forth below, the Exchange Debentures will not be redeemable
at the option of Company prior to July 1, 2003. Thereafter, the Exchange
Debentures will be redeemable, at the Company's option, in whole or in part, at
any time or from time to time, upon not less than 30 nor more than 60 days'
prior notice mailed by first-class mail to each holder's registered address, at
the following redemption prices (expressed in percentages of principal amount),
plus accrued interest to the redemption date (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
July 1 of the years set forth below:
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<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------------------- -------------
<S> <C> <C>
2003.................. 106.625%
2004.................. 105.300%
2005.................. 103.975%
2006.................. 102.650%
2007.................. 101.325%
2008 and thereafter... 100.000%
</TABLE>
In addition, at any time prior to January 1, 2001, the Company may redeem
at its option (i) up to 50% or (ii) all but not less than all of the outstanding
Exchange Debentures with the net proceeds of any Public Equity Offering by the
Company at a redemption price (expressed as a percentage of principal amount) of
113 1/4% plus accrued interest to the redemption date (subject to the right of
holders of record on the relevant record date to receive interest due on the
relevant interest payment date). Any such redemption shall be made for a period
of 90 days following consummation of such Public Equity Offering upon not less
than 30 nor more than 60 days' notice.
SUBORDINATION
The Exchange Debentures will be subordinated, unsecured obligations of the
Company. The payment of the principal of, and premium, if any, and interest on,
the Exchange Debentures will be subordinated in right of payment to the payment
when due of all Senior Debt (including senior subordinated indebtedness) of the
Company. The Exchange Debentures will rank pari passu in right of payment with
any future Subordinated Debt of the Company.
As of June 30, 1998, after giving effect to the Recapitalization, the
Company would have had approximately $100.0 million of Senior Debt. The Company
would also have had $25.0 million of undrawn commitments available under the New
Credit Facility, which if drawn would constitute Senior Debt. The Company would
not have had any outstanding Subordinated Debt.
The Exchange Debentures will be effectively subordinated to creditors
(including trade creditors) and preferred stockholders, if any, of Subsidiaries
of the Company. Since a substantial portion of the operations of the Company
are conducted through Subsidiaries, the Company's ability to service its debt,
including the Exchange Debentures , is partially dependent upon the earnings of
any such Subsidiaries and the distribution of those earnings to, or upon loans
or other payments of funds by those Subsidiaries to, the Company. The payment
of dividends and the making of loans and advances to the Company by such
Subsidiaries are subject to statutory restrictions.
The Company may not pay principal of, or premium, if any, or interest on,
the Exchange Debentures, or make any deposit pursuant to the provisions
described under "--Events of Default--Defeasance," and may not repurchase,
redeem or otherwise retire any Exchange Debentures (collectively, "pay the
Exchange Debentures"), if (a) any principal, premium or interest in respect of
any Senior Debt is not paid within any applicable grace period (including at
maturity) or (b) any other default on Senior Debt occurs and the maturity of
such Senior Debt is accelerated in accordance with its terms unless, in either
case, (i) the default has been cured or waived and any such acceleration has
been rescinded or (ii) such Senior Debt has been paid in full in cash; provided,
however, that the Company may pay the Exchange Debentures without regard to the
foregoing if the Company and the Trustee receive written notice approving such
payment from the Representative of each issue of Designated Senior Debt. During
the continuance of any default (other than a default described in clause (a) or
(b) of the preceding sentence) with respect to any Designated Senior Debt
pursuant to which the maturity thereof may be accelerated immediately without
further notice (except notice required to effect the acceleration) or the
expiration of any applicable grace period, the Company may not pay the Exchange
Debentures for a period (a "Payment Blockage Period") commencing upon the
receipt by the Company and the Trustee of written notice of such default from
the Representative of the holders of such Designated Senior Debt specifying an
election to effect a Payment Blockage Period (a "Payment Blockage Notice") and
ending 179 days thereafter (unless such Payment Blockage Period is earlier
terminated (a) by written notice to the Trustee and the Company from the
Representative which gave such
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Payment Blockage Notice, (b) because such default is no longer continuing or (c)
because such Designated Senior Debt has been repaid in full in cash). Unless the
holders of such Designated Senior Debt or the Representative of such holders
have accelerated the maturity of such Designated Senior Debt and not rescinded
such acceleration, the Company may (unless otherwise prohibited as described in
the first sentence of this paragraph) resume payments on the Exchange Debentures
after the end of such Payment Blockage Period. Not more than one Payment
Blockage Notice with respect to all issues of Designated Senior Debt may be
given in any consecutive 360-day period, irrespective of the number of defaults
with respect to one or more issues of Designated Senior Debt during such period.
Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation, dissolution or winding up of the Company or in a
bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to the Company or its Property, the holders of Senior Debt will be
entitled to receive payment in full in cash before the holders of the Exchange
Debentures are entitled to receive any payment of principal of or interest on
the Exchange Debentures, except that holders of Exchange Debentures may receive
and retain shares of stock and any debt securities that are subordinated to
Senior Debt to at least the same extent as the Exchange Debentures. Until the
Senior Debt is paid in full in cash, any distribution to which holders of the
Exchange Debentures would be entitled will be made to holders of the Senior
Debt. If a payment or distribution is made to holders of Exchange Debentures
that, due to the subordination provisions, should not have been made to them,
such holders are required to hold it in trust for the holders of Senior Debt and
pay it over to them as their interests may appear.
If payment of the Exchange Debentures is accelerated when any Designated
Senior Debt is outstanding, the Company may not pay the Exchange Debentures
until three business days after the Representatives of all issues of Designated
Senior Debt receive notice of such acceleration.
By reason of the subordination provisions contained in the Exchange
Indenture, in the event of bankruptcy or similar proceedings relating to the
Company, holders of Senior Debt and other creditors (including trade creditors)
of the Company may recover more ratably, even if the Exchange Debentures are
pari passu with their claims, than the holders of the Exchange Debentures. In
such event, there may be insufficient assets or no assets remaining to pay the
principal of or interest on the Exchange Debentures.
Payment from the money or the proceeds of U.S. Government Obligations held
in any defeasance trust pursuant to the provisions described under "--Events of
Default--Defeasance" will not be subject to the subordination provisions
described above.
See "Risk Factors--Subordination," "--Fraudulent Conveyance
Considerations," "--Substantial Leverage; Stockholders' Deficit" and
"Description of New Credit Facility."
The terms of the subordination provisions described above will not apply to
payments from money or the proceeds of U.S. Government Obligations held in
trust by the Trustee for the payment of principal of and interest on the
Exchange Debentures pursuant to the provisions described under "--Events of
Default--Defeasance."
For the purposes of this section regarding Subordination, the following
definitions apply:
"Designated Senior Debt" means any Senior Debt which has, at the time of
determination, an aggregate principal amount outstanding of at least $10.0
million (including the amount of all undrawn commitments and matured and
contingent reimbursement obligations pursuant to letters of credit thereunder)
that is specifically designated in the instrument evidencing such Senior Debt
and is designated in a notice delivered by the Company to the holders or a
Representative of the holders of such Senior Debt and in an Officers'
Certificate delivered to the Trustee as "Designated Senior Debt" of the Company
for purposes of the Exchange Indenture; provided that the Credit Facility shall
be deemed to be Designated Senior Debt under the Exchange Indenture.
"Senior Debt" of the Company means (a) all obligations consisting of the
principal, premium, if any, and accrued and unpaid interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company to the extent post-filing interest is
allowed in such proceeding) in respect
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of (i) Debt of the Company for borrowed money, including Debt under the Credit
Facility, and (ii) Debt of the Company evidenced by notes, debentures, bonds or
other similar instruments permitted under the Exchange Indenture for the payment
of which the Company is responsible or liable; (b) all Capital Lease Obligations
of the Company; (c) all obligations of the Company (i) for the reimbursement of
any obligor on any letter of credit, bankers' acceptance or similar credit
transaction, (ii) under Hedging Obligations or (iii) issued or assumed as the
deferred purchase price of Property and all conditional sale obligations of the
Company and all obligations under any title retention agreement permitted under
the Exchange Indenture; and (d) all obligations of other Persons of the type
referred to in clauses (a), (b) and (c) for the payment of which the Company is
responsible or liable as Guarantor; provided, however, that Senior Debt shall
not include (A) Debt of the Company that is by its terms subordinate or pari
passu in right of payment to the Exchange Debentures, including any Subordinated
Debt and Subordinated Obligations; (B) any Debt Incurred in violation of the
provisions of the Exchange Indenture; (C) accounts payable or any other
obligations of the Company to trade creditors created or assumed by the Company
in the ordinary course of business in connection with the obtaining of materials
or services (including Guarantees thereof or instruments evidencing such
liabilities); (D) any liability for Federal, state, local or other taxes owed or
owing by the Company; (E) any obligation of the Company to any Subsidiary; or
(F) any obligations with respect to any Capital Stock.
BOOK-ENTRY SYSTEM
The Exchange Debentures may be issued in the form of one or more global
securities (collectively, a "Global Security"). A Global Security will be
deposited with, or on behalf of, the DTC and registered in the name of the DTC
or its nominee. Except as set forth below, a Global Security may be
transferred, in whole and not in part, only to the DTC or another nominee of the
DTC. Investors may hold their beneficial interests in a Global Security
directly through the DTC if they have an account with the DTC or indirectly
through organizations which have accounts with the DTC.
Depository Procedures
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of Persons holding through it with the respective principal amounts of
the Exchange Debentures represented by such Global Security purchased by such
Persons. Such accounts shall be designated by the Initial Purchaser of such
Exchange Debentures. Ownership of beneficial interests in a Global Security will
be limited to Persons that have accounts with DTC ("participants") or Persons
that may hold interests through participants. Any Person acquiring an interest
in a Global Security through an offshore transaction in reliance on Regulation S
of the Securities Act may hold such interest through Cedel or Euroclear.
Ownership of beneficial interests in a Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by DTC (with respect to participants' interests) and such
participants (with respect to the owners of beneficial interests in such Global
Security other than participants). The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal of and interest on Exchange Debentures represented by
a Global Security will be made to DTC or its nominee, as the case may be, as the
sole registered owner and the sole holder of the Exchange Debentures represented
thereby for all purposes under the Exchange Indenture. The Company has been
advised by DTC that upon receipt of any payment of principal of or interest on
any Global Security, DTC will immediately credit, on its book-entry registration
and transfer system, the accounts of participants with payments in amounts
proportionate to their respective beneficial interests in the principal or face
amount of such Global Security as shown on the records of DTC. Payments by
participants to owners of beneficial interests in a Global Security held through
such participants will be governed by standing instructions and customary
practices as is now the case with securities held for customer accounts
registered in "street name" and will be the sole responsibility of such
participants.
A Global Security may not be transferred except as a whole by DTC or a
nominee of DTC to a nominee of DTC or to DTC. A Global Security is exchangeable
for certificated Exchange Debentures only if (a) DTC notifies the Company that
it is unwilling or unable to continue as a depositary for such Global Security
or if at any time DTC ceases to be a clearing agency registered under the
Exchange Act, (b) the Company in its discretion at
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any time determines not to have all the Exchange Debentures represented by such
Global Security or (c) there shall have occurred and be continuing a Default or
an Event of Default with respect to the Exchange Debentures represented by such
Global Security. Any Global Security that is exchangeable for certificated
Exchange Debentures pursuant to the preceding sentence will be exchanged for
certificated Exchange Debentures in authorized denominations and registered in
such names as DTC or any successor depositary holding such Global Security may
direct. Subject to the foregoing, a Global Security is not exchangeable, except
for a Global Security of like denomination to be registered in the name of DTC
or any successor depositary or its nominee. In the event that a Global Security
becomes exchangeable for certificated Exchange Debentures, (a) certificated
Exchange Debentures will be issued only in fully registered form in
denominations of $1,000 or integral multiples thereof, (b) payment of principal
of, and premium, if any, and interest on, the certificated Exchange Debentures
will be payable, and the transfer of the certificated Exchange Debentures will
be registerable, at the office or agency of the Company maintained for such
purposes and (c) no service charge will be made for any registration of transfer
or exchange of the certificated Exchange Debentures, although the Company may
require payment of a sum sufficient to cover any tax or governmental charge
imposed in connection therewith.
So long as DTC or any successor depositary for a Global Security, or any
nominee, is the registered owner of such Global Security, DTC or such successor
depositary or nominee, as the case may be, will be considered the sole owner or
holder of the Exchange Debentures represented by such Global Security for all
purposes under the Exchange Indenture and the Exchange Debentures. Except as
set forth above, owners of beneficial interests in a Global Security will not be
entitled to have the Exchange Debentures represented by such Global Security
registered in their names, will not receive or be entitled to receive physical
delivery of certificated Exchange Debentures in definitive form and will not be
considered to be the owners or holders of any Exchange Debentures under such
Global Security. Accordingly, each Person owning a beneficial interest in a
Global Security must rely on the procedures of DTC or any successor depositary,
and, if such Person is not a participant, on the procedures of the participant
through which such Person owns its interest, to exercise any rights of a holder
under the Exchange Indenture. The Company understands that under existing
industry practices, in the event that the Company requests any action of holders
or that an owner of a beneficial interest in a Global Security desires to give
or take any action which a holder is entitled to give or take under the Exchange
Indenture, DTC or any successor depositary would authorize the participants
holding the relevant beneficial interest to give or take such action and such
participants would authorize beneficial owners owning through such participants
to give or take such action or would otherwise act upon the instructions of
beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (which may include the Initial Purchaser), banks, trust companies,
clearing corporations and certain other organizations some of whom (or their
representatives) own DTC. Access to DTC's book-entry system is also available
to others, such as banks, brokers, dealers and trust companies, that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in Global Securities among participants of DTC, it is
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of the Company, the Trustee or
the Initial Purchaser will have any responsibility for the performance by DTC or
its participants or indirect participants of their respective obligations under
the rules and procedures governing their operations.
REPURCHASE AT THE OPTION OF THE HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Exchange
Debentures shall have the right to require the Company to repurchase all or any
part of such holder's Exchange Debentures pursuant to the offer described below
(the "Change of Control Offer") at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the purchase date
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(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date). The Trustee does
not have the authority under the Exchange Indenture to waive the covenant
relating to the holder's right to require redemption of the Exchange Debentures
upon the occurrence of a Change of Control.
Within 30 days following any Change of Control, the Company shall (a) cause
a notice of the Change of Control Offer to be sent at least once to the Dow
Jones News Service or similar business news service in the United States and (b)
send, by first-class mail, with a copy to the Trustee, to each holder of
Exchange Debentures, at such holder's address appearing in the Security
Register, a notice stating: (i) that a Change of Control has occurred and a
Change of Control Offer is being made pursuant to the covenant entitled
"Repurchase at the Option of Holders Upon a Change of Control" and that all
Exchange Debentures timely tendered will be accepted for payment; (ii) the
Change of Control Purchase Price and the purchase date, which shall be, subject
to any contrary requirements of applicable law, a business day no earlier than
30 days nor later than 60 days from the date such notice is mailed; (iii) the
circumstances and relevant facts regarding the Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to the Change of Control); and (iv) the
procedures that holders of Exchange Debentures must follow in order to tender
their Exchange Debentures (or portions thereof) for payment, and the procedures
that holders of Exchange Debentures must follow in order to withdraw an election
to tender Exchange Debentures (or portions thereof) for payment.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Exchange Debentures pursuant to a Change of
Control Offer. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the covenant described
hereunder by virtue of such compliance.
The Change of Control repurchase feature is a result of negotiations
between the Company and the Initial Purchaser. Management has no present
intention to engage in a transaction involving a Change of Control, although it
is possible that the Company would decide to do so in the future. Subject to
certain covenants described below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Exchange Indenture, but that could increase the amount of debt outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
The definition of Change of Control includes a phrase relating to the sale,
transfer, assignment, lease, conveyance or other disposition of "all or
substantially all" the Company's assets. Although there is a developing body of
case law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a holder of Exchange Debentures to require the Company to repurchase
such Exchange Debentures as a result of a sale, transfer, assignment, lease,
conveyance or other disposition of less than all the assets of the Company may
be uncertain.
The Credit Facility prohibits the repurchase by the Company of any Exchange
Debentures. In addition, the occurrence of certain of the events that would
constitute a Change of Control would constitute a default under the Credit
Facility. Other future debt of the Company may require repayment upon a Change
of Control and may prohibit the Company from repurchasing Exchange Debentures.
Moreover, the exercise by holders of Exchange Debentures of their right to
require the Company to repurchase such Exchange Debentures could cause a default
under existing or future debt of the Company, even if the Change of Control
itself does not. Finally, the Company's ability to pay cash to holders of
Exchange Debentures upon a repurchase may be limited by the Company's then
existing financial resources. There can be no assurance that sufficient funds
will be available when necessary to make any required repurchases. The Company's
failure to purchase Exchange Debentures in connection with a Change of Control
would result in a default under the Exchange Indenture which would, in turn,
constitute a default under existing (and may constitute a default under future)
debt of the Company. If such debt constitutes Designated Senior Debt, the
subordination provisions in the Exchange Indenture would likely restrict payment
to holders of Exchange Debentures. The provisions under the Exchange Indenture
relative to the Company's obligation to make an offer to repurchase the Exchange
Debentures as a result of a Change of Control
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may be waived or modified (at any time prior to the occurrence of such Change of
Control) with the written consent of the holders of a majority in principal
amount of the Exchange Debentures.
CERTAIN COVENANTS
The Exchange Indenture contains covenants including, among others, the
following:
Limitation on Debt. The Company shall not, and shall not permit any
Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after
giving pro forma effect to the application of the proceeds thereof, no Default
or Event of Default would occur as a consequence of such Incurrence or be
continuing following such Incurrence and either (a) after giving effect to the
Incurrence of such Debt and the application of the proceeds thereof, the
Consolidated Interest Coverage Ratio would be greater than 2.00 to 1.00 or (b)
such Debt is Permitted Debt.
The term "Permitted Debt" is defined to include the following:
(a) Debt evidenced by the Exchange Debentures;
(b)(i) Debt under the Credit Facility; provided that the aggregate
principal amount of all such Debt under the Credit Facility comprised of
(A) term loans at any one time outstanding shall not exceed $100.0 million
minus all principal amounts repaid in respect of such term loans and (B)
revolving credit loans and obligations at any one time outstanding shall
not exceed the greater of (x) $25.0 million or (y) the sum of the amounts
equal to (1) 60% of the net book value of the inventory of the Company and
the Restricted Subsidiaries and (2) 85% of the net book value of the
accounts receivable of the Company and the Restricted Subsidiaries, in each
case as of the most recent fiscal quarter ending at least 45 days prior to
the date of determination and (ii) Guarantees of Debt under the New Credit
Facility;
(c) Debt in respect of Capital Lease Obligations and Purchase Money
Debt; provided that (i) the aggregate principal amount of such Debt does
not exceed the Fair Market Value (on the date of the Incurrence thereof) of
the Property acquired, constructed or leased (including costs of
installation, taxes and delivery charges with respect to such acquisition,
construction or lease) and (ii) the aggregate principal amount of all Debt
Incurred and then outstanding pursuant to this clause (c) (together with
all Permitted Refinancing Debt Incurred in respect of Debt previously
Incurred pursuant to this clause (c) and then outstanding) does not exceed
$10.0 million;
(d) Debt of the Company owing to and held by any Wholly Owned
Subsidiary and Debt of a Wholly Owned Subsidiary owing to and held by the
Company or any Wholly Owned Subsidiary; provided, however, that any
subsequent issue or transfer of Capital Stock or other event that results
in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary
or any subsequent transfer of any such Debt (except to the Company or a
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute the
Incurrence of such Debt by the issuer thereof;
(e) Debt of a Wholly Owned Subsidiary Incurred and outstanding on or
prior to the date on which such Wholly Owned Subsidiary was acquired by the
Company or otherwise became a Restricted Subsidiary (other than Debt
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
transactions pursuant to which such Wholly Owned Subsidiary became a
Subsidiary of the Company or was otherwise acquired by the Company);
provided that at the time such Wholly Owned Subsidiary was acquired by the
Company or otherwise became a Restricted Subsidiary and after giving pro
forma effect to the Incurrence of such Debt, the Company would have been
able to Incur $1.00 of additional Debt pursuant to clause (a) in the first
paragraph of this covenant;
(f) Debt under Interest Rate Agreements entered into by the Company or
a Restricted Subsidiary for the purpose of limiting interest rate risk in
the ordinary course of the financial management of the Company or such
Restricted Subsidiary and not for speculative purposes, provided that the
obligations
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under such agreements are directly related to payment obligations on Debt
otherwise permitted by the terms of this covenant;
(g) Debt under Currency Exchange Protection Agreements entered into by
the Company or a Restricted Subsidiary for the purpose of limiting currency
exchange rate risks directly related to transactions entered into by the
Company or such Restricted Subsidiary in the ordinary course of business
and not for speculative purposes;
(h) Debt in connection with one or more standby letters of credit or
performance bonds issued for the account of the Company or any Restricted
Subsidiary in the ordinary course of business or pursuant to self-insurance
obligations and not in connection with the borrowing of money or the
obtaining of advances;
(i) Debt outstanding on the Issue Date not otherwise described in
clauses (a) through (h) above;
(j) Debt not otherwise described in clauses (a) through (i) above in
an aggregate principal amount outstanding at any one time not to exceed
$15.0 million; and
(k) Permitted Refinancing Debt Incurred in respect of Debt Incurred
pursuant to clause (a) of the first paragraph of this covenant and clauses
(a), (c), (e) and (i) above, subject, in the case of clause (c) above, to
the limitations set forth in the proviso thereto.
Notwithstanding the immediately foregoing two paragraphs, (a) the Company
shall not, and shall not permit any Restricted Subsidiary to, Incur any Debt
pursuant to such paragraphs if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations unless such Debt shall be
subordinated to the Exchange Debentures to at least the same extent as such
Subordinated Obligations.
Limitation on Restricted Payments. The Company shall not make, and shall
not permit any Restricted Subsidiary to make, directly or indirectly, any
Restricted Payment if at the time of, and after giving pro forma effect to, such
proposed Restricted Payment,
(a) a Default or Event of Default shall have occurred and be
continuing,
(b) the Company could not Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described
under "--Limitation on Debt" or
(c) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made since the Issue Date (the amount of
any Restricted Payment, if made other than in cash, to be based upon Fair
Market Value) would exceed an amount equal to the sum of:
(i) 50% of the aggregate amount of Consolidated Net Income
accrued during the period (treated as one accounting period) from the
beginning of the fiscal quarter during which the Issue Date occurs to the
end of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment (or if the aggregate amount of Consolidated
Net Income for such period shall be a deficit, minus 100% of such deficit),
(ii) Capital Stock Sale Proceeds,
(iii) the amount by which Debt of the Company Incurred after the
Issue Date is reduced on the Company's balance sheet upon the conversion or
exchange (other than by the Company or a Subsidiary of the Company)
subsequent to the Issue Date of any Debt (other than Subordinated
Obligations) of the Company for Capital Stock (other than Disqualified
Stock) of the Company (less the amount of any cash or other Property
distributed by the Company or any Restricted Subsidiary upon such
conversion or exchange), and
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(iv) an amount equal to the sum of (A) the net reduction in
Investments in any Person other than the Company or a Restricted Subsidiary
resulting from dividends, repayments of loans or advances or other
transfers of Property, in each case to the Company or any Restricted
Subsidiary from such Person, to the extent such dividends, repayments or
transfers do not increase the amount of Permitted Investments permitted to
be made pursuant to clause (i) of the definition thereof and (B) the
portion (proportionate to the Company's equity interest in such
Unrestricted Subsidiary) of the Fair Market Value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the foregoing
sum shall not exceed, in the case of any Person, the amount of Investments
previously made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Person, and
(v) $5.0 million.
Notwithstanding the foregoing limitation, the Company may:
(a) pay dividends on its Capital Stock within 60 days of the
declaration thereof if, on said declaration date, such dividends could have
been paid in compliance with the Exchange Indenture; provided, however,
that at the time of such payment of such dividend, no other Default or
Event of Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments;
(b) purchase, repurchase, redeem, legally defease, acquire or retire
for value Capital Stock of the Company or Subordinated Obligations in
exchange for, or in an amount not in excess of the proceeds of the
substantially concurrent sale of, Capital Stock of the Company (other than
Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary of the Company or an employee stock ownership plan or trust
established by the Company or any of its Subsidiaries for the benefit of
their employees); provided, however, that (i) such purchase, repurchase,
redemption, legal defeasance, acquisition or retirement shall be excluded
in the calculation of the amount of Restricted Payments and (ii) the
Capital Stock Sale Proceeds from such exchange or sale shall be excluded
from the calculation pursuant to clause (c)(ii) above;
(c) purchase, repurchase, redeem, legally defease, acquire or retire
for value any Subordinated Obligations in exchange for, or in an amount not
in excess of the proceeds of the substantially concurrent sale of,
Permitted Refinancing Debt; provided, however, that such purchase,
repurchase, redemption, legal defeasance, acquisition or retirement shall
be excluded in the calculation of the amount of Restricted Payments;
(d) purchase, repurchase, redeem, legally defease, acquire or retire
for value shares of, or options to purchase shares of, common stock of the
Company, from employees or former employees of the Company or its
Subsidiaries (or their estates or beneficiaries thereof) upon death,
disability, retirement or termination pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors, under which such individuals
purchase or sell, or are granted the option to purchase or sell, shares of
such common stock, provided, however, that (i) the aggregate amount of such
purchases, repurchases, redemptions, defeasances, acquisitions or
retirements shall not exceed $2.5 million in any year or $5.0 million
during the term of the Exchange Debentures, except that (x) such amounts
shall be increased by the aggregate net amount of cash received by the
Company after the Issue Date from the sale of such shares to, or the
exercise of options to purchase such shares by, employees of the Company or
its Subsidiaries and (y) the Company may forgive or return Employee Notes
without regard to the limitation set forth in clause (d)(i) above and such
forgiveness or return shall not be treated as a Restricted Payment for
purposes of determining compliance with such clause (d)(i) and (ii) such
purchases, repurchases, defeasances, acquisitions or retirements (but not
forgiveness or return of Employee Notes) shall be included in the
calculation of the amount of Restricted Payments; and
(e) purchase or redeem Subordinated Obligations pursuant to asset sale
or change of control provisions contained in the governing instrument
relating thereto; provided, however, that (i) no offer or
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purchase obligation may be triggered in respect of any such Subordinated
Obligation unless a corresponding obligation also arises with respect to
the Exchange Debentures and (ii) in any event, no repurchase or redemption
of any such Subordinated Obligation may be consummated unless and until the
Company shall have satisfied all repurchase obligations with respect to any
required purchase offer made with respect to the Exchange Debentures;
provided, however, that such purchases or redemptions shall be included in
the calculation of the amount of Restricted Payments.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any
Lien (other than Permitted Liens) upon any of its Property (including Capital
Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, or any interest therein or any income or profits therefrom, unless (i)
if such Lien secures Subordinated Debt, the Exchange Debentures are secured on
an equal and ratable basis with such Debt and (ii) if such Lien secures
Subordinated Obligations, such Lien shall be subordinated to a Lien securing the
Exchange Debentures in the same Property as that securing such Lien to the same
extent as such Subordinated Obligations are subordinated to the Exchange
Debentures.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries.
The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any
shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted
Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any
shares of its Capital Stock, other than (i) directors' qualifying shares, (ii)
to the Company or a Wholly Owned Subsidiary or (iii) a disposition of 100% of
the shares of Capital Stock of a Restricted Subsidiary that complies with the
covenant described under "--Limitation on Asset Sales."
Limitation on Asset Sales. The Company shall not, and shall not permit
any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale
unless (a) the Company or such Restricted Subsidiary receives consideration at
the time of such Asset Sale at least equal to the Fair Market Value of the
Property subject to such Asset Sale; (b) at least 75% of the consideration
received by the Company or such Restricted Subsidiary in connection with such
Asset Sale is in the form of cash, cash equivalents or Additional Assets or the
assumption by the purchaser of liabilities of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
Exchange Debentures) as a result of which the Company and the Restricted
Subsidiaries are no longer obligated with respect to such liabilities; and (c)
the Company delivers an Officers' Certificate to the Trustee certifying that
such Asset Sale complies with the foregoing clauses (a) and (b).
The Net Available Cash (or any portion thereof) from Asset Sales may be
applied by the Company or a Restricted Subsidiary, to the extent the Company or
such Restricted Subsidiary elects (or is required by the terms of any Debt): (a)
to prepay, repay, legally defease or purchase Senior Debt of the Company or any
Restricted Subsidiary (excluding, in any such case, Disqualified Stock and Debt
owed to the Company or an Affiliate of the Company); or (b) to reinvest in
Additional Assets (including by means of an Investment in Additional Assets by a
Restricted Subsidiary with Net Available Cash received by the Company or another
Restricted Subsidiary); provided, however, that in connection with any
prepayment, repayment, legal defeasance or purchase of Debt pursuant to clause
(a) above, the Company or such Restricted Subsidiary shall retire such Debt and
shall cause the related loan commitment (if any) to be permanently reduced by an
amount equal to the principal amount so prepaid, repaid, legally defeased or
purchased.
Any Net Available Cash from an Asset Sale not applied in accordance with
the preceding paragraph within twelve months from the date of the receipt of
such Net Available Cash shall constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $10.0 million (taking into account income
earned on such Excess Proceeds, if any), the Company will be required to make an
offer to purchase (the "Prepayment Offer") the Exchange Debentures which offer
shall be in the amount of the Excess Proceeds, on a pro rata basis according to
principal amount, at a purchase price equal to 100% of the principal amount
thereof plus accrued and unpaid interest thereon, if any, to the purchase date
(subject to the right of holders of record on the relevant record date to
receive interest due on the relevant interest payment date) in accordance with
the procedures (including prorating in the event of oversubscription) set forth
in the Exchange Indenture. To the extent that any portion of the amount of Net
Available Cash remains after compliance with the preceding sentence and provided
that all holders of Exchange Debentures have been given the opportunity to
tender their Exchange Debentures for purchase in accordance with
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the Exchange Indenture, the Company or such Restricted Subsidiary may use such
remaining amount for any purpose permitted by the Exchange Indenture and the
amount of Excess Proceeds will be reset to zero.
Within five business days after the Company is obligated to make a
Prepayment Offer as described in the preceding paragraph, the Company shall send
a written notice, by first-class mail, to the holders of Exchange Debentures,
accompanied by such information regarding the Company and its Subsidiaries as
the Company in good faith believes will enable such holders to make an informed
decision with respect to such Prepayment Offer. Such notice shall state, among
other things, the purchase price and the purchase date, which shall be, subject
to any contrary requirements of applicable law, a business day no earlier than
30 days nor later than 60 days from the date such notice is mailed.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Exchange Debentures pursuant to the
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the covenant
described hereunder, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the covenant described hereunder by virtue thereof.
Limitation on Restrictions on Distributions from Restricted Subsidiaries.
The Company shall not, and shall not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist any
consensual restriction on the right of any Restricted Subsidiary to (a) pay
dividends, in cash or otherwise, or make any other distributions on or in
respect of its Capital Stock, or pay any Debt or other obligation owed, to the
Company or any other Restricted Subsidiary (except, with respect to restrictions
on dividends of non-cash Property, as permitted pursuant to clause (ii) of the
next sentence), (b) make any loans or advances to the Company or any other
Restricted Subsidiary or (c) transfer any of its Property to the Company or any
other Restricted Subsidiary. The foregoing limitations will not apply (i) with
respect to clauses (a), (b) and (c), to restrictions (A) in effect on the Issue
Date, (B) pursuant to the New Credit Facility, (C) relating to Debt of a
Restricted Subsidiary and existing at the time it became a Restricted Subsidiary
if such restriction was not created in connection with or in anticipation of the
transaction or series of transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the Company or (D)
which result from the Refinancing of Debt Incurred pursuant to an agreement
referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below,
provided such restriction is no less favorable to the holders of Exchange
Debentures than those under the agreement evidencing the Debt so Refinanced, and
(ii) with respect to clause (c) only, to restrictions (A) relating to Debt that
is permitted to be Incurred and secured without also securing the Exchange
Debentures equal and ratable treatment pursuant to the covenants described under
"--Limitation on Debt" and "--Limitation on Liens" that limit the right of the
debtor to dispose of the Property securing such Debt, (B) encumbering Property
at the time such Property was acquired by the Company or any Restricted
Subsidiary, so long as such restriction relates solely to the Property so
acquired and was not created in connection with or in anticipation of such
acquisition, (C) resulting from customary provisions restricting subletting or
assignment of leases or customary provisions in other agreements that restrict
assignment of such agreements or rights thereunder or (D) customary restrictions
contained in asset sale agreements limiting the transfer of such Property
pending the closing of such sale.
Limitation on Transactions with Affiliates. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, conduct
any business or enter into or suffer to exist any transaction or series of
transactions (including the purchase, sale, transfer, assignment, lease,
conveyance or exchange of any Property or the rendering of any service) with, or
for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"),
unless (a) the terms of such Affiliate Transaction are (i) set forth in writing,
(ii) in the interest of the Company or such Restricted Subsidiary, as the case
may be, and (iii) no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained in a
comparable arm's-length transaction with a Person that is not an Affiliate of
the Company, (b) if such Affiliate Transaction involves aggregate payments or
value in excess of $2.5 million, the Board of Directors (including a majority of
the disinterested members of the Board of Directors) approves such Affiliate
Transaction and, in its good faith judgment, believes that such Affiliate
Transaction complies with clauses (a) (ii) and (iii) of this paragraph as
evidenced by a Board Resolution promptly delivered to the Trustee and (c) if
such Affiliate Transaction involves aggregate payments or value in excess of
$5.0 million, the Company obtains a written opinion from an Independent
Appraiser to the effect that the
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consideration to be paid or received in connection with such Affiliate
Transaction is fair, from a financial point of view, to the Company or such
Restricted Subsidiary, as the case may be.
Notwithstanding the foregoing limitation, the Company or any Restricted
Subsidiary may enter into or suffer to exist the following:
(i) any transaction or series of transactions between the Company and
one or more Restricted Subsidiaries or between two or more Restricted
Subsidiaries in the ordinary course of business; provided that no more than
5% of the total voting power of the Voting Stock (on a fully diluted basis)
of any such Restricted Subsidiary is owned by an Affiliate of the Company
(other than a Restricted Subsidiary);
(ii) any Restricted Payment permitted to be made pursuant to the
covenant described under "--Limitation on Restricted Payments";
(iii) the payment of compensation (including amounts paid pursuant to
employee benefit plans) for the personal services of officers, directors
and employees of the Company or any of the Restricted Subsidiaries, so long
as the Board of Directors in good faith shall have approved the terms
thereof and deemed the services theretofore or thereafter to be performed
for such compensation to be fair consideration therefor;
(iv) loans and advances to employees made in the ordinary course of
business and consistent with the past practices of the Company or such
Restricted Subsidiary, as the case may be; provided that such loans and
advances do not exceed $1.0 million in the aggregate at any one time
outstanding;
(v) the payment of fees and expenses in connection with the
Recapitalization pursuant to written agreements in effect on the Issue
Date;
(vi) the sale of common stock of the Company for cash; provided, that
the Company may receive Employee Notes in an aggregate principal amount not
in excess of $1.0 million at any one time outstanding;
(vii) the payment of dividends in kind in respect of (i) the Exchange
Preferred Stock or (ii) any other preferred stock issued in compliance with
this covenant;
(viii) a proportionate split of, or a common stock dividend payable
on, the common stock of the Company;
(ix) payments under any real or personal property lease with an
Affiliate of the Company existing at the date of the Exchange Indenture and
any other real or personal property lease with an Affiliate of the Company
that is approved by a majority of the disinterested members of the board of
directors of the Company; and
(x) sales of inventory at a price no less than the price the Company
paid to purchase such inventory and in customary volumes to Century
Airconditioning Supply, Inc. ("CAC"), purchases of inventory at cost from
CAC, and the provision of administrative services to CAC.
Designation of Restricted and Unrestricted Subsidiaries. The Board of
Directors may designate any Subsidiary of the Company to be an Unrestricted
Subsidiary if (a) the Subsidiary to be so designated does not own any Capital
Stock or Debt of, or own or hold any Lien on any Property of, the Company or any
other Restricted Subsidiary, (b) the Subsidiary to be so designated is not
obligated under any Debt, Lien or other obligation that, if in default, would
result (with the passage of time or notice or otherwise) in a default on any
Debt of the Company or of any Restricted Subsidiary and (c) either (i) the
Subsidiary to be so designated has total assets of $1,000 or less or (ii) such
designation is effective immediately upon such entity becoming a Subsidiary of
the Company. Unless so designated as an Unrestricted Subsidiary, any Person
that becomes a Subsidiary of the Company will be classified as a Restricted
Subsidiary; provided, however, that such Subsidiary shall not be designated a
Restricted Subsidiary
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and shall be automatically classified as an Unrestricted Subsidiary if either of
the requirements set forth in clauses (x) and (y) of the immediately following
paragraph will not be satisfied after giving pro forma effect to such
classification. Except as provided in the first sentence of this paragraph, no
Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary if, immediately after giving pro forma effect to such
designation, (x) the Company could Incur at least $1.00 of additional Debt
pursuant to clause (a) of the first paragraph of the covenant described under "-
- -Limitation on Debt" and (y) no Default or Event of Default shall have occurred
and be continuing or would result therefrom.
Any such designation or redesignation by the Board of Directors will be
evidenced to the Trustee by filing with the Trustee a Board Resolution giving
effect to such designation or redesignation and an Officers' Certificate (a)
certifying that such designation or redesignation complies with the foregoing
provisions and (b) giving the effective date of such designation or
redesignation, such filing with the Trustee to occur within 45 days after the
end of the fiscal quarter of the Company in which such designation or
redesignation is made (or, in the case of a designation or redesignation made
during the last fiscal quarter of the Company's fiscal year, within 90 days
after the end of such fiscal year).
Limitation on Company's Business. The Company shall not, directly or
indirectly, engage in any business or activity other than the business currently
conducted by it and its Restricted Subsidiaries, and Related Businesses.
MERGER, CONSOLIDATION AND SALE OF PROPERTY
The Company shall not merge, consolidate or amalgamate with or into any
other Person (other than a merger of a Wholly Owned Subsidiary into the Company)
or sell, transfer, assign, lease, convey or otherwise dispose of all or
substantially all its Property in any one transaction or series of transactions
unless: (a) the Company shall be the surviving Person (the "Surviving Person")
or the Surviving Person (if other than the Company) formed by such merger,
consolidation or amalgamation or to which such sale, transfer, assignment,
lease, conveyance or disposition is made shall be a corporation organized and
existing under the laws of the United States of America, any State thereof or
the District of Columbia; (b) the Surviving Person (if other than the Company)
expressly assumes, by supplemental indenture in form satisfactory to the
Trustee, executed and delivered to the Trustee by such Surviving Person, the due
and punctual payment of the principal of, and premium, if any, and interest on,
all the Exchange Debentures, according to their tenor, and the due and punctual
performance and observance of all the covenants and conditions of the Exchange
Indenture to be performed by the Company; (c) in the case of a sale, transfer,
assignment, lease, conveyance or other disposition of all or substantially all
the Property of the Company, such Property shall have been transferred as an
entirety or virtually as an entirety to one Person; (d) immediately before and
after giving effect to such transaction or series of transactions on a pro forma
basis (and treating, for purposes of this clause (d) and clauses (e) and (f)
below, any Debt which becomes, or is anticipated to become, an obligation of the
Surviving Person or any Restricted Subsidiary as a result of such transaction or
series of transactions as having been Incurred by the Surviving Person or such
Restricted Subsidiary at the time of such transaction or series of
transactions), no Default or Event of Default shall have occurred and be
continuing; (e) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, the Company or the Surviving Person, as the
case may be, would be able to Incur at least $1.00 of additional Debt under
clause (a) of the first paragraph of the covenant described under "--Certain
Covenants--Limitation on Debt"; provided, however, that this clause (e) shall
not apply to a merger between the Company and a Wholly Owned Subsidiary of the
Company incorporated in another state of the United States solely for the
purpose of reincorporating the Company as long as the total amount of
Indebtedness of the Company and its Restricted Subsidiaries is not increased as
a result thereof; and (f) the Company shall deliver, or cause to be delivered,
to the Trustee, in form and substance reasonably satisfactory to the Trustee an
Opinion of Counsel and an Officers' Certificate stating that such transaction
and the supplemental indenture, if any, in respect thereto comply with this
covenant and that all conditions precedent herein provided for relating to such
transaction have been satisfied.
The Surviving Person shall succeed to, and be substituted for, and may
exercise every right and power of the Company under the Exchange Indenture, but
the predecessor Company in the case of a sale, transfer,
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assignment, lease, conveyance or other disposition shall not be released from
the obligation to pay the principal of, and premium, if any, and interest on,
the Exchange Debentures.
SEC REPORTS
At any time after 60 days after the Issue Date, notwithstanding that the
Company may not be subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, the Company shall file with the Commission and provide the
Trustee, registered holders of Exchange Debentures and, upon request, security
analysts of prospective holders of Exchange Debentures with such annual reports
and such information, documents and other reports as are specified in Sections
13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject
to such sections, such information, documents and reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such sections; provided, however, that the Company shall not
be so obligated to file such information, documents and reports with the
Commission if the Commission does not permit such filings.
EVENTS OF DEFAULT
Events of Default in respect of the Exchange Debentures as set forth in the
Exchange Indenture include: (a) failure to make the payment of any interest on
the Exchange Debentures when the same becomes due and payable, and such failure
continues for a period of 30 days; (b) failure to make the payment of any
principal of, or premium, if any, on, any of the Exchange Debentures when the
same becomes due and payable at its Stated Maturity, upon acceleration,
redemption, optional redemption, required repurchase or otherwise; (c) failure
to comply with the covenant described above under "--Merger, Consolidation and
Sale of Property"; (d) failure to comply with any other covenant or agreement in
the Exchange Debentures or in the Exchange Indenture (other than a failure which
is the subject of the foregoing clause (a), (b) or (c)) and such failure
continues for 30 days after written notice is given to the Company as provided
below; (e) a default under any Debt by the Company or any Restricted Subsidiary
which results in acceleration of the stated maturity of such Debt, or failure to
pay any such Debt at final maturity, in an aggregate amount greater than $7.5
million (or its foreign currency equivalent at the time) (the "cross
acceleration provisions"); (f) any judgment or judgments for the payment of
money in an aggregate amount in excess of $7.5 million (or its foreign currency
equivalent at the time) shall be rendered against the Company or any Restricted
Subsidiary and shall not be waived, satisfied or discharged for any period of 30
consecutive days during which a stay of enforcement shall not be in effect (the
"judgment default provisions"); and (g) certain events involving bankruptcy,
insolvency or reorganization of the Company or any Significant Subsidiary (the
"bankruptcy provisions").
A Default under clause (d) is not an Event of Default until the Trustee or
the holders of not less than 25% in aggregate principal amount of the Exchange
Debentures then outstanding notify the Company of the Default and the Company
does not cure such Default within the time specified after receipt of such
notice. Such notice must specify the Default, demand that it be remedied and
state that such notice is a "Notice of Default." Under the terms of the
Exchange Indenture, for purposes of calculation of such percentage, the
aggregate principal amount of the Exchange Debentures held by the Company or an
Affiliate thereof is not counted to determine such percentage.
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any event which with the giving of notice and the lapse of time would become an
Event of Default, its status and what action the Company is taking or proposes
to take with respect thereto.
The Exchange Indenture provides that if an Event of Default with respect to
the Exchange Debentures (other than an Event of Default resulting from certain
events involving bankruptcy, insolvency or reorganization with respect to the
Company or any Significant Subsidiary) shall have occurred and be continuing,
the Trustee or the registered holders of not less than 25% in aggregate
principal amount of the Exchange Debentures then outstanding may declare to be
immediately due and payable the principal amount of all the Exchange Debentures
then outstanding, plus accrued but unpaid interest to the date of acceleration.
In case an Event of Default resulting from certain events of bankruptcy,
insolvency or reorganization with respect to the Company or any Significant
Subsidiary shall occur, such amount with respect to all the Exchange Debentures
shall be due and payable immediately without any declaration or other act on the
part of the Trustee or the holders of the Exchange
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Debentures. After any such acceleration, but before a judgment or decree based
on acceleration is obtained by the Trustee, the registered holders of a majority
in aggregate principal amount of the Exchange Debentures then outstanding may,
under certain circumstances, rescind and annul such acceleration if all Events
of Default, other than the nonpayment of accelerated principal, premium or
interest, have been cured or waived as provided in the Exchange Indenture.
Subject to the provisions of the Exchange Indenture relating to the duties
of the Trustee, in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Exchange Indenture at the request or direction of any of the holders
of the Exchange Debentures, unless such holders shall have offered to the
Trustee reasonable indemnity. Subject to such provisions for the
indemnification of the Trustee, the holders of a majority in aggregate principal
amount of the Exchange Debentures then outstanding will have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee with
respect to the Exchange Debentures.
No holder of Exchange Debentures will have any right to institute any
proceeding with respect to the Exchange Indenture, or for the appointment of a
receiver or trustee, or for any remedy thereunder, unless (a) such holder has
previously given to the Trustee written notice of a continuing Event of Default,
(b) the registered holders of at least 25% in aggregate principal amount of the
Exchange Debentures then outstanding have made written request and offered
reasonable indemnity to the Trustee to institute such proceeding as trustee and
(c) the Trustee shall not have received from the registered holders of a
majority in aggregate principal amount of the Exchange Debentures then
outstanding a direction inconsistent with such request and shall have failed to
institute such proceeding within 60 days. However, such limitations do not
apply to a suit instituted by a holder of any Exchange Debenture for enforcement
of payment of the principal of, and premium, if any, or interest on, such
Exchange Debenture on or after the respective due dates expressed in such
Exchange Debenture.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Exchange Indenture may be amended with
the consent of the registered holders of a majority in aggregate principal
amount of the Exchange Debentures then outstanding (including consents obtained
in connection with a tender offer or exchange offer for the Exchange Debentures)
and any past default or compliance with any provisions may also be waived
(except a default in the payment of principal, premium or interest and certain
covenants and provisions of the Exchange Indenture which cannot be amended
without the consent of each holder of an outstanding Exchange Debenture) with
the consent of the registered holders of at least a majority in aggregate
principal amount of the Exchange Debentures then outstanding. However, without
the consent of each holder of an outstanding Exchange Debenture, no amendment
may, among other things, (a) reduce the amount of Exchange Debentures whose
holders must consent to an amendment or waiver, (b) reduce the rate of or extend
the time for payment of interest on any Exchange Debenture, (c) reduce the
principal of or extend the Stated Maturity of any Exchange Debenture, (d) make
any Exchange Debenture payable in money other than that stated in the Exchange
Debenture, (e) impair the right of any holder of the Exchange Debentures to
receive payment of principal of and interest on such holder's Exchange
Debentures on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's Exchange
Debentures, (f) release any security interest that may have been granted in
favor of the holders of the Exchange Debentures, (g) reduce the premium payable
upon the redemption or repurchase of any Exchange Debenture, or change the time
at which any Exchange Debenture may be redeemed, as described under "--Optional
Redemption," (h) reduce the premium payable upon a Change of Control or, at any
time after a Change of Control or Asset Sale has occurred, change the time at
which the Change of Control Offer or Prepayment Offer relating thereto must be
made or at which the Exchange Debentures must be repurchased pursuant to such
Change of Control Offer or (i) make any change to the subordination provisions
of the Exchange Indenture that would adversely affect the holders of the
Exchange Debentures. Under the terms of the Exchange Indenture, the aggregate
principal amount of Exchange Debentures held by the Company or an Affiliate
thereof is not counted to determine the principal amount of the Exchange
Debentures that have consented.
Without the consent of any holder of the Exchange Debentures, the Company
and the Trustee may amend the Exchange Indenture to cure any ambiguity,
omission, defect or inconsistency, to provide for the assumption by
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a successor corporation of the obligations of the Company under the Exchange
Indenture, to provide for uncertificated Exchange Debentures in addition to or
in place of certificated Exchange Debentures (provided that the uncertificated
Exchange Debentures are issued in registered form for purposes of Section 163(f)
of the Code, or in a manner such that the uncertificated Exchange Debentures are
described in Section 163(f)(2)(B) of the Code), to secure the Exchange
Debentures, to add to the covenants of the Company for the benefit of the
holders of the Exchange Debentures or to surrender any right or power conferred
upon the Company, to make any change that does not adversely affect the rights
of any holder of the Exchange Debentures in any material respect, to make any
change to the subordination provisions of the Exchange Indenture that would
limit or terminate the benefits available to any holder of Senior Debt under
such provisions or to comply with any requirement of the Commission in
connection with the qualification of the Exchange Indenture under the Trust
Indenture Act.
No amendment may be made to the subordination provisions of the Exchange
Indenture that adversely affects the rights of any holder of Senior Debt then
outstanding unless the holders of such Senior Debt (or their Representative)
consent to such change. The consent of the holders of the Exchange Debentures
is not necessary under the Exchange Indenture to approve the particular form of
any proposed amendment. It is sufficient if such consent approves the substance
of the proposed amendment. After an amendment under the Exchange Indenture
becomes effective, the Company is required to mail to each registered holder of
the Exchange Debentures at such holder's address appearing in the Security
Register a notice briefly describing such amendment. However, the failure to
give such notice to all holders of the Exchange Debentures, or any defect
therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the
Exchange Debentures and the Exchange Indenture ("legal defeasance"), except for
certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the Exchange Debentures, to
replace mutilated, destroyed, lost or stolen Exchange Debentures and to maintain
a registrar and paying agent in respect of the Exchange Debentures. The Company
at any time may terminate its obligations under the covenants described under
"--Repurchase at the Option of Holders Upon a Change of Control" and "--Certain
Covenants," the operation of the cross acceleration provisions, the judgment
default provisions, the bankruptcy provisions with respect to Significant
Subsidiaries and the limitations contained in clauses (e) and (f) under the
first paragraph of "--Merger, Consolidation and Sale of Property" above
("covenant defeasance"). The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Exchange Debentures may not be accelerated because of an Event of Default with
respect thereto. If the Company exercises its covenant defeasance option,
payment of the Exchange Debentures may not be accelerated because of an Event of
Default specified in clause (d) (with respect to the covenants described under
"--Certain Covenants"), (e), (f), (g) (with respect only to Significant
Subsidiaries) or (h) under "--Events of Default" above or because of the failure
of the Company to comply with clauses (e) and (f) under the first paragraph of
"--Merger, Consolidation and Sale of Property" above.
In order to exercise either defeasance option, the Company must, among
other things, irrevocably deposit in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations for the payment of principal and
interest on the Exchange Debentures to maturity or redemption, as the case may
be, and must comply with certain other conditions, including delivery to the
Trustee of an Opinion of Counsel to the effect that holders of the Exchange
Debentures will not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amounts and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
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GOVERNING LAW
The Exchange Indenture and the Exchange Debentures are governed by the
internal laws of the State of New York without reference to principles of
conflicts of law.
THE TRUSTEE
Prior to entering into the Exchange Indenture, the Company will appoint a
trustee which will satisfy the requirements of Sections 310(a)(1) and 310(a)(5)
of the Trust Indenture Act of 1939, as amended, which will have a combined
capital and surplus of at least $100.0 million as set forth on its most recently
published report of condition and will have a corporate trust office located in
the City of New York.
The Exchange Indenture provides that, except during the continuance of an
Event of Default, the Trustee will perform only such duties as are specifically
set forth in the Exchange Indenture. During the existence of an Event of
Default, the Trustee will exercise such of the rights and powers vested in it
under the Exchange Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax
consequences expected to result to Holders whose Initial Preferred Stock is
exchanged for Exchange Preferred Stock. This discussion is based on the
Internal Revenue Code of 1986, as amended (the "Code"), regulations of the
Treasury Department, administrative rulings and pronouncements of the Internal
Revenue Service ("IRS") and judicial decisions, all of which are subject to
change, possibly with retroactive effect. This discussion does not purport to
address all the U.S. federal income tax consequences that may be applicable to
particular Holders, including dealers in securities, financial institutions,
insurance companies and tax-exempt organizations. In addition, the discussion
does not consider the effect of any foreign, state, local, gift, estate or other
tax laws that may be applicable to a particular Holder. Except as provided
below with respect to Non-U.S. Holders (as such term is defined below), this
discussion is limited to U.S. Holders who hold their Initial Preferred Stock and
will hold the Exchange Preferred Stock and the Exchange Debentures as a "capital
asset" within the meaning of Section 1221 of the Code. For purposes of this
discussion, a "U.S. Holder" means any person or entity which is (i) a citizen or
resident of the United States, (ii) a corporation or other entity taxable as a
corporation created or organized in or under the laws of the United States or
any political subdivision thereof, (iii) an estate or trust that is described in
Section 7701(a)(30) of the Code or (iv) a person whose worldwide income or gain
is otherwise subject to U.S. federal income tax on a net income basis, and a
"Non-U.S. Holder" means any holder of the Exchange Preferred Stock and the
Exchange Debentures that is not a U.S. Holder. HOLDERS CONSIDERING THE EXCHANGE
OF INITIAL PREFERRED STOCK FOR EXCHANGE PREFERRED STOCK SHOULD CONSULT THEIR OWN
TAX ADVISORS AS TO ANY FEDERAL, STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES
TO THEM OF RECEIVING, OWNING AND DISPOSING OF THE EXCHANGE PREFERRED STOCK AND
OF RECEIVING, OWNING AND DISPOSING OF THE EXCHANGE DEBENTURES.
TAXATION OF THE EXCHANGE PREFERRED STOCK
Unless otherwise stated, for purposes of the following discussion, the term
"Exchange Preferred Stock" shall mean the Exchange Preferred Stock and any
Additional Preferred Shares that shall have been issued with respect thereto.
Exchange Offer
The exchange of Initial Preferred Stock for Exchange Preferred Stock will
not constitute a recognition event for federal income tax purposes.
Consequently, no gain or loss will be recognized by a Holder on the exchange.
Immediately after the exchange, a Holder's adjusted tax basis in the Exchange
Preferred Stock will be the same as
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the holder's adjusted tax basis in the Initial Preferred Stock. A Holder will be
considered to have held the Exchange Preferred Stock from the time the Holder
originally acquired the Initial Preferred Stock.
Upon failure to comply with certain of their obligations under the
Registration Rights Agreement, the Company would be required to pay additional
amounts on the Exchange Preferred Stock. Although the matter is not free from
doubt, if such additional amounts become payable, such amounts should be treated
in the same manner as dividends described below in "Dividends and Dividends
Received Deduction."
Dividends and Dividends Received Deduction
Distributions with respect to the Exchange Preferred Stock will be treated
as dividends (taxable as ordinary income) to the extent of the current and
accumulated earnings and profits of the Company. To the extent that the amount
of a distribution with respect to the Exchange Preferred Stock exceeds the
current and accumulated earnings and profits of the Company, it will be treated,
first, as a tax-free return of capital to the extent of the holder's basis in
the Exchange Preferred Stock and then as capital gain from the sale or exchange
of the Exchange Preferred Stock. The Company cannot predict whether it will
have current or accumulated earnings and profits at the time of any distribution
on the Exchange Preferred Stock.
If a distribution with respect to the Exchange Preferred Stock is paid in
the form of Additional Preferred Shares (i) the amount of the distribution will
be the fair market value of the Additional Preferred Shares as of the date of
the distribution, and (ii) the distribution will be treated as described above.
Such holder's holding period will begin on the day following the distribution
date.
A holder that is a corporation otherwise entitled to the dividends received
deduction as provided in Section 243 of the Code will be entitled to such
deduction (generally at a 70% rate) with respect to amounts treated as dividends
on the Exchange Preferred Stock, but will not be entitled to such deduction with
respect to amounts treated as a return of capital or capital gain, as described
above. In addition, the benefit of a dividends received deduction may be
reduced by the corporate alternative minimum tax.
In determining entitlement to the dividends received deduction, corporate
holders should also consider the provisions of Sections 246(c), 246A and 1059 of
the Code and Treasury Regulations promulgated thereunder, and IRS rulings and
administrative pronouncements relating to such Code provisions. Section 246(c)
of the Code disallows the dividends received deduction in its entirety if (i)
the holder does not satisfy the applicable holding period requirement for the
dividend-paying stock for a period immediately before or immediately after such
holder becomes entitled to receive each dividend on the stock or (ii) the holder
is under an obligation to make related payments with respect to positions in
substantially similar or related property. Code Section 246(c)(4) provides that
a holder may not count toward the minimum holding period any period in which the
holder (i) has, among other things, an option to sell, (ii) is under a
contractual obligation to sell, (iii) has made (and not closed) a short sale of
substantially identical stock or securities or (iv) has diminished its risk of
loss by holding one or more positions with respect to substantially similar or
related property. Section 246A of the Code provides the "debt-financed portfolio
stock" rules, under which the dividends received deduction could be reduced to
the extent that the holder incurs indebtedness directly attributable to its
investment in the Exchange Preferred Stock. With respect to stock that a
corporate holder has held for two years or less before the dividend announcement
date, Section 1059 of the Code (i) reduces the tax basis of such stock by a
portion of any "extraordinary dividends" that are eligible for the dividends
received deduction and (ii), to the extent that the basis reduction would
otherwise reduce the tax basis of the Exchange Preferred Stock below zero,
requires immediate recognition of gain, which is treated as gain from the sale
or exchange of the stock. In the case of preferred stock, an "extraordinary
dividend" is a dividend that (i) equals or exceeds five percent of either (A)
the holder's adjusted tax basis in the stock (taking into account any prior
reduction in basis under Section 1059 as a result of any prior dividend) or (B),
at the holder's election, the fair market value of the stock as of the day
before the ex-dividend date if such value can be established to the satisfaction
of the IRS, in each case treating all dividends having ex- dividend dates within
an 85-day period as one dividend or (ii) exceeds 20 percent of either (A) the
holder's adjusted tax basis in the stock or (B), at the holder's election, the
fair market value of the stock as of the day before the ex-dividend date if such
value can be established to the satisfaction of the IRS, in each case treating
all dividends having ex-dividend dates within a 365- day period as one dividend.
An extraordinary dividend would also include any amount treated as a dividend
with respect to
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a redemption that is not pro rata to all holders (or meets certain other
requirements), without regard to either the relative amount of the dividend or
the holder's holding period for the Exchange Preferred Stock. However, with
respect to "qualified preferred dividends" with respect to any share of stock,
(i) Section 1059 of the Code will not apply to such dividends if the holder
holds such stock for more than five years and (ii) if the holder disposes of
such stock before it has been held for more than five years, the aggregate
reduction in the holder's tax basis in such stock with respect to such dividends
will not be greater than the excess of the qualified preferred dividends paid
with respect to such stock during the period the holder held such stock over the
qualified preferred dividends which would have been paid during such period
based on the annual rate of the qualified preferred dividends payable with
respect to such stock. "Qualified preferred dividends" means any fixed dividend
payable with respect to any share of stock which (i) provides for fixed
preferred dividends payable at least annually and (ii) is not in arrears as to
dividends at the time the holder acquires such stock.
If the Company does not have any current or accumulated earnings and
profits, distributions on the Exchange Preferred Stock will constitute, first,
tax-free returns of capital (to the extent of the holder's tax basis in the
Exchange Preferred Stock) and then capital gain, and will not be eligible for
the dividends received deduction.
Redemption of Exchange Preferred Stock
Gain or loss recognized by a holder on a redemption of the Exchange
Preferred Stock for cash will be treated as gain or loss from the sale or
exchange of the Exchange Preferred Stock if, taking into account stock that is
actually or constructively owned under the constructive ownership rules of Code
Section 318 by such holder, either (i) the holder's stock interest in the
Company is completely terminated as a result of the redemption or (ii) the
redemption is "not essentially equivalent to a dividend." Under Section 318 of
the Code, a person will generally be treated as the owner of stock of the
Company owned by certain related parties or certain entities in which the person
owns an interest and stock of the Company that a holder could acquire through
exercise of an option. Whether a redemption is not essentially equivalent to a
dividend depends on each holder's facts and circumstances, but, in any event,
requires a "meaningful reduction" in such holder's equity interest in the
Company. A holder of the Exchange Preferred Stock who sells some or all of the
stock of the Company owned by it may be able to take such sales into account, if
necessary, to satisfy one of the foregoing conditions, but such a holder should
consult with his, her or its own tax advisor. Conversely, a holder who purchases
additional shares of stock of the Company may be required to take such shares
into account in determining whether any of the foregoing conditions are
satisfied.
If none of the above conditions is satisfied, the entire amount of the cash
payment received on a redemption will be treated as a distribution (without
offset by the holder's tax basis in the redeemed shares), which will be taxable
as a dividend to the extent of the Company's current and accumulated earnings
and profits. In such case, the holder's tax basis in the redeemed Exchange
Preferred Stock would be transferred to the shares of Company stock, if any. If
the holder does not retain any shares of Company stock, such basis may be
entirely lost.
Redemption Premium
Under Section 305 of the Code and the applicable Treasury Regulations, if
the redemption price of the Exchange Preferred Stock exceeds its issue price
(i.e., its fair market value at its date of original issue) by more than a de
minimis amount, then such excess will be treated as a series of constructive
distributions over the life of the Exchange Preferred Stock under a constant
interest (economic yield) method that takes into account the compounding of the
yield. The amount of each such constructive distribution will be treated in the
same manner as actual dividends as described above under "Dividends and
Dividends Received Deduction."
If the liquidation preference of an Additional Preferred Share exceeds the
issue price of such share by more than a de minimis amount, then a holder
thereof would be required to treat such excess as a series of constructive
distributions over the term of the Additional Preferred Share (as described
above), which distributions would be treated in the same manner as distributions
described above under "Dividends and Dividends Received Deduction." Because
Additional Preferred Shares may be issued at different times prior to July 1,
2003 (and possibly thereafter), it is possible that a holder would own
Additional Preferred Shares with different issue prices. Consequently, if the
Company had current or accumulated earnings and profits in such a case, a holder
would be treated as having
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received constructive dividends on its Additional Preferred Shares in differing
amounts depending on the issue price of each Additional Preferred Share and
those shares would not be fungible with each other or with Exchange Preferred
Stock purchased pursuant to the Exchange Offer due to their differing U.S.
federal income tax characteristics. As a result, the Company might not be able
to determine the proper amount of income to be accrued for any particular share
of Exchange Preferred Stock.
Exchange of Exchange Preferred Stock for Exchange Debentures
An exchange of the Exchange Preferred Stock for Exchange Debentures
pursuant to the terms of the Exchange Preferred Stock exchange right will be
subject to the same general rules as a redemption for cash (as described above,
see "Redemption of Exchange Preferred Stock"), except that the amount of the
redemption proceeds will be determined based upon the issue price of the
Exchange Debentures. The issue price of such Exchange Debentures will generally
be the fair market value of such Exchange Debentures on their issue date,
provided that such Exchange Debentures are traded on an established securities
market within thirty days either prior to or following such issue date. If the
Exchange Preferred Stock, but not the Exchange Debentures issued therefor, is
traded on an established securities market within either thirty days prior to or
following the issue date of the Exchange Debentures, then the issue price of
such Exchange Debentures will be the fair market value of the Exchange Preferred
Stock exchanged therefor. In the event that neither the Exchange Preferred
Stock nor the Exchange Debentures is traded on an established securities market
within the applicable period, the issue price of the Exchange Debentures will be
their stated principal amount--generally their face value--unless the Exchange
Debentures do not bear "adequate stated interest" within the meaning of Section
1274 of the Code, in which case, the issue price of such Exchange Debentures
generally will be an amount equal to the sum of the present values of all
payments due under the Exchange Debentures, determined using a discount rate
equal to the applicable federal rate ("AFR") (as discussed below under
"Applicable High-Yield Discount Obligations").
Sale, Exchange or Other Disposition of Exchange Preferred Stock
Upon a sale, exchange or other disposition of the Exchange Preferred Stock
(other than an exchange of the Exchange Preferred Stock for Exchange Debentures,
and subject to the discussion of redemption above), a holder will generally
recognize capital gain or loss for U.S. federal income tax purposes in an amount
equal to the difference between (i) the sum of the amount of cash and the fair
market value of any property received upon such sale or other taxable
disposition and (ii) the holder's adjusted tax basis in the Exchange Preferred
Stock.
A holder's initial tax basis in the Exchange Preferred Stock (other than an
Additional Preferred Share) will generally be the price such holder paid for
such Exchange Preferred Stock. A holder's initial tax basis in an Additional
Preferred Share will be the fair market value of such Additional Preferred Share
on the distribution date. Thereafter, the initial tax basis in the Exchange
Preferred Stock or an Additional Preferred Share will be (i) increased by the
amount (if any) of any constructive distributions the holder is treated as
having received pursuant to the rules described above under "Redemption Premium"
and (ii) decreased by the portion of any distribution (actual or constructive)
that is treated as a tax-free recovery of basis as described above under
"Dividends and Dividends Received Deduction."
TAXATION OF THE EXCHANGE DEBENTURES
Unless otherwise stated, for purposes of the following discussion, the term
"Exchange Debentures" shall mean the Exchange Debentures and any additional
Exchange Debentures ("Additional Exchange Debentures," each, individually, an
"Additional Exchange Debenture") that shall have been issued with respect
thereto.
Interest on the Exchange Debentures
With respect to any Exchange Debenture issued after July 1, 2003, a holder
of an Exchange Debenture will be required to report stated interest earned on
the Exchange Debenture as ordinary interest income for U.S. federal income tax
purposes in accordance with such holder's method of tax accounting.
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Original Issue Discount
Some or all of the Exchange Debentures may be considered issued with
original issue discount for U.S. federal income tax purposes. In general,
original issue discount on the Exchange Debentures, defined as the excess of
"stated redemption price at maturity" over "issue price," must be included in a
holder's gross income in advance of the receipt of cash representing that income
(regardless of whether the holder is a cash or accrual method taxpayer).
The "issue price" of an Exchange Debenture (other than an Additional
Exchange Debenture) will depend on whether the Exchange Debenture or the
Exchange Preferred Stock is traded on an established securities market as
discussed above under "Exchange of Exchange Preferred Stock for Exchange
Debentures." The "stated redemption price at maturity" of the Exchange
Debentures will equal their principal amount at maturity plus, in the case of an
Exchange Debenture issued on or prior to July 1, 2003, the aggregate amount of
the stated interest payable on such Exchange Debentures. For this purpose (and
for purposes of determining the yield to maturity of an Exchange Debenture as
discussed below), it will be assumed that the Company will elect to pay interest
in the form of Additional Exchange Debentures if such election will reduce the
yield to maturity of the underlying Exchange Debenture (determined as if the
cash interest and principal payable with respect to the Additional Exchange
Debentures was payable with regard to the underlying Exchange Debenture).
Thus, Additional Exchange Debentures issued with respect to an Exchange
Debenture will not be considered as a payment of interest and instead will be
aggregated with the Exchange Debenture for purposes of computing and accruing
original issue discount on, and determining a holder's tax basis in, the
Exchange Debenture and the related Additional Exchange Debentures. At the time
an Additional Exchange Debenture is issued, the adjusted issue price of the
underlying Exchange Debenture will be allocated between the Exchange Debenture
and the Additional Exchange Debenture proportionately to their respective
principal amounts, such that the Exchange Debenture and the related Additional
Exchange Debenture are treated as having the same adjusted issue price and
inherent amount of original issue discount per dollar of principal amount. The
Exchange Debenture and the related Additional Exchange Debenture would also be
treated as having the same yield to maturity. Corresponding rules apply to the
payment of Additional Exchange Debentures with respect to Additional Exchange
Debentures.
If it is assumed (under the rules described above) that the Company will
instead elect to pay interest on the underlying Exchange Debenture in the form
of cash, and the Company instead actually issues Additional Exchange Debentures
in payment of interest thereon, then the underlying Exchange Debenture will be
deemed to be reissued on the date such Additional Exchange Debenture is issued
at a price equal to the adjusted issue price of the Exchange Debenture on such
date.
Conversely, if it is assumed (under the rules described above) that the
Company will elect to issue Additional Exchange Debentures in payment of
interest with respect to the underlying Exchange Debenture and the Company
instead elects to pay interest on such underlying Exchange Debenture in the form
of cash rather than Additional Exchange Debentures, such a cash payment will
result in a pro rata prepayment of the underlying Exchange Debenture (or, as
applicable, underlying Additional Exchange Debentures), and may result in gain
or loss to the holder.
The Company will report annually to the IRS and to record holders of the
Exchange Debentures information with respect to original issue discount accruing
during the calendar year.
A holder of an Exchange Debenture will be required to include in gross
income for U.S. federal income tax purposes the sum of the "daily portions" of
original issue discount with respect to the Exchange Debenture for each day of
the taxable year during which such holder holds the Exchange Debenture. The
daily portions of original issue discount with respect to an Exchange Debenture
are determined by allocating to each day in any "accrual period" a ratable
portion of the original issue discount allocable to such accrual period.
Accrual periods with respect to an Exchange Debenture may be any set of periods
(which may be of varying lengths) selected by a holder provided that (i) no
accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on the Exchange Debenture occurs on either the first or
final day of an accrual period.
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The amount of original issue discount allocable to each accrual period
equals the amount determined by multiplying the "adjusted issue price" of the
Exchange Debenture at the beginning of the accrual period by the yield to
maturity of the Exchange Debenture (i.e., the discount rate that, when applied
to all payments under the Exchange Debenture, including payments of stated
interest or principal, results in a present value equal to the issue price).
The "adjusted issue price" at the beginning of any accrual period is the issue
price of the Exchange Debenture, plus the amount of original issue discount
taken into account for all prior accrual periods, minus the amount of all cash
payments previously made on the Exchange Debenture (other than payments of
stated interest on Exchange Debentures issued after July 1, 2003). This
constant yield method of determining the amount of original issue discount
included in income for any period will require a holder of an Exchange Debenture
to include increasing amounts of original issue discount in income in successive
accrual periods. The holder will not be required to recognize as additional
income payments of interest with respect to Exchange Debentures issued on or
prior to July 1, 2003.
Bond Premium
If the holder's tax basis in Exchange Debentures exceeds the remaining
stated redemption premium at maturity, such excess will be deductible by the
holder of the Exchange Debentures as amortizable bond premium over the term of
the Exchange Debentures under a yield-to-maturity formula if the holder makes or
has already made an election under Section 171 of the Code. An election under
Section 171 of the Code (i) is available only if the Exchange Debentures are
held as capital assets, (ii) is revocable only with the consent of the IRS and
(iii) applies to all obligations owned or subsequently acquired by the holder on
or after the first day of the taxable year in which such election applies. To
the extent that the excess is deducted as amortizable bond premium, the holder's
adjusted tax basis in the Exchange Debentures will be reduced. Current Treasury
Regulations under Section 171 of the Code provide that any such deduction will
offset interest income on the Exchange Debentures and will not be treated as a
separate deduction item. Moreover, such regulations generally conform the
treatment of amortizable bond premium to the treatment of original issue
discount as discussed above.
Sale or Redemption
A holder generally will recognize taxable gain or loss upon the sale,
exchange, retirement or other taxable disposition of an Exchange Debenture equal
to the difference between the amount realized upon such disposition (other than
amounts attributable to stated interest on Exchange Debentures issued after July
1, 2003) and its adjusted tax basis in the Exchange Debenture. A holder's
adjusted tax basis in an Exchange Debenture and any related Additional Exchange
Debentures will equal the issue price of such Exchange Debentures, increased by
accrued original issue discount previously included in the holder's gross income
with respect to the Exchange Debenture, and decreased by any cash payments
(other than payments of stated interest on Exchange Debentures issued after
July 1, 2003) made with respect thereto. Such adjusted tax basis will be
allocated among the Exchange Debentures and the related Additional Exchange
Debentures in proportion to their respective principal amounts.
Applicable High-Yield Discount Obligations
The original issue discount on any obligation that constitutes an
"applicable high yield discount obligation" is not deductible until paid. An
"applicable high yield discount obligation" is any debt instrument that (i) has
a maturity date which is more than five years from the date of issue, (ii) has a
yield to maturity which equals or exceeds the AFR (as set forth in Section
1274(d) of the Code) for the calendar month in which the obligation is issued
plus five percentage points and (iii) has "significant original issue discount."
The AFR is an interest rate, announced monthly by the IRS, that is based on the
yield of debt obligations issued by the U.S. Treasury. A debt instrument
generally has "significant original issue discount" if the aggregate amount
(including original issue discount) that would be includable in gross income
with respect to the debt instrument for periods before the close of any accrual
period that ends more than five years after the date of issue exceeds the sum of
(i) the aggregate amount of interest to be paid on the instrument before the
close of such accrual period and (ii) the product of the issue price of the
instrument and its yield to maturity. Because, for this purpose, any payment
under the Exchange Debentures will be assumed to be made on the last day
permitted under the Exchange Debentures, the Company believes that the Exchange
Debentures issued on or prior to July 1, 2003 will have significant original
issue discount. Moreover, if the debt instrument's yield to maturity exceeds
the AFR plus six percentage points, a ratable
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<PAGE>
portion of the issuing corporation's deduction for original issue discount (the
"Disqualified Original Issue Discount") (based on the portion of the yield to
maturity that exceeds the AFR plus six percentage points) will be permanently
disallowed. In the case of corporate holders, the Disqualified Original Issue
Discount will be treated as a dividend, eligible for the dividends received
deduction, to the extent it would have been so treated had such amount been
distributed by the Company with respect to its stock. Whether the Exchange
Debentures will constitute applicable high yield debt obligations will depend
upon the facts and circumstances existing at the time of their issuance.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under Section 3406 of the Code and applicable Treasury Regulations, a
noncorporate U.S. Holder of the Exchange Preferred Stock or the Exchange
Debentures who is not otherwise exempt from backup withholding may be subject to
backup withholding at the rate of 31% with respect to, in the case of Exchange
Preferred Stock, actual or constructive dividends paid with respect thereto, or,
in the case of Exchange Debentures, interest paid thereon, or the proceeds of a
sale, exchange or redemption of the Exchange Preferred Stock or the Exchange
Debentures. Generally, backup withholding applies only when the taxpayer (i)
fails to furnish or certify his correct taxpayer identification number to the
payor in the manner required, (ii) is notified by the IRS that he has failed to
report payments of interest or dividends properly or (iii) under certain
circumstances, fails to certify that he has not been notified by the IRS that he
is subject to backup withholding for failure to report interest or dividend
payments. Holders of Exchange Preferred Stock or Exchange Debentures should
consult their own tax advisors regarding their qualification for exemption from
backup withholding and the procedures for obtaining any applicable exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder of Exchange Preferred Stock or Exchange Debentures will be allowed as a
refund or a credit against such holder's U.S. federal income tax liability,
provided that the required information is furnished to the IRS.
SPECIAL TAX RULES APPLICABLE TO NON-U.S. HOLDERS
Dividends and Interest Distributions in General
Dividends on the Exchange Preferred Stock (including dividends in the form
of additional shares and constructive dividends) actually or deemed paid to a
Non-U.S. Holder that are not effectively connected with a trade or business
carried on by such Non-U.S. Holder in the United States are generally subject to
a 30% United States withholding tax. The rate of withholding may be reduced to
the extent provided by a tax treaty to which the United States is a party if the
recipient of the dividends is entitled to the benefits of the treaty. A Non-
U.S. Holder seeking a reduction in the rate of withholding under an income tax
treaty and a Non-U.S. Holder seeking an exemption from withholding tax on
dividends effectively connected with a trade or business carried on by such Non-
U.S. Holder in the United States (as described below) will be required to comply
with certain certification and other requirements. A Non-U.S. Holder that is
eligible for a reduced rate of United States withholding tax pursuant to a tax
treaty but who does not comply with the certification and other requirements of
the time such dividends are paid may obtain a refund of any excess amounts
withheld by filing a tax return with the IRS that establishes such holder's
eligibility for treaty benefits.
Subject to the discussion below under "--United States Information
Reporting Requirements and Backup Withholding for Non-U.S. Holders," payments of
principal (and premium, if any) and interest (including original issue discount)
by the Company or any agent of the Company (acting in capacity as such) to a
Non-U.S. Holder of an Exchange Debenture will not be subject to U.S. federal
withholding tax, provided, in the case of interest (including original issue
discount) that (i) the Non-U.S. Holder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of the
Company entitled to vote, (ii) the Non-U.S. Holder is not a controlled foreign
corporation for U.S. tax purposes that is related to the Company (directly or
indirectly) through stock ownership and (iii) either (A) the Non-U.S. Holder
certifies to the Company or its agent under penalties of perjury that it is not
a U.S. person and provides its name and address or (B) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "financial
institution") and holds the Exchange Debentures certifies to the Company or its
agent under penalties of perjury that such statement has been received from the
Non-U.S. Holder by it or by another financial institution and furnishes the
payor with a copy thereof. Subject to the discussion of effectively connected
income below, a Non-U.S. Holder that does not qualify for exemption from
withholding under the preceding sentence
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<PAGE>
generally will be subject to withholding of U.S. federal income tax at the rate
of 30% (or lower applicable treaty rate) on payments of interest (including
original issue discount) on the Exchange Debentures.
If the dividends on the Exchange Preferred Stock or the interest (including
original issue discount) on the Exchange Debentures are effectively connected
with a trade or business carried on in the United States by a Non-U.S. Holder,
or, alternatively, if a tax treaty applies, attributable to a United States
permanent establishment maintained by the Non-U.S. Holder, such dividends or
interest will be subject to tax at the rates and in the manner applicable to
U.S. Holders. Effectively connected dividends or interest, or dividends or
interest attributable to a United States permanent establishment, as the case
may be, received by a corporate Non-U.S. Holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by law or an applicable income tax treaty.
Non-U.S. Holders seeking a reduced rate of tax pursuant to an income tax treaty
must comply with certain certification and other requirements.
Gain on Disposition of Exchange Preferred Stock or Exchange Debentures
Subject to the discussion below under "--United States Information
Reporting Requirements and Backup Withholding Tax for Non-U.S. Holders," Non-
U.S. Holders generally will not be subject to U.S. federal income tax in respect
of gain recognized on a sale, exchange or other disposition (including a
redemption that is not treated as a dividend) of the Exchange Preferred Stock or
the Exchange Debentures unless (i) the gain is effectively connected with a
trade or business conducted by the Non-U.S. Holder within the United States or,
alternatively, if a tax treaty applies, attributable to a United States
permanent establishment maintained by the Non-U.S. Holder (in which cases such
gain will be subject to tax at the rates and in the manner applicable to U.S.
persons and, if the holder is a foreign corporation, the branch profits tax
described above may also apply), (ii) in the case of an individual Non-U.S.
Holder, such holder is present in the United States for 183 or more days in the
taxable year of the disposition and meets certain other requirements, (iii) the
Non-U.S. Holder is subject to tax pursuant to the provisions of the United
States federal income tax laws applicable to certain United States expatriates,
or (iv) in the case of the disposition of Exchange Preferred Stock, the Company
is or has been during certain periods preceding the disposition a "U.S. real
property holding corporation" for U.S. federal income tax purposes (which the
Company does not believe it is or is likely to become).
United States Information Reporting Requirements and Backup Withholding Tax
for Non-U.S. Holders
Under current law, backup withholding will not apply to actual or
constructive dividends paid or deemed paid before January 1, 2000, with respect
to the Exchange Preferred Stock to a Non-U.S. Holder, that are either (i)
subject to withholding at the 30% rate (or at a reduced rate under an applicable
treaty) or (ii) paid at an address outside the United States. However,
dividends paid or deemed paid after December 31, 1999, will generally be subject
to information reporting and backup withholding unless the Non-U.S. Holder
provides a valid Form W-8 (or substitute form) and meets other applicable
certification requirements establishing such holder's foreign status or the Non-
U.S. Holder is a corporation or other exempt recipient and certain conditions
are met. Similarly, a Non-U.S. Holder of an Exchange Debenture generally will
be exempt from backup withholding and information reporting requirements with
respect to payments of principal or interest (including original issue
discount), but will be required to comply with certain certification and
identification procedures (as described above in the second paragraph of
"Distributions in General") in order to obtain such exemption. The Company must
report annually to the IRS and to each Non-U.S. Holder any interest (including
original issue discount) that is subject to U.S. withholding tax or that is
exempt from withholding pursuant to a treaty or other exemption.
The payment of the proceeds of a sale of Exchange Preferred Stock
(including a redemption that is not treated as a dividend) or Exchange
Debentures to or through the United States office of a broker is subject to
information reporting and backup withholding at a rate of 31% unless either (i)
the Non-U.S. Holder is a corporation or other exempt recipient that meets
certain requirements or (ii) the Non-U.S. Holder provides a valid Form W-8 (or
substitute form). The payment of the proceeds of a sale of Exchange Preferred
Stock (including a redemption that is not
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<PAGE>
treated as a dividend) or Exchange Debentures before January 1, 2000, to or
through the foreign office of a broker generally will not be subject to backup
withholding tax. After December 31, 1999, backup withholding will apply if
information reporting is required. Information reporting requirements will apply
to a payment of proceeds from the disposition of Exchange Preferred Stock
(including a redemption that is not treated as a dividend) or Exchange
Debentures through a foreign office of a broker that is a U.S. person or a "U.S.
related person," unless the broker has documentary evidence in its files that
the owner is a Non-U.S. Holder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is (i) a "controlled foreign
corporation" for U.S. federal income tax purposes, (ii) a foreign person 50% or
more of whose gross income from all sources for certain periods is effectively
connected with the conduct of a United States trade or business or (iii) after
December 31, 1999, a foreign partnership of which either (A) more than 50% of
the income or capital interest is owned by U.S. Holders or (B) with certain
connections to the United States. After December 31, 1999, payment made through
a foreign intermediary satisfying certain requirements will not be subject to
either backup withholding or information reporting. Holders should consult with
their own tax advisors regarding these rules.
THE FOREGOING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO ANY FEDERAL,
STATE, LOCAL, FOREIGN OR OTHER TAX CONSEQUENCES TO THEM OF RECEIVING, OWNING AND
DISPOSING OF THE EXCHANGE PREFERRED STOCK AND OF RECEIVING, OWNING AND DISPOSING
OF THE EXCHANGE DEBENTURES.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 15,000,000 shares of
common stock, $.001 par value, and 2,000,000 shares of preferred stock, $.001
par value.
COMMON STOCK
Holders of common stock of the Company are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. There
is no cumulative voting for the election of directors, which means that the
holders of a majority of the shares of common stock voted in the election of
directors will be able to elect all of the directors they nominate for election.
Subject to preferences that may be applicable to any outstanding preferred
stock, holders of common stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of common stock are entitled to share ratably in all assets
remaining after payment to all creditors and payments required to be made in
respect of any outstanding preferred stock.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance in
series of up to 2,000,000 shares of preferred stock and permits the Company's
Board of Directors to establish the voting rights, designations, powers,
preferences and relative and other special rights and the qualifications,
limitations and restrictions of each of such series. The Board has established
such designations and preferences for the Exchange Preferred Stock. See
"Description of the Exchange Preferred Stock" for a description of the terms of
the Exchange Preferred Stock.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director except for liability
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit. The Company's Certificate of
Incorporation further provides that if the Delaware General Corporation Law is
amended to authorize further elimination or limitation of the liability of
directors, then the liability of a director of the Company shall be limited to
the fullest extent permitted by the amended Delaware law. The Company's
Certificate of Incorporation requires the Company to indemnify its directors and
officers against liabilities that may arise by reason of their status or service
as directors, officers, employees or agents of the Company to the full extent
permitted by Delaware law or any other applicable law as may from time to time
be in effect. Insofar as indemnification for liabilities under the Securities
Act of 1933 may be permitted with respect to directors, officers or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company where indemnification will be required or
permitted, and the Company is not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Preferred Stock for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Preferred Stock. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Preferred Stock
received in exchange for Initial Preferred Stock where such Initial Preferred
Stock was acquired as a result of market-making activities or other trading
activities and not acquired directly from the Company. The Company has agreed
that for a period of 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until , 1998,
all dealers effecting transactions in the Exchange Preferred Stock may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange
Preferred Stock by broker-dealers. Exchange Preferred Stock received by broker-
dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange
Preferred Stock or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or negotiated prices. Any such resale may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or purchasers of any
such Exchange Preferred Stock. Any broker-dealer that resells Exchange Preferred
Stock that was received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a distribution of such Exchange
Preferred Stock may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any such resale of Exchange Preferred Stock
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of
Transmittal states that by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days following the consummation of the Exchange Offer,
the Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the Letter of Transmittal. The Company has agreed to pay the
expenses incident to the Exchange Offer and to the Company's performance of, or
compliance with, the Registration Rights Agreement (other than commissions or
concessions of any brokers or dealers) and will indemnify the Holders of the
Initial Preferred Stock against certain liabilities, including liabilities under
the Securities Act, in connection with the Exchange Offer. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and persons controlling the Company pursuant to
the foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
EXPERTS
The consolidated financial statements of Century Maintenance Supply, Inc.
at December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, and the combined financial statements of Nationwide
Apartment Supply, Inc., and Fairview Wholesale Supply, Inc. (collectively,
"Nationwide") at June 30, 1997 and 1996, and for each of the two years in the
period ended June 30, 1997, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the legality of the Exchange
Preferred Stock offered hereby will be passed upon for the Company by Riordan &
McKinzie, a Professional Corporation, Los Angeles, California. Certain
principals and employees of Riordan & McKinzie are limited partners in a
partnership which is a limited partner of an FS&Co. investment fund that owns a
majority of the Company's equity interests. See "Security Ownership of Certain
Beneficial Owners."
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
FINANCIAL STATEMENTS
<S> <C>
Report of Independent Auditors for Century Maintenance Supply, Inc. ...... F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997. F-3
Consolidated Statements of Income for the Years Ended December 31, 1995,
December 31, 1996 and December 31, 1997.................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1994, December 31, 1995, December 31, 1996 and
December 31, 1997........................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, December 31, 1996 and December 31, 1997............................ F-6
Notes to Consolidated Financial Statements................................ F-7
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998
(unaudited).............................................................. F-17
Consolidated Statements of Income for the Six Months Ended June 30,
1997 and June 30, 1998 (unaudited)....................................... F-19
Consolidated Statement of Changes in Stockholders' Equity for the Six
Months Ended June 30, 1998 (unaudited)................................... F-20
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1997 and June 30, 1998 (unaudited)....................................... F-21
Notes to Consolidated Financial Statements (unaudited).................... F-22
Report of Independent Auditors for Nationwide Apartment Supply, Inc. and
Fairview Wholesale Supply, Inc. ......................................... F-26
Combined Balance Sheets as of June 30, 1996 and June 30, 1997............. F-27
Combined Statements of Income and Retained Earnings for the Years Ended
June 30, 1996 and June 30, 1997.......................................... F-28
Combined Statements of Cash Flows for the Years Ended June 30, 1996 and
June 30, 1997............................................................ F-29
Notes to Combined Financial Statements.................................... F-30
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Consolidated Statement of Operations for the Year Ended December
31, 1997................................................................. P-1
Notes to Pro Forma Consolidated Financial Statements...................... P-2
Pro Forma Consolidated Statement of Operations for the Six Months Ended
June 30, 1998 (unaudited)................................................ P-5
Pro Forma Consolidated Balance Sheet as of June 30, 1998 (unaudited)...... P-6
Notes to Pro Forma Consolidated Financial Statements (unaudited).......... P-7
Pro Forma Consolidated Statement of Operations for the Six Months Ended
June 30, 1997 (unaudited)................................................ P-10
Notes to Pro Forma Consolidated Financial Statements (unaudited).......... P-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Century Maintenance Supply, Inc.
We have audited the accompanying consolidated balance sheets of Century
Maintenance Supply, Inc. (formerly Century Air Supply, Inc.), and subsidiaries
as of December 31, 1996 and 1997, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Century
Maintenance Supply, Inc., and subsidiaries at December 31, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Houston, Texas
March 31, 1998
F-2
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1996 1997
----------- -----------
ASSETS
------
<S> <C> <C>
Current assets:
Cash................................................. $ 4,923,622 $ 6,598,687
Accounts receivable:
Trade, net......................................... 8,851,184 14,954,665
Related parties.................................... 2,177,589 1,495,585
Inventory, net....................................... 14,023,470 23,900,128
Deferred income taxes................................ 616,068 857,229
Prepaid expenses and other current assets............ 482,042 636,159
----------- -----------
Total current assets................................... 31,073,975 48,442,453
Goodwill, net.......................................... -- 5,687,353
Other assets........................................... 950 550,600
Property and equipment:
Land................................................. 200,000 20,000
Buildings and improvements........................... 642,549 232,030
Furniture and fixtures............................... 855,989 1,025,720
Machinery and equipment.............................. 1,534,956 3,826,088
----------- -----------
3,233,494 5,103,838
Less accumulated depreciation........................ 1,372,561 2,530,519
----------- -----------
Total property and equipment........................... 1,860,933 2,573,319
----------- -----------
Total assets....................................... $32,935,858 $57,253,725
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable............................... $ 2,859,789 $ 7,361,452
Note payable......................................... 8,300,814 8,800,000
Income taxes payable................................. 920,157 1,993,801
Accrued expenses..................................... 2,305,475 3,001,314
Current portion of long-term debt.................... 105,868 159,174
Current portion of long-term debt--related parties... 2,125,468 1,509,509
----------- -----------
Total current liabilities.......................... 16,617,571 22,825,250
----------- -----------
Long-term debt, less current portion................... 397,256 474,765
Long-term debt--related parties, less current portion.. 1,323,541 8,054,023
Deferred income taxes.................................. 124,798 331,500
Minority interest...................................... 3,437,771 --
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares--15,000,000 at December 31, 1996
and 1997
Issued and outstanding shares--8,318,676 and
10,000,000 at December 31, 1996 and 1997.......... 8,319 10,000
Additional paid-in capital......................... 665,381 11,918,428
Retained earnings.................................. 10,361,221 13,639,759
----------- -----------
Total stockholders' equity............................. 11,034,921 25,568,187
----------- -----------
Total liabilities and stockholders' equity............. $32,935,858 $57,253,725
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net sales.............................. $80,115,457 $103,113,217 $146,165,709
Cost of goods sold..................... 59,200,549 75,552,397 105,635,895
----------- ------------ ------------
Gross profit........................... 20,914,908 27,560,820 40,529,814
Selling, general, and administrative
expenses.............................. 15,255,941 17,270,989 22,264,267
Stock based compensation charges....... -- -- 6,968,776
----------- ------------ ------------
Operating income....................... 5,658,967 10,289,831 11,296,771
Interest expense....................... 789,909 864,700 1,147,058
----------- ------------ ------------
Income before income taxes and minority
interest.............................. 4,869,058 9,425,131 10,149,713
Provision (benefit) for income taxes:
Current.............................. 1,235,110 3,007,040 6,456,647
Deferred............................. 123,461 (208,905) (87,189)
----------- ------------ ------------
1,358,571 2,798,135 6,369,458
----------- ------------ ------------
Income before minority interest........ 3,510,487 6,626,996 3,780,255
Minority interest in earnings of
subsidiaries.......................... 681,911 1,237,266 848,181
----------- ------------ ------------
Net income............................. $ 2,828,576 $ 5,389,730 $ 2,932,074
=========== ============ ============
Pro forma information (unaudited):
Historical income before income taxes
and minority interest............... $ 4,869,058 $ 9,425,131 $ 10,149,713
Pro forma provision for income taxes
(unaudited)......................... 1,898,932 3,675,801 6,663,920
----------- ------------ ------------
Pro forma income before minority
interest (unaudited)................ 2,970,126 5,749,330 3,485,793
Minority interest in earnings of
subsidiaries........................ 681,911 1,237,266 848,181
----------- ------------ ------------
Pro forma net income (unaudited)..... $ 2,288,215 $ 4,512,064 $ 2,637,612
=========== ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL
SHARES COMMON PAID-IN RETAINED STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL EARNINGS EQUITY
----------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1994................... 8,318,676 $ 8,319 $ 665,381 $ 4,379,301 $ 5,053,001
Distributions......... -- -- -- (1,303,550) (1,303,550)
Net income............ -- -- -- 2,828,576 2,828,576
---------- ------- ----------- ----------- -----------
Balances at December 31,
1995................... 8,318,676 8,319 665,381 5,904,327 6,578,027
Distributions......... -- -- -- (932,836) (932,836)
Net income............ -- -- -- 5,389,730 5,389,730
---------- ------- ----------- ----------- -----------
Balances at December 31,
1996................... 8,318,676 8,319 665,381 10,361,221 11,034,921
Issuance of common
shares for minority
shares at June 30,
1997................. 1,681,324 1,681 10,627,807 -- 10,629,488
Stock options granted. -- -- 625,240 -- 625,240
Contribution.......... -- -- -- 346,464 346,464
Net income............ -- -- -- 2,932,074 2,932,074
---------- ------- ----------- ----------- -----------
Balances at December 31,
1997................... 10,000,000 $10,000 $11,918,428 $13,639,759 $25,568,187
========== ======= =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................ $ 2,828,576 $ 5,389,730 $ 2,932,074
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Compensation expense related to
stock transactions................. -- -- 6,968,776
Deferred income tax benefit......... 123,461 (208,905) (87,189)
Depreciation and amortization....... 371,639 432,849 769,308
Bad debt expense.................... 104,972 247,782 237,911
(Gain) loss on sale of property and
equipment.......................... -- (10,553) 11,319
Minority interest in earnings....... 681,911 1,237,266 848,181
Changes in operating assets and
liabilities net of effects of
acquisitions:
Accounts receivable................. (2,018,384) (3,754,553) (1,034,355)
Inventory........................... (1,263,250) (3,750,301) (5,557,705)
Prepaid expenses and other assets... (145,016) (24,348) (254,986)
Accounts payable.................... (1,534,061) (348,110) 1,269,782
Accrued expenses.................... 526,153 795,305 (88,901)
Income taxes payable................ (265,384) 778,788 290,021
----------- ----------- -----------
Net cash provided by (used in)
operating activities............. (589,383) 784,950 6,304,236
INVESTING ACTIVITIES:
Purchases of property and equipment... (460,675) (513,131) (1,534,341)
Cash paid for acquisition, net........ -- -- (8,740,102)
Proceeds from sale of property and
equipment............................ 2,427 19,911 699,274
----------- ----------- -----------
Net cash used in investing activities. (458,248) (493,220) (9,575,169)
FINANCING ACTIVITIES:
Net borrowings under revolving line of
credit............................... 2,775,000 3,125,814 299,186
Proceeds from long-term debt.......... 592,000 270,297 6,650,000
Repayments of long-term debt.......... (974,804) (527,946) (2,349,652)
Sale of minority interest in
subsidiaries......................... -- 147,948 --
Capital contributions (distributions). (1,303,550) (932,836) 346,464
----------- ----------- -----------
Net cash provided by financing
activities....................... 1,088,646 2,083,277 4,945,998
----------- ----------- -----------
Net increase in cash.................... 41,015 2,375,007 1,675,065
Cash at beginning of year............... 2,507,600 2,548,615 4,923,622
----------- ----------- -----------
Cash at end of year..................... $ 2,548,615 $ 4,923,622 $ 6,598,687
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Century Maintenance Supply, Inc. (the "Company" or "CMS"), distributes
general maintenance supplies and air conditioning and heating equipment and
parts to apartment complexes throughout the United States.
Principles of Consolidation
On June 30, 1997, CMS was incorporated under the laws of the State of
Delaware. Century Air Supply, Inc. ("CAS"), was incorporated on January 21,
1976 under the laws of the State of Texas. At the same time as the
incorporation of CMS, all of the outstanding shareholders of CAS exchanged all
of their shares of common stock for CMS common stock at a ratio of 6,616 for
1. Share amounts in the consolidated financial statements and accompanying
notes have been restated to reflect the reorganization.
On June 30, 1997, the Company purchased all assets of the general
maintenance supply operations of an affiliated company, Century
Airconditioning Supply, Inc. ("CAC"), with 1,702,703 shares of the Company's
common stock. Also, on June 30, 1997, the Company sold one of its subsidiaries
in the heating and air conditioning business to CAC for $215,000. These
transactions were conducted between the Company and CAC, which were under
common control, and, as such, the transactions were recorded at historical
cost in a manner similar to a pooling of interests. All periods presented have
been restated to reflect these transactions (see Note 8).
The accompanying consolidated financial statements include the accounts of
the Company. All significant intercompany balances and transactions have been
eliminated.
Inventories
Inventories consist wholly of finished goods and are stated at cost, applied
on the first-in, first-out method of pricing, which is not in excess of
market. The Company continuously evaluates its reserve for obsolescence and
the reserve was $129,000 and $354,000 at December 31, 1996 and 1997,
respectively.
Allowance for Doubtful Accounts
The Company continuously evaluates the creditworthiness of its customers.
The Company's allowance for doubtful accounts is based on current market
conditions and losses on uncollectible accounts have consistently been within
management's expectations. The allowance for doubtful accounts was $131,513,
$452,079, and $755,940 at December 31, 1995, 1996, and 1997, respectively. In
1997, the Company recorded an allowance for doubtful accounts of $100,974 due
to acquisitions (see Note 8) which is reflected in the amount set forth above.
Net writeoffs (recoveries) of uncollectible accounts were $156,486, $(72,784),
and $35,024 for the years ended December 31, 1995, 1996, and 1997,
respectively.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs are
charged to expense as incurred, and renewals and improvements are capitalized.
The cost of property and equipment sold or otherwise retired and the
accumulated depreciation applicable thereto are eliminated from the accounts,
and the resulting profit or loss is reflected in operations.
F-7
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets. Depreciation is computed using the straight-line
method for financial reporting purposes and on the ACRS and MACRS methods for
income tax purposes. The estimated useful lives of property and equipment for
purposes of computing depreciation for financial reporting are as follows:
<TABLE>
<S> <C>
Buildings...................................................... 30 years
Leasehold improvements......................................... 3-10 years
Furniture and fixtures......................................... 5-7 years
Machinery and equipment........................................ 3-8 years
</TABLE>
Depreciation expense was approximately $372,000, $433,000, and $669,000 for
1995, 1996, and 1997, respectively.
Intangible Assets
Intangible assets consist primarily of goodwill associated with businesses
acquired in 1997. Goodwill is amortized on a straight-line basis over 30
years. Amortization expense was $100,000 for 1997, and accumulated
amortization was $100,000 at December 31, 1997.
Revenue Recognition
Revenue is recognized upon delivery of inventory to customers.
Income Taxes
The Company follows the liability method of accounting for income taxes.
Under this method, deferred income tax assets and liabilities are determined
based on differences between the financial statement basis and income tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Statement of Cash Flows
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental information
Interest paid.......................... $ 718,000 $ 740,000 $1,338,000
========== ========== ==========
Taxes paid............................. $1,613,000 $2,228,000 $4,334,500
========== ========== ==========
</TABLE>
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising expense
was approximately $397,000, $192,000, and $416,000 for the years ended
December 31, 1995, 1996, and 1997, respectively.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate their fair values due to the short-term maturities of these
instruments.
The carrying amounts of borrowings pursuant to the Company's revolving line
of credit approximate fair value because the rates on such agreements are
variable, based on current market rates. At December 31, 1997, the carrying
amount of the Company's other long-term debt approximates fair value.
F-8
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2. RELATED PARTIES
The Company purchases/sells various inventory items at cost from/to CAC,
which is wholly owned by the majority stockholder of the Company, extends
credit under standard terms in connection with these sales, and collects
management and administrative fees from CAC. The Company also has certain
notes payable to the majority stockholder of the Company. Account balances and
transactions with related parties are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Accounts receivable................................ $2,685,608 $1,963,984
Accounts payable................................... 508,019 468,399
---------- ----------
Net accounts receivable............................ $2,177,589 $1,495,585
========== ==========
Long-term debt-stockholder......................... $3,449,009 $3,078,114
========== ==========
Long term debt-related party....................... $ -- $6,485,418
========== ==========
</TABLE>
Sales to and purchases from CAC amounted to $818,828 and $1,427,376 for
1995, $882,233 and $833,609 for 1996, and $1,178,546 and $908,862 for 1997,
respectively. Management and administrative fee income charged to CAC amounted
to $117,103, $198,330, and $284,746 for 1995, 1996, and 1997, respectively.
The Company had lease expense to related parties amounting to $521,190 for
1997.
During 1997, Century Air Services, Inc. ("Services"), a subsidiary of CMS,
entered into a limited partnership agreement with the majority stockholder and
one other stockholder of the Company, in which Services is the general partner
and has an investment of $500. The partnership purchased the land and building
for fair value of $660,000, which also approximates cost, from a subsidiary of
the Company and leases the land and building to the subsidiary.
During 1996, Services entered into three limited partnership agreements with
the majority stockholder of the Company and, in two of those partnerships,
with other stockholders of CMS. Services is the general partner in each
limited partnership and has a total investment in the partnerships of $2,700.
These partnerships lease the land and buildings to subsidiaries of the
Company.
In 1995, the Company purchased land in Phoenix and Tucson, Arizona, for
$177,955 and $117,117, respectively. The Company sold the land and a building
in 1996 at cost plus construction expenses to a limited partnership consisting
of the stockholders of Century Maintenance Supply (AZ) Inc., and the Company.
The limited partnership leases the land and buildings to Century Maintenance
Supply (AZ) Inc.
The Company paid interest on long-term debt of approximately $280,000,
$280,000, and $210,000 to the majority stockholder in 1995, 1996, and 1997,
respectively, and has approximately $416,000 and $484,000 in accrued interest
due to stockholders at December 31, 1996 and 1997, respectively.
The Company paid interest on long-term debt of approximately $253,000 to an
employee and former owner of Nationwide Apartment Supply, Inc., and Fairview
Wholesale Supply, Inc. (collectively, "Nationwide"), in 1997 and has
approximately $37,000 in accrued interest due to the employee and former owner
at December 31, 1997.
F-9
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Century Air Supply, Inc., has a revolving line of credit
agreement with a bank which allows borrowings up to
$17,500,000, is due October 31, 1998, and bears
interest at the bank's prime or LIBOR contract plus 150
basis points. Century Air Supply, Inc., has pledged
accounts receivable, inventory, and property as
collateral for the note. The note agreement contains
customary financial covenants.......................... $8,300,814 $8,800,000
========== ==========
</TABLE>
NOTE 4. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
-------- --------
<S> <C> <C>
Long-term debt:
Note payable to a bank with interest at LIBOR contract plus
175 basis points. Monthly payments of $10,000, plus
interest, until maturity at May 31, 2002................... $ -- $530,000
Note payable to an investment company with interest at 8.5%.
Monthly payments of $7,191, which includes principal and
interest until maturity on April 1, 2002, secured by land
and building of Century Maintenance Supply--Dal, Inc. This
mortgage was assumed by the purchaser of the land and
building in 1997........................................... 359,824 --
Note payable to a bank with interest at prime plus .75%.
Monthly payments of $2,976, which includes principal and
interest, with a balloon payment at maturity on September
22, 1999, secured by real property of a stockholder........ 111,636 84,437
Note payable to a bank with interest at prime. Monthly
payments of $1,722 in principal plus interest until
maturity at March 30, 1998, secured by computer equipment
of Century Maintenance Supply--KS, Inc. ................... 21,578 3,445
Note payable to a bank with interest at prime. Monthly
payments of $1,861 in principal and interest until maturity
at October 7, 1997, secured by computer equipment of
Century Maintenance Supply (N CA) Inc. The remaining
principal was paid during 1997............................. 7,445 --
Note payable to a bank with interest at prime plus .75%.
Monthly payments of $879 in principal plus interest until
maturity at March 7, 1997, secured by computer equipment of
Century Air Services, Inc. The remaining principal was paid
during 1997................................................ 2,641 --
Other notes payable......................................... -- 16,057
-------- --------
503,124 633,939
Less current portion........................................ 105,868 159,174
-------- --------
$397,256 $474,765
======== ========
</TABLE>
F-10
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Long-term debt--related parties:
Promissory notes payable to the majority stockholder
with interest at 10%. Various monthly payments of
principal plus interest. Maturities are through 2000.. $3,449,009 $3,078,114
Promissory notes payable to a related party with
interest at 9%. Various monthly payments of principal
plus interest. Maturities are through 2004............ -- 6,485,418
---------- ----------
3,449,009 9,563,532
Less current portion................................... 2,125,468 1,509,509
---------- ----------
$1,323,541 $8,054,023
========== ==========
</TABLE>
Maturities of long-term debt at December 31, 1997 are summarized as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 1,668,683
1999.......................................................... 2,926,073
2000.......................................................... 2,361,285
2001.......................................................... 977,143
2002.......................................................... 907,143
Thereafter.................................................... 1,357,144
-----------
$10,197,471
===========
</TABLE>
NOTE 5. COMMITMENTS
Lease Commitments
The Company leases store facilities in 30 locations under operating leases
that expire over the next six years. The Company also leases vehicles under
operating leases.
Future minimum payments under these operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31
-----------
<S> <C>
1998.......................................................... $1,859,966
1999.......................................................... 1,647,816
2000.......................................................... 1,279,716
2001.......................................................... 1,027,479
2002.......................................................... 255,803
Thereafter.................................................... 35,890
----------
$6,106,670
==========
</TABLE>
Rental expenses for 1995, 1996, and 1997 were $1,310,591, $1,804,881, and
$2,556,757, respectively.
F-11
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1995, 1996, and 1997, consisted of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal............................ $1,059,465 $2,698,928 $5,729,375
State.............................. 175,645 308,112 727,272
---------- ---------- ----------
1,235,110 3,007,040 6,456,647
Deferred:
Federal............................ 186,265 (171,985) (121,725)
State.............................. (62,804) (36,920) 34,536
---------- ---------- ----------
123,461 (208,905) (87,189)
---------- ---------- ----------
$1,358,571 $2,798,135 $6,369,458
========== ========== ==========
</TABLE>
The differences between income taxes computed at the federal statutory
income tax rate and the provision for income taxes for the years ended
December 31, 1995, 1996, and 1997, are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income tax computed at federal statutory
income tax rate........................... $1,655,480 $3,204,545 $3,552,400
State income taxes, net of federal benefit. 68,788 180,092 514,950
Nontaxable income due to S-corporation
status.................................... (397,479) (584,703) (356,270)
Nondeductible compensation expense......... -- -- 2,439,262
Amortization of nondeductible goodwill..... -- -- 35,000
Nondeductible portion of business meals and
entertainment............................. 21,620 15,361 29,341
Other...................................... 10,162 (17,160) 154,775
---------- ---------- ----------
Provision for income taxes................. $1,358,571 $2,798,135 $6,369,458
========== ========== ==========
</TABLE>
Deferred tax assets and liabilities as of December 31, 1996 and 1997
comprised the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Bad debt allowances................................ $ 137,074 $ 288,920
Accrued bonuses.................................... 60,550 46,666
Related party accrued interest..................... 146,495 199,350
Accrued franchise taxes............................ 58,630 125,443
Inventory reserves................................. 51,000 135,299
Net operating loss carryforwards................... 113,459 58,740
Other.............................................. 48,860 2,811
--------- ---------
Total deferred tax assets............................ 616,068 857,229
Deferred tax liabilities:
Depreciation expense............................... (107,354) (140,978)
Inventory basis.................................... -- (190,000)
Other.............................................. (17,444) (522)
--------- ---------
Total deferred tax liabilities....................... (124,798) (331,500)
--------- ---------
Net deferred tax assets.............................. $ 491,270 $ 525,729
========= =========
</TABLE>
All net operating losses will expire by 2010.
F-12
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED)
As mentioned in Note 8, the Company acquired all of the assets of the
general maintenance supply operations of CAC and has restated the financial
statements for the periods presented to reflect the transaction in a manner
similar to a pooling of interests. The operations that the Company acquired
were part of an S corporation and were not subject to federal income taxes. To
reflect the earnings of the restated financial statements of the Company on an
after-tax basis since the operations are now all part of a C corporation, an
unaudited pro forma provision for income tax has been included in the
accompanying statements of income. The provision was computed as if the
Company were a C corporation and responsible for its federal and state income
taxes.
8. ACQUISITIONS AND TRANSACTIONS AMONG ENTITIES UNDER COMMON CONTROL
On June 30, 1997, the Company acquired all of the outstanding minority
shareholder interests in each of the Company's subsidiaries with common stock
of the Company. The exchanges were completed at fair value and resulted in the
Company distributing 1,681,324 shares of common stock to the minority
shareholders. The acquisition resulted in compensation expense of $6,343,536
for the difference between the fair value of the stock exchanged and the
recorded basis of minority shareholder interests consisting of amounts paid by
the minority shareholders for their stock in the subsidiaries and their
allocated earnings reflected as charges to minority interest in earnings of
subsidiaries.
On June 30, 1997, the Company purchased all of the assets of the general
maintenance supply operations of CAC, which were located in San Antonio and
Austin, Texas (acquired assets to be called "SA/A"), with 1,702,703 shares of
the Company's common stock. The number of shares was determined based on the
fair value of the operations acquired divided by the fair value per share of
common stock of the Company.
Also, on June 30, 1997, the Company sold one of its subsidiaries, Air
Management, Inc. ("Air"), which is in the heating and air conditioning
business, to CAC for $215,000. The sales price was based on the fair value of
the subsidiary sold.
F-13
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Both transactions described in the previous two paragraphs were conducted
between the Company and CAC which were under common control; therefore, the
transactions were recorded at historical cost in a manner similar to a pooling
of interests. All periods presented have been restated to reflect the
transactions. Separate results of operations of each of the entities under
common control throughout the periods are depicted below.
<TABLE>
<CAPTION>
ADJUSTMENTS
CMS ADD: SA/A LESS: AIR (1) COMBINED
------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995
Sales................... $ 71,842,124 $13,372,461 $4,011,652 $(1,087,476) $ 80,115,457
Income (loss) before
taxes and minority
interest............... 3,549,658 1,169,056 (150,344) -- 4,869,058
Net income (loss)....... 1,589,662 1,169,056 (69,858) -- 2,828,576
YEAR ENDED DECEMBER 31,
1996
Sales................... 94,430,210 15,234,321 5,086,734 (1,464,580) 103,113,217
Income (loss) before
taxes and minority
interest............... 7,706,670 1,719,715 1,254 -- 9,425,131
Net income (loss)....... 3,662,051 1,719,715 (7,964) -- 5,389,730
YEAR ENDED DECEMBER 31,
1997(2)
Sales................... 144,640,182 7,703,681 5,488,875 (689,279) 146,165,709
Income (loss) before
taxes and minority
interest............... 8,732,486 1,017,915 (399,312) -- 10,149,713
Net Income (loss)....... 1,676,640 1,017,915 (237,519) -- 2,932,074
</TABLE>
- --------
(1) The adjustments reflect sales transactions between the entities that need
to be eliminated upon combination.
(2) SA/A and Air financial information for 1997 is for the period from January
1, 1997 through June 30, 1997.
In regard to the purchase of the assets of the general maintenance supply
operations of CAC, any net cash provided by or used in the operations before
the acquisition have been reflected in the restated statement of stockholders'
equity as either distributions or contributions. Also, a net deferred tax
asset of $36,300 was recorded on July 1, 1997 as part of the acquisition.
On July 11, 1997, the Company acquired all of the issued and outstanding
common stock of Nationwide for approximately $9,160,000. The seller also
received 140,000 options to purchase common stock of the Company at $7.00 per
share. The acquisition was accounted for using the purchase method of
accounting and resulted in goodwill of approximately $5,787,000. The following
unaudited pro forma results of operations have been prepared assuming the
acquisition had occurred as of the beginning of the periods presented. Those
results are not necessarily indicative of results of the future operations nor
of results that would have occurred had the acquisition been consummated as of
the beginning of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net sales...................................... $133,795,000 $166,011,000
Net income..................................... $ 7,499,000 $ 4,028,000
</TABLE>
F-14
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE STOCK OPTION PLAN
In July 1997, the Company established the 1997 Incentive Stock Plan (the
"Stock Option Plan"), pursuant to which options may be granted to eligible
employees of the Company or its subsidiaries for the purchase of an aggregate
of 1,000,000 shares of common stock of the Company (the "Company Stock"). The
Stock Option Plan is administered by the Board of Directors (the "Board"). The
Board has the power to determine which eligible employees will receive stock
option rights, the timing and manner of the grant of such rights, the exercise
price, the number of shares to be covered by the option, and the type and
terms of the options. The Board may, at any time, terminate or amend the Stock
Option Plan, provided that no such amendment may adversely affect the rights
of optionees with regard to outstanding options.
On July 1, 1997, the Company granted 269,500 non-qualified, fully vested stock
options to purchase Common Stock with an exercise price of $4.00 per common
share with an expiration date of three years after the date of grant. The grant
of options resulted in compensation expense of $625,240 for the excess of the
fair value of the Common Stock over the exercise price at the date of the grant.
The Company also granted 140,000 non-qualified, fully vested stock options to
purchase Common Stock, with an exercise price of $7.00 per common share and with
an expiration date of three years after the date of grant on July 11, 1997 (see
Note 8). The weighted average remaining contractual life of all outstanding
options at December 31, 1997 was 2.5 years. Changes in the outstanding options
granted pursuant to the Stock Option Plan are summarized in the table below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
NUMBER EXERCISE AVERAGE
OF PRICE PER FAIR VALUE
SHARES SHARE PER SHARE
------- ----------- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1996..................... -- -- --
Granted July 1, 1997................................. 269,500 $4.00 $6.32
Granted July 11, 1997................................ 140,000 $7.00 $7.00
------- ----- -----
Outstanding at December 31, 1997..................... 409,500 $5.02 $6.55
======= ===== =====
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for stock-based compensation arrangements.
Pro forma information regarding net income per share is required by FASB
Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"), which
also requires that the information be determined as if the Company had accounted
for its employee stock options granted under the fair value method of FAS 123.
The fair value for these options was estimated at the date of grant using the
minimum value option pricing model using the following assumptions: risk-free
interest rate of 5.8%, a dividend yield of 0%, and expected life of 1.5 years.
The minimum value method calculated a fair value that is approximately the same
as recorded by the Company according to APB 25; therefore, pro forma
presentation has not been included.
The 140,000 stock options granted on July 11, 1997 were part of the
consideration for the acquisition of Nationwide (see Note 8). The minimum value
method resulted in no additional purchase consideration using the same
assumptions noted above.
10. PROFIT SHARING PLAN AND DEFINED CONTRIBUTION PLAN
CAC sponsors a noncontributory, defined contribution profit sharing plan for
the benefit of all eligible employees (as defined in the plan agreement), in
which Century Maintenance Supply--Dal, Inc., and Services participate. The
annual contribution to the plan is determined at the discretion of the Board.
For the years ended December 31, 1995, 1996, and 1997, the Company made no
contribution to the plan.
The Company sponsors a 401(k) savings and retirement plan which is open to
all employees who have attained age 21 and who have completed one full year of
service. Each employee may contribute a minimum of 2%, up to a maximum of 15%,
of basic compensation. The Company matches contributions at a rate of 50% for
contributions by the employee up to 8% of an employee's compensation. The
Company contributed approximately $170,000, $241,000, and $297,000 in 1995,
1996, and 1997, respectively, as matching funds to the plan. No discretionary,
lump-sum contributions were made in 1995, 1996, and 1997.
F-15
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED)
Effective July 8, 1998, the Company completed a recapitalization of the
Company pursuant to an agreement and plan of merger (the "Recapitalization").
Key components of the Recapitalization include:
(1) Common equity investments in consideration for approximately 56%
ownership in the Company's common stock.
(2) Issuance of $40 million senior exchangeable payment-in-kind (PIK)
preferred stock.
(3) Execution of a new bank credit facility consisting of $100 million of
term loans and a $25 million revolving loan facility.
(4) Repayment of existing indebtedness.
(5) Merger consideration payments to the existing shareholders (the
existing stockholders will retain approximately 44% interest of the
outstanding common shares).
The Company will recognize a charge of approximately $10.9 million, net of
taxes, at the date of the transaction, related to transaction costs, bonuses,
and the cancellation of stock options.
F-16
<PAGE>
Century Maintenance Supply, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,598,687 $ 4,303,903
Accounts receivable:
Trade, net 14,954,665 24,597,239
Related parties 1,495,585 297,489
Inventory, net 23,900,128 29,795,851
Deferred income taxes 857,229 857,229
Prepaid expenses and other current assets 636,159 1,018,733
----------- -----------
Total current assets 48,442,453 60,870,444
Goodwill, net 5,687,353 5,458,638
Other assets 550,600 547,400
Property and equipment:
Land 20,000 20,000
Buildings and improvements 232,030 249,419
Furniture and fixtures 1,025,720 1,115,223
Machinery and equipment 3,826,088 4,070,355
----------- -----------
5,103,838 5,454,997
Less accumulated depreciation 2,530,519 2,819,514
----------- -----------
Total property and equipment 2,573,319 2,635,483
----------- -----------
Total assets $57,253,725 $69,511,965
=========== ===========
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1997 1998
----------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 7,361,452 $ 13,133,856
Note payable 8,800,000 11,025,000
Income taxes payable 1,993,801 1,551,403
Accrued expenses 3,001,314 2,912,814
Current portion of long-term debt 159,174 205,297
Current portion of long-term debt--related parties 1,509,509 2,034,193
----------- ------------
Total current liabilities 22,825,250 30,862,563
Long-term debt, less current portion 474,765 360,000
Long-term debt--related parties, less current 8,054,023 6,351,692
portion
Deferred income taxes 331,500 331,500
Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value:
Authorized shares--15,000,000
Issued and outstanding shares--10,000,000 10,000 10,000
Additional paid-in capital 11,918,428 11,918,428
Treasury stock, at cost -- (500,000)
Retained earnings 13,639,759 20,177,782
----------- ------------
Total stockholders' equity 25,568,187 31,606,210
----------- ------------
Total liabilities and stockholders' equity $57,253,725 $69,511,965
=========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE>
Century Maintenance Supply, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
1997 1998
---------------------------
(Unaudited)
<S> <C> <C>
Net sales $58,760,851 $94,182,095
Cost of goods sold 42,468,227 68,597,838
---------------------------
Gross profit 16,292,624 25,584,257
Selling, general, and administrative expenses 9,096,605 14,181,827
Stock-based compensation charge 6,343,536 -
---------------------------
Operating income 852,483 11,402,430
Interest expense 322,935 718,757
---------------------------
Income before income taxes and minority interest 529,548 10,683,673
Provision for income taxes 2,138,611 4,145,650
---------------------------
(Loss) income before minority interest (1,609,063) 6,538,023
Minority interest in earnings of subsidiaries 848,181 -
---------------------------
Net (loss) income $(2,457,244) $ 6,538,023
===========================
Pro forma information (unaudited):
Historical income before income taxes and
minority interest $ 529,548
Pro forma provision for income taxes (unaudited) 2,433,073
-----------
Pro forma loss before minority interest (1,903,525)
(unaudited)
Minority interest in earnings of subsidiaries 848,181
-----------
Pro forma net loss (unaudited) $(2,751,706)
===========
</TABLE>
See accompanying notes.
F-19
<PAGE>
Century Maintenance Supply, Inc.
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
<TABLE>
<CAPTION>
NUMBER OF ADDITIONAL TOTAL
SHARES COMMON PAID-IN TREASURY RETAINED STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL STOCK EARNINGS EQUITY
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1997 10,000,000 $10,000 $11,918,428 $ - $13,639,759 $25,568,187
Purchase of
treasury stock,
at cost - - - (500,000) - (500,000)
Net income - - - - 6,538,023 6,538,023
------------------------------------------------------------------------------------------------------
Balances at June 30,
1998 10,000,000 $10,000 $11,918,428 $(500,000) $20,177,782 $31,606,210
======================================================================================================
</TABLE>
See accompanying notes.
F-20
<PAGE>
Century Maintenance Supply, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1998
-------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (2,457,244) $ 6,538,023
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Compensation expense related to stock 6,343,536 -
transactions
Deferred income tax benefit (46,000) -
Depreciation and amortization 246,753 476,300
Bad debt expense 101,290 173,309
Loss on sale of property and equipment 13,377 -
Minority interest in earnings 848,181 -
Changes in operating assets and liabilities:
Accounts receivable (10,602,123) (8,617,787)
Inventory (4,977,094) (5,895,723)
Prepaid expenses and other assets 161,056 (379,374)
Accounts payable 5,651,053 5,772,404
Accrued expenses (56,346) (88,500)
Income taxes payable (77,479) (442,398)
-------------------------------
Net cash used in operating activities (4,851,040) (2,463,746)
INVESTING ACTIVITIES
Purchases of property and equipment (983,721) (500,099)
Proceeds from sale of property and equipment 681,958 40,350
-------------------------------
Net cash used in investing activities (301,763) (459,749)
FINANCING ACTIVITIES
Net borrowings under revolving line of credit 2,275,549 2,225,000
Proceeds from long-term debt 600,000 -
Repayments of long-term debt (723,477) (1,096,289)
Purchase of treasury stock, at cost - (500,000)
Capital contributions 346,464 -
-------------------------------
Net cash provided by financing activities 2,498,536 628,711
-------------------------------
Net decrease in cash (2,654,267) (2,294,784)
Cash at beginning of period 4,923,622 6,598,687
-------------------------------
Cash at end of period $ 2,269,355 $ 4,303,903
===============================
</TABLE>
See accompanying notes.
F-21
<PAGE>
Century Maintenance Supply, Inc.
Notes to Consolidated Financial Statements (Unaudited)
June 30, 1998
1. BASIS OF PRESENTATION
Century Maintenance Supply, Inc. (the "Company"), distributes general
maintenance supplies and air conditioning and heating equipment and parts to
apartment complexes throughout the United States.
The consolidated financial statements include the accounts of Century
Maintenance Supply, Inc., and its wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
The consolidated balance sheet at December 31, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information or footnotes required by generally accepted accounting principles
for complete financial statements. The Company's consolidated balance sheet at
June 30, 1998 and the consolidated statements of operations, changes in
stockholders' equity, and cash flows for the interim periods ended June 30, 1997
and 1998 have been prepared by the Company without audit. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations, and cash flows have been made. The results of operations for the
interim periods are not necessarily indicative of the operating results for a
full year or of future operations.
On June 30, 1997, the Company acquired all of the outstanding minority
shareholder interests in each of the Company's subsidiaries with common stock of
the Company. The exchanges were completed at fair value and resulted in the
Company distributing 1,681,324 shares of common stock to the minority
shareholders. The acquisition resulted in compensation expense of $6,343,536 for
the difference between the fair value of the stock exchanged and the recorded
basis of minority shareholder interests consisting of amounts paid by the
minority shareholders for their stock in the subsidiaries and their allocated
earnings reflected as charges to minority interest in earnings of subsidiaries.
F-22
<PAGE>
Century Maintenance Supply, Inc.
Notes to Consolidated Financial Statements (Unaudited) (continued)
1. BASIS OF PRESENTATION (CONTINUED)
On June 30, 1997, the Company purchased all assets of the general maintenance
supply operations of an affiliated company, Century Airconditioning Supply, Inc.
("CAC"), with 1,702,703 shares of the Company's common stock. Also on June 30,
1997, the Company sold one of its subsidiaries in the heating and air
conditioning business to CAC for $215,000. These transactions were conducted
between the Company and CAC, which were under common control, and, as such, the
transactions were recorded at historical cost in a manner similar to a pooling
of interests. The six months ended June 30, 1997 have been restated to reflect
these transactions.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1997.
2. INCOME TAXES
The Company follows the liability method of accounting for income taxes. Under
this method, deferred income tax assets and liabilities are determined based on
differences between the financial statement basis and income tax basis of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The Company's interim provisions for income taxes were computed using its
estimated effective tax rate for the year. The Company's provision for income
taxes differs from the federal statutory rate of 35% in 1998 due primarily to
nondeductible goodwill and state income taxes and in 1997 due primarily to the
stock compensation and state income taxes (see also Note 3).
3. PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED)
As mentioned in Note 1, the Company acquired all of the assets of the general
maintenance supply operations of CAC and has restated the financial statements
for the periods presented to reflect the transaction in a manner similar to a
pooling of interests. The operations that the Company acquired were part of an S
corporation and were not subject to federal income taxes. To reflect the
earnings of the restated financial statements of the Company on an after-tax
basis since the operations are now all a part of a
F-23
<PAGE>
Century Maintenance Supply, Inc.
Notes to Consolidated Financial Statements (Unaudited) (continued)
3. PRO FORMA PROVISION FOR INCOME TAXES (UNAUDITED) (CONTINUED)
C corporation, an unaudited pro forma provision for income tax has been included
in the accompanying consolidated statements of operations. The provision was
computed as if the Company were a C corporation and responsible for its federal
and state income taxes.
4. ACQUISITIONS
On July 11, 1997, the Company acquired all of the issued and outstanding common
stock of Nationwide Apartment Supply, Inc., and Fairview Wholesale Supply, Inc.
(collectively, "Nationwide"), for approximately $9,160,000. The seller also
received 140,000 options to purchase common stock of the Company at $7.00 per
share. The acquisition was accounted for using the purchase method of accounting
and resulted in goodwill of approximately $5,787,000. The purchase price was
adjusted in the first quarter 1998 by $150,000 as a reduction in goodwill and
the note payable to the seller.
The following unaudited pro forma results of operations have been prepared
assuming the acquisitions had occurred as of the beginning of the periods
presented. Those results are not necessarily indicative of results of the future
operations nor of results that would have occurred had the acquisitions been
consummated as of the beginning of the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
1997
--------------
<S> <C>
Net sales $77,100,000
Net loss $(1,413,000)
</TABLE>
5. STOCKHOLDERS' EQUITY
Effective March 29, 1998, the Company repurchased 83,962 shares of common stock
from a stockholder for $500,000. These shares have been placed in treasury
stock.
F-24
<PAGE>
Century Maintenance Supply, Inc.
Notes to Consolidated Financial Statements (Unaudited) (continued)
6. SUBSEQUENT EVENTS
Effective July 8, 1998, the Company consummated a recapitalization of the
Company pursuant to an Agreement and Plan of Merger (the "Recapitalization").
Key components of the Recapitalization include:
(1) Common equity investments in consideration for approximately 56% ownership
in the Company's common stock
(2) Issuance of $40 million senior exchangeable payment-in-kind preferred stock
(3) Execution of a new bank credit facility consisting of $100 million of term
loans and a $25 million revolving loan facility
(4) Repayment of existing indebtedness
(5) Merger consideration payments to the existing shareholders (the existing
shareholders will retain approximately 44% interest of the outstanding
common shares).
The Company has incurred approximately $345,000 in costs related to the
Recapitalization which has been paid and recorded as a prepaid expense at June
30, 1998. The Company will recognize a charge of approximately $10.9 million,
net of taxes, at the date of the transaction, related to transaction costs,
bonuses, and the cancellation of stock options.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Boards of Directors
Nationwide Apartment Supply, Inc. and Fairview Wholesale Supply, Inc.
We have audited the accompanying combined balance sheets of Nationwide
Apartment Supply, Inc., and Fairview Wholesale Supply, Inc. (collectively, the
"Company"), as of June 30, 1997 and 1996, and the related combined statements
of income and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Nationwide
Apartment Supply, Inc., and Fairview Wholesale Supply, Inc., at June 30, 1997
and 1996, and the combined results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Indianapolis, Indiana
August 25, 1997
F-26
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
----------------------
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash.................................................. $ 419,898 $ 8,588
Accounts receivable, net of allowance for doubtful
accounts
(1997--$100,974; 1996--$80,974)...................... 4,625,033 3,750,080
Inventory............................................. 4,031,100 2,942,500
Note receivable....................................... 23,781 34,325
----------- ----------
Total current assets................................ 9,099,812 6,735,493
Available-for-sale securities........................... 425,000 321,700
Property and equipment, net............................. 584,641 503,448
Deferred tax asset...................................... 40,575 --
----------- ----------
Total assets........................................ $10,150,028 $7,560,641
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable...................................... $ 3,307,642 $2,668,543
Accrued expenses...................................... 784,740 666,186
Income taxes payable:
Federal............................................. 642,603 166,769
State............................................... 141,020 44,833
Dividend payable...................................... -- 11,140
Revolving note payable line of credit................. 200,000 125,000
Current portion of long-term debt..................... 373,742 331,076
Current portion of notes payable, related party....... 245,132 197,500
----------- ----------
Total current liabilities........................... 5,694,879 4,211,047
Long-term debt.......................................... 667,897 833,883
Notes payable, related party............................ 658,219 816,756
Shareholders' equity:
Preferred stock, $10 par value, authorized shares--
100,000, Issued and outstanding shares--10,000....... 100,000 100,000
Common stock, no par value, authorized shares--
101,000, Issued and outstanding shares--3,000........ 201,000 201,000
Retained earnings..................................... 2,828,033 1,397,955
----------- ----------
Total shareholders' equity.......................... 3,129,033 1,698,955
----------- ----------
Total liabilities and shareholders' equity.......... $10,150,028 $7,560,641
=========== ==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales................................................. $34,957,514 $25,846,800
Cost of sales......................................... 24,028,094 17,912,700
----------- -----------
Gross profit.......................................... 10,929,420 7,934,100
Selling, general and administrative expenses.......... 8,457,232 6,999,256
----------- -----------
Income from operations................................ 2,472,188 934,844
Other (income) expense:
Interest expense.................................... 177,334 186,617
Other............................................... (88,715) 13,787
----------- -----------
Income before income taxes............................ 2,383,569 734,440
Income taxes.......................................... 953,491 326,695
----------- -----------
Net income............................................ 1,430,078 407,745
Retained earnings, beginning of year.................. 1,397,955 990,210
----------- -----------
Retained earnings, end of year........................ $ 2,828,033 $ 1,397,955
=========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................. $ 1,430,078 $ 407,745
Adjustments to reconcile net
income to net cash
provided by (used in)
operating activities:
Depreciation.............. 217,792 206,053
Deferred tax expense...... (40,575) --
Gain on disposal of
property and equipment... (427) --
Changes in operating
assets and liabilities:
Accounts receivable..... (874,953) (1,449,864)
Inventory............... (1,088,600) (749,025)
Accounts payable........ 639,099 1,000,504
Accrued expenses........ 118,554 115,577
Income taxes payable.... 572,021 211,602
----------- -----------
Net cash provided by (used
in) operating activities... 972,989 (257,408)
INVESTING ACTIVITIES
Purchases of property and
equipment.................. (301,558) (297,150)
Proceeds from sale of
property and equipment..... 3,000 --
Notes receivable............ 10,544 14,306
Purchases of available-for-
sale securities............ (103,300) (78,300)
----------- -----------
Net cash used in investing
activities................. (391,314) (361,144)
FINANCING ACTIVITIES
Proceeds from notes payable. 525,000 1,282,000
Principal payments on notes
payable.................... (573,320) (1,028,476)
Proceeds from notes payable,
related parties............ 100,000 420,000
Principal payments on notes
payable, related parties... (210,905) (106,921)
Dividends paid.............. (11,140) (13,018)
----------- -----------
Net cash (used in) provided
by financing activities.... (170,365) 553,585
----------- -----------
Net increase (decrease) in
cash....................... 411,310 (64,967)
Cash at beginning of year... 8,588 73,555
----------- -----------
Cash at end of year......... $ 419,898 $ 8,588
=========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 30, 1997
1. PRINCIPLES OF COMBINATION AND NATURE OF BUSINESS
The combined financial statements include the accounts of Nationwide
Apartment Supply, Inc. ("Nationwide"), and Fairview Wholesale Supply, Inc.
("Fairview"), entities affiliated through common ownership, and are
hereinafter referred to collectively as the "Company." All significant
intercompany accounts and transactions have been eliminated in the combination
of the Company's financial statements.
The Company has its principal office in Indianapolis, Indiana. The Company
operates exclusively in one industry segment, the sale of repair and
maintenance products primarily to the apartment housing markets in the
Midwestern United States. Nationwide has offices in Indianapolis, Indiana;
Cincinnati, Ohio; St. Louis, Missouri; Detroit, Michigan; Atlanta, Georgia;
Kansas City, Missouri; the District of Columbia; Columbus, Ohio; and
Cleveland, Ohio. Fairview has offices in Chicago, Illinois and Minneapolis,
Minnesota.
2. SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventory is recorded at the lower of cost (determined using the last-in,
first-out method) or market. Inventory costs determined using current costs
exceed the carrying amounts of inventories determined by the last-in, first-
out method by $487,853 at June 30, 1997 ($347,934 at June 30, 1996).
Available-for-Sale Securities
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company
classifies its ownership interest in the Co-op of one of its vendors as
"available-for-sale." The Co-op is required to repurchase these securities at
their fair value in the event the Company's relationship with the Co-op is
terminated. These securities are valued at cost which the Company believes
approximates fair value.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a straight-
line basis over the estimated useful lives of the assets. The carrying value
of long-lived assets is periodically reviewed by management. If this review
indicates that the carrying value may be impaired, then the impaired amount
will be written off.
Revenue Recognition
Revenue is recognized upon shipment of inventory to customers.
Income Taxes
The Company accounts for income taxes in accordance with FASB Statement No.
109, Accounting for Income Taxes, which requires recognition of deferred tax
liabilities and assets based on the difference between the financial statement
and tax bases of assets and liabilities. Both Nationwide and Fairview file
separate tax returns at the state and federal levels.
F-30
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting on Comprehensive Income, and
No. 131, Disclosures about Segments of an Enterprise and Related Information.
These statements will affect the disclosure requirements for annual and
interim financial statements beginning after December 15, 1997. The Company
expects that the new reporting requirements will have no material effect on
its financial position or results of operations.
Advertising Expenses
Advertising and promotion expenses are charged to operations during the year
in which they are incurred in accordance with AICPA Statement of Position 93-
7, Reporting on Advertising Costs. The Company incurred advertising expenses
of approximately $198,000 in 1997 ($153,000 in 1996).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Land.................................................. $ 20,000 $ 20,000
Buildings and improvements............................ 71,390 71,390
Equipment and fixtures................................ 435,432 499,607
Vehicles.............................................. 834,083 685,494
--------- ---------
1,360,905 1,276,491
Accumulated depreciation.............................. 776,264 773,043
--------- ---------
$584,641 $ 503,448
========= =========
</TABLE>
4. RELATED PARTY TRANSACTIONS
At June 30, 1997, the Company has notes payable aggregating $903,351 due to
the principal shareholder maturing through June 2006. The notes payable relate
primarily to various payments made on behalf of the Company and bear interest
at rates ranging from 8% to 10.25%. Included in accrued liabilities at June
30, 1997 is $6,000 of interest in connection with these notes payable.
At June 30, 1997, the Company has a lease commitment for a warehouse
building with a revocable trust in the name of the principal shareholder. The
lease expires in April 2001 and requires monthly lease payments of $8,025.
F-31
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consisted of the following:
<TABLE>
<CAPTION>
JUNE 30
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Note payable to a bank requiring monthly principal
payments of $19,917 plus interest (9.0% at June 30, 1997)
at the bank's prime rate plus .5%, maturing in February
2000, collateralized by substantially all of the
Company's assets......................................... $ 657,250 $ 896,250
Note payable to a bank requiring monthly principal
payments of $3,750 plus interest (8.5% at June 30, 1997)
at the bank's prime rate, balance due October 2000,
collateralized by substantially all of the Company's
assets................................................... 206,250 --
Revolving line of credit not to exceed $200,000 due
November 1997 plus interest (9.0% at June 30, 1997) at
the bank's prime rate plus .5%, collateralized by
equipment................................................ 200,000 125,000
Note payable to a bank requiring monthly principal
payments of $6,250 plus interest (9.0% at June 30, 1997)
at the bank's prime rate plus .5%, maturing in April
1998, subordinately collateralized by substantially all
of the Company's assets.................................. 137,500 212,500
Note payable to a bank requiring monthly principal
payments of $667 plus interest (9.0% at June 30, 1997) at
the bank's prime rate plus .5%, maturing in December
1997..................................................... 4,000 12,000
Notes payable to a bank requiring aggregate monthly
principal payments of $1,064 including interest at 9.05%,
maturing in September 2000, collateralized by two
automobiles.............................................. 36,639 44,209
--------- ---------
1,241,639 1,289,959
Less current portion...................................... 573,742 456,076
--------- ---------
$667,897 $ 833,883
========= =========
</TABLE>
Aggregate maturities of notes payable as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
RELATED
PARTY BANK TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
1998.......................................... $245,132 $ 573,742 $ 818,874
1999.......................................... 159,456 357,639 517,095
2000.......................................... 125,132 307,395 432,527
2001.......................................... 64,847 2,863 67,710
2002.......................................... 70,591 -- 70,591
Thereafter.................................... 238,193 -- 238,193
-------- ---------- ----------
$903,351 $1,241,639 $2,144,990
======== ========== ==========
</TABLE>
The carrying amounts of the Company's notes payable at June 30, 1997
approximate their fair values. The fair values of the Company's notes payable
to banks and related party are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
Cash paid for interest in 1997 was approximately $183,000 ($161,000 in
1996).
F-32
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. LEASE COMMITMENTS
The Company has operating lease agreements for eleven warehouse buildings
located throughout the Midwestern United States. The lease agreements expire
at various dates between 1997 and 2003.
Future minimum payments for lease obligations at June 30, 1997 are as
follows:
<TABLE>
<S> <C>
1998............................................................ $ 594,223
1999............................................................ 573,454
2000............................................................ 486,948
2001............................................................ 289,884
2002............................................................ 176,936
Thereafter...................................................... 112,500
----------
$2,233,945
==========
</TABLE>
Total rent expense was approximately $566,000 in 1997 ($424,000 in 1996).
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Deferred income taxes relate to a temporary difference associated with the
allowance for doubtful accounts.
The reconciliation of income tax expense for 1997 and 1996 computed at the
U.S. federal statutory rate to the Company's effective income tax rate is as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Tax at U.S. federal statutory rate:............................ 34.0% 34.0%
State and local income taxes, net of U.S. federal benefit...... 4.5 6.0
Other.......................................................... 1.5 4.5
---- ----
40.0% 44.5%
==== ====
</TABLE>
Income tax expense (benefit) is composed of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current expense:
Federal............................................... $826,803 $260,329
State................................................. 167,263 66,366
Deferred expense:
Federal............................................... (35,375) --
State................................................. (5,200) --
-------- --------
$953,491 $326,695
======== ========
</TABLE>
Cash paid for income taxes in 1997 was approximately $356,000 ($123,000 in
1996).
F-33
<PAGE>
NATIONWIDE APARTMENT SUPPLY, INC. AND
FAIRVIEW WHOLESALE SUPPLY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. 401(K) PLAN
The Company has a 401(k) retirement savings plan which is available to all
employees over the age of 21 who have completed one year of service with the
Company. Employees may contribute up to 12% of their compensation per payroll
period. The Company matches a discretionary percentage of contributions made
by employees. The Company's total contribution in 1997 was approximately
$194,000 ($165,000 in 1996).
9. SUBSEQUENT EVENT
On July 11, 1997, all of the outstanding stock of the Company was purchased
by Century Air Supply, Inc., for an aggregate purchase price of $9,000,000
plus the assumption and payment of existing indebtedness of the Company.
F-34
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------- ---------------------------------------------------------------
CENTURY RECAPITALIZATION
MAINTENANCE NATIONWIDE AS ADJUSTMENTS AS
SUPPLY, INC. (NOTE 2) ADJUSTMENTS ADJUSTED (NOTE 3) ADJUSTED
-------------- ------------ ------------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $146,166 $19,845 $ - $166,011 $ - $166,011
Cost of sales........................ 105,636 14,734 (70) (a) 120,300 - 120,300
-------- ------- ------ -------- -------- --------
Gross profit......................... 40,530 5,111 70 45,711 - $ 45,711
Expenses:
General and
administrative................... 22,264 3,731 102 (b)
(12) (c)
(44) (d) 26,041 - 26,041
Stock-based compensation
charge........................... 6,969 - - 6,969 - 6,969
-------- ------- ------ -------- -------- --------
Operating income..................... 11,297 1,380 24 12,701 - 12,701
Interest expense..................... 1,147 86 287 (e) 1,520 7,743 (i) 9,263
-------- ------- ------ -------- -------- --------
Income (loss) before income
taxes and minority interest........ 10,150 1,294 (263) 11,181 (7,743) 3,438
Provision (benefit) for income
taxes.............................. 6,370 552 (64) (f)
295 (g) 7,153 (3,096) (j) 4,056
-------- ------- ------ -------- -------- --------
Income (loss) before minority
interest........................... 3,780 742 (494) 4,028 (4,647) (618)
Minority interest in earnings
of subsidiaries.................... 848 - (848) (h) - - -
-------- ------- ------ -------- -------- --------
Net income (loss).................... $ 2,932 $ 742 $ 354 $ 4,028 (4,647) (618)
======== ======= ====== ======== -------- --------
Preferred stock dividends............ (5,707) (k) (5,707)
-------- --------
Net loss available to common
stock.............................. $(10,354) $ (6,325)
======== ========
</TABLE>
See accompanying notes.
P-1
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Basis of Presentation
The accompanying unaudited pro forma consolidated statement of operations (the
"Pro Forma Financial Statements") is based on adjustments to the historical
consolidated financial statements of Century Maintenance Supply, Inc. (the
"Company"), to give effect to the acquisitions described in Note 2 (the
"Acquisitions") and the transaction described in Note 3 ("Recapitalization").
The pro forma consolidated statement of operations assumes the Acquisitions
described in Note 2 and the Recapitalization described in Note 3 were
consummated at the beginning of the period presented. The pro forma consolidated
statement of operations is not necessarily indicative of results that would have
occurred had the Acquisitions and Recapitalization been consummated as of the
beginning of the period presented or that might be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Pro Forma Financial Statements should be read in conjunction
with the historical consolidated financial statements of the Company, the
historical financial statements of the entity acquired in the Acquisition and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Registration Statement.
2. ACQUISITIONS AND TRANSACTIONS AMONG ENTITIES UNDER COMMON CONTROL
On June 30, 1997, the Company acquired all of the outstanding minority
shareholder interests in each of the Company's subsidiaries with common stock of
the Company. The exchanges were completed at fair value, resulting in the
Company's distributing 1,681,324 shares of common stock. This acquisition
resulted in compensation expense of $6,343,536.
On June 30, 1997, the Company purchased all of the assets of the general
maintenance supply operations of Century Airconditioning Supply, Inc. ("CAC"),
an affiliated company, which were located in San Antonio and Austin, Texas
(acquired assets to be called "SA/A"), with 1,702,703 shares of the Company's
common stock. CAC was an S corporation and was not subject to federal income
taxes. Also, on June 30, 1997, the Company sold one of its subsidiaries in the
heating and air conditioning business to CAC for $215,000. The transactions were
conducted between the Company and CAC, which were under common control, and, as
such, the transactions were recorded at historical cost in a manner similar to a
pooling of interests. All periods in the consolidated historical financial
statements have been restated to reflect the transactions.
On July 11, 1997, the Company acquired all of the issued and outstanding
common stock of Nationwide Apartment Supply, Inc., and Fairview Wholesale
Supply, Inc. (collectively "Nationwide"), for approximately $9,160,000. The
seller also received 140,000 options to purchase common stock of the Company at
$7.00 per share. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of these companies have
been included in the consolidated results of operations of the Company from the
date of acquisition. This acquisition resulted in goodwill of approximately
$5,787,000. The historical combined statement of operations for Nationwide prior
to the acquisition, from January 1, 1997 to July 11, 1997, is included as part
of the pro forma information.
3. TRANSACTION
On July 8, 1998, the Company consummated a recapitalization pursuant to an
Agreement and Plan of Merger (the "Recapitalization Agreement"). Under the terms
of the Recapitalization Agreement, Century Acquisition Corporation, an entity
formed by affiliates of Freeman, Spogli & Co. LLC ("FS&Co.") merged with and
into the Company, with the Company as the surviving corporation.
P-2
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pursuant to the Recapitalization, affiliates of FS&Co. invested $67.5 million,
a prospective director of the Company invested $750,000, and a third-party
invested $125,000 in cash for common stock of the Company (the "Common Stock
Investment") and the stockholders that existed prior to the Recapitalization
(after the Recapitalization, called "Continuing Stockholders"), retained common
stock with a value of $54.2 million (based on the valuation of the Company used
in the Recapitalization). As part of the Recapitalization, Senior Exchangeable
PIK Preferred Stock (with a dividend rate of 13.25%), due 2010, of the Company
with an aggregate liquidation preference of $28.0 million was sold to third
parties, and additional preferred stock with an aggregate liquidation preference
of $12.0 million was sold to two affiliates of the Company in a private
placement ("Sales of Preferred").
The Company entered into the New Credit Facility, providing for $100.0 million
of secured term loan facilities (the "Term Loan Facility"), which was funded in
connection with the consummation of the Recapitalization, and a $25.0 million
revolving loan facility (the "Revolving Credit Facility").
Century Acquisition Corporation merged into the Company with the Company being
the surviving entity and the Century Acquisition Corporation common stock was
converted into 2,969,820 newly issued shares of the Company's common stock. The
Company applied the proceeds from the Common Stock Investment, Sales of
Preferred, and $100.0 million of the Term Loan Facility to pay cash
consideration of $179.3 million to the Continuing Stockholders and option
holders, repay existing indebtedness and pay transaction fees and expenses
(including bonuses). In connection with the Recapitalization 7,561,355 shares of
common stock and 240,750 options to purchase shares of common stock were
converted into the right to receive cash. In connection with the cancellation of
common stock options in the Recapitalization, the Company recognized a one-time
compensation charge of approximately $2.4 million, net of taxes. Immediately
following consummation of the Recapitalization, FS&Co. and the Continuing
Stockholders beneficially own approximately 55.2% and 44.2%, respectively of the
outstanding common stock of the Company.
The Pro Forma Consolidated Financial Statements give effect to the Common
Stock Investment, the Sales of Preferred and the Recapitalization as if these
transactions occurred as of January 1, 1997 for purposes of the consolidated
statement of operations.
4. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
consolidated statement of operations as if the acquisitions described in Note 2
and the Recapitalization described in Note 3 were consummated as of the
beginning of the period presented:
(a) To reduce cost of goods sold to eliminate the change in the LIFO reserve
for the period prior to acquisition to conform the accounting method of
Nationwide to the Company's accounting method.
(b) To reflect additional amortization of goodwill related to the purchase of
Nationwide, which is being amortized on a straight-line basis over 30 years, for
the period from January 1, 1997 to date of acquisition.
(c) To reduce lease expense due to contractual reductions in monthly lease
expense as a result of the Nationwide acquisition.
(d) To reduce expenses for reductions in salary expense in connection with the
Nationwide acquisition.
(e) To reflect additional interest expense related to the purchase of
Nationwide, for the period from January 1, 1997 to date of acquisition.
(f) To reflect the change in taxes related to the above pro forma adjustments
based on an effective rate of 40% (considering goodwill and stock compensation
as nondeductible).
(g) To record the effect of taxes as if SA/A operating assets had been part of
the C corporation since the beginning of the period presented.
P-3
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(h) To reflect the acquisition of minority shares as if the transaction had
occurred on January 1, 1997.
(i) To reflect the adjustment to interest expense and amortization of deferred
financing costs as follows (amounts in thousands):
<TABLE>
<S> <C>
Elimination of interest expenses on existing debt................................... $(1,520)
Interest expense on new bank facility at an approximate interest rate of 8.5%....... 8,500
Amortization of deferred financing costs (6.2 year life)............................ 763
-------
Total............................................................................... $ 7,743
=======
</TABLE>
(j) To reflect the change in taxes related to the Recapitalization pro forma
adjustment based on an effective rate of 40%.
(k) To reflect the payment-in-kind preferred stock dividends at a rate of
13.25% due semiannually.
5. USE OF ESTIMATES IN THE PRO FORMA FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
P-4
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(Unaudited)
June 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
Century
Maintenance Recapitalization Pro Forma
Supply, Inc. Adjustments as Adjusted
-------------- ------------------ -------------
<S> <C> <C> <C>
Revenues........................................... $94,182 $ - $94,182
Cost of sales...................................... 68,598 - 68,598
------- ------- -------
Gross profit...................................... 25,584 - 25,584
Expenses:
General and administrative........................ 14,182 - 14,182
------- ------- -------
Operating income................................... 11,402 - 11,402
Interest expense................................... 719 3,912 (a) 4,631
------- ------- -------
Income (loss) before income taxes.................. 10,683 (3,912) 6,771
Provision (benefit) for income taxes............... 4,145 (1,565)(b) 2,580
------- ------- -------
Net income......................................... $ 6,538 (2,347) 4,191
=======
Preferred stock dividend........................... (2,766)(c) (2,766)
------- -------
Net income available to common stock............... $(5,113) $ 1,425
======= =======
</TABLE>
P-5
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET--(Unaudited)
June 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
Recapitalization
Historical Adjustments Pro Forma
------------ ------------------ -----------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash......................................................... $ 4,304 $ (4,304) (d) $ -
Accounts receivable.......................................... 24,895 - 24,895
Inventory, net............................................... 29,796 - 29,796
Deferred income taxes........................................ 857 - 857
Prepaid expenses and other current assets.................... 1,019 (345) (f) 674
------- --------- -----------
Total current assets....................................... 60,871 (4,649) 56,222
Goodwill, net................................................. 5,459 - 5,459
Other assets.................................................. 547 - 547
Deferred financing costs..................................... - 4,728 (e) 4,728
Property and equipment, net.................................. 2,635 - 2,635
------- --------- -----------
Total assets............................................... $69,512 $ 79 $ 69,591
======= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
Current liabilities:
Trade accounts payable....................................... $13,134 $ - $ 13,134
Notes payable................................................ 11,025 (11,025) (f) -
Income taxes payable......................................... 1,552 - 1,552
Accrued expenses............................................. 2,913 (533) (f) -
1,863 (f) 4,243
Current portion of long-term debt............................ 205 (205) (f) -
Current portion of long-term debt--related parties........... 2,034 (2,034) (f) -
------- --------- -----------
Total current liabilities.................................. 30,863 (11,934) 18,929
New Credit Facility........................................... - 100,000 (f) 100,000
Long-term debt, less current portion.......................... 360 (360) (f) -
Long-term debt--related parties, less current portion......... 6,352 (6,352) (f) -
Deferred income taxes......................................... 331 - 331
Mandatory redeemable preferred stock - 37,227 (f) 37,227
Stockholders' equity (deficit):
Common stock................................................. 10 (5) (g) 5
Additional paid-in capital................................... 11,918 59,238 (h) 71,156
Treasury stock, at cost...................................... (500) 500 (i) -
Retained earnings (deficit).................................. 20,178 (178,235) (j) (158,057)
------- --------- -----------
Total stockholders' equity (deficit)....................... 31,606 (118,502) (86,896)
------- --------- -----------
Total liabilities and stockholders' equity................. $69,512 $ 79 $ 69,591
======= ========= =========
</TABLE>
P-6
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)
June 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma consolidated statement of operations (the
"Pro Forma Financial Statements") are based on adjustments to the historical
consolidated financial statements of Century Maintenance Supply, Inc. (the
"Company"), to give effect to the transaction described in Note 2
("Recapitalization"). The pro forma consolidated balance sheet and the pro forma
consolidated statement of operations assumes the Recapitalization described in
Note 2 was consummated at the beginning of the period presented. The pro forma
consolidated balance sheet and the pro forma consolidated statement of
operations are not necessarily indicative of results that would have occurred
had the Recapitalization been consummated as of the beginning of the period
presented or that might be attained in the future. Certain information normally
included in financial statements prepared in accordance with generally accepted
accounting principals has been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Pro Forma Financial
Statements should be read in conjunction with the historical consolidated
financial statements of the Company and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Registration Statement.
2. TRANSACTION
On July 8, 1998, the Company consummated a recapitalization pursuant to an
Agreement and Plan of Merger (the "Recapitalization Agreement"). Under the terms
of the Recapitalization Agreement, Century Acquisition Corporation, an entity
formed by affiliates of Freeman, Spogli & Co. LLC ("FS&Co.") merged with and
into the Company, with the Company as the surviving corporation.
Pursuant to the Recapitalization, affiliates of FS&Co. invested $67.5 million,
a prospective director of the Company invested $750,000, and a third party
invested $125,000 in cash for common stock of the Company (the "Common Stock
Investment"), and the stockholders that existed prior to Recapitalization (after
the Recapitalization, called "Continuing Stockholders") retained common stock
with a value of $54.2 million (based on the valuation of the Company used in the
Recapitalization). As part of the Recapitalization, Senior Exchangeable PIK
Preferred Stock (with a dividend rate of 13.25%), due 2010, of the Company with
an aggregate liquidation preference of $28.0 million was sold to third parties,
and additional preferred stock with an aggregate liquidation preference of $12.0
million was sold to two affiliates of the Company in a private placement ("Sales
of Preferred").
The Company entered into the New Credit Facility, providing for $100.0 million
of secured term loan facilities (the "Term Loan Facility"), which was funded in
connection with the consummation of the Recapitalization, and a $25.0 million
revolving loan facility (the "Revolving Credit Facility").
Century Acquisition Corporation merged into the Company with the Company being
the surviving entity and the Century Acquisition Corporation common stock was
converted into 2,969,820 newly issued shares of the Company's common stock. The
Company applied the proceeds from the Common Stock Investment, the Sales of
Preferred, and $100.0 million of the Term Loan Facility to pay cash
consideration of $179.3 million to the Continuing Stockholders and option
holders, repay existing indebtedness and pay transaction fees and expenses
(including bonuses). In connection with the Recapitalization, 7,561,355 shares
of common stock and 240,750 options to purchase shares of common stock were
converted into the right to receive cash. In connection with the cancellation of
common stock options in the Recapitalization, the Company recognized a one-time
compensation charge of approximately $2.4 million, net of taxes. Immediately
following consummation of the Recapitalization, FS&Co. and the Continuing
Stockholders beneficially own approximately 55.2% and 44.2%, respectively, of
the outstanding common stock of the Company.
P-7
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Pro Forma Consolidated Financial Statements give effect to the Common
Stock Investment, the Sales of Preferred, and the Recapitalization as if these
transactions occurred as of January 1, 1998 for purposes of the consolidated
statement of operations.
3. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
consolidated balance sheet and historical consolidated statement of operations
as if the Recapitalization described in Note 2 was consummated as of the
beginning of the period presented.
Pro forma adjustments to the consolidated statement of operations:
(a) To reflect the adjustment to interest expense and amortization of
deferred financing costs as follows (amounts in thousands):
<TABLE>
<S> <C>
Elimination of interest expenses on existing debt................................... $ (719)
Interest expense on new bank facility at an approximate interest rate of 8.5%....... 4,250
Amortization of deferred financing costs (6.2 year life)............................ 381
------
Total............................................................................... $3,912
======
</TABLE>
(b) To reflect the change in taxes related to the Recapitalization pro
forma adjustment based on an effective rate of 40%.
(c) To reflect the payment-in-kind preferred stock dividends at a rate of
13.25% due semiannually.
Pro forma adjustments to the consolidated balance sheet:
(d) Reflects the use of existing cash in connection with the
Recapitalization.
(e) Reflects the portion of the transaction and other related expenses
which will be attributable to obtaining the debt as part of the
Recapitalization.
(f) The pro forma adjustments which reflect the financing and repayment of
existing debt of the Company are as follows (amounts in thousands):
<TABLE>
<S> <C>
Repayment of note payable........................................................... $(11,025)
Repayment of accrued interest....................................................... (533)
Repayment of current portion of long-term debt...................................... (205)
Repayment of current portion of long-term debt--related parties..................... (2,034)
Long-term debt:
Repayment of long-term debt, less current portion................................. (360)
Repayment of long-term debt--related parties, less current portion................ (6,352)
New credit facility............................................................... 100,000
--------
Total debt.......................................................................... $ 79,491
========
Issuance of mandatory redeemable preferred stock
Series A (less costs of $2,754)................................................... $ 25,246
Series B (less costs of $19)...................................................... 11,981
--------
$ 37,227
========
Prepayment of expenses related to the transaction $ 345
========
Accrued expenses related to the transaction $ 1,863
========
</TABLE>
P-8
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(g) Reflects the par value of the 7,561,355 shares of common stock
converted into the right to receive cash in the Recapitalization and the
issuance of 2,969,820 shares of common stock purchased in connection with the
Common Stock Investment.
(h) Reflects the following adjustments (amounts in thousands):
<TABLE>
<S> <C>
Additional paid-in capital related to the conversion of common stock
in (g) above................................................................... $(9,088)
Common Stock Investment........................................................... 68,326
---------
Total............................................................................. $59,238
=========
</TABLE>
(i) Reflects the elimination of treasury stock.
(j) Reflects the following adjustments (amounts in thousands):
<TABLE>
<S> <C>
Payment for shares and stock options.............................................. $(169,236)
Transaction costs................................................................. (7,499)
Other costs....................................................................... (1,000)
Cancellation of existing treasury stock........................................... (500)
---------
Total............................................................................. $(178,235)
=========
</TABLE>
4. USE OF ESTIMATES IN THE PRO FORMA FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
P-9
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS--(Unaudited)
June 30, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------ ---------------------------------------------------------
Century Recapitalization
Maintenance Nationwide As Adjustments As
Supply, Inc. (Note 2) Adjustments Adjusted (Note 3) Adjusted
-------------- ------------ ------------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $58,761 $18,339 $ - $77,100 $ - $77,100
Cost of sales............................ 42,468 13,588 (70) (a) 55,986 - 55,986
------- ------- ----- ------- ------- -------
Gross profit............................. 16,293 4,751 70 21,114 - 21,114
Expenses:
General and administrative............. 9,097 3,495 102 (b)
(12) (c)
(44) (d) 12,638 12,638
Stock-based compensation charge........ 6,343 - - 6,343 - 6,343
------- ------- ----- ------- ------- -------
Operating income (loss).................. 853 1,256 24 2,133 2,133
Interest expense......................... 323 76 270 (e) 669 3,962 (i) 4,631
------- ------- ----- ------- ------- -------
Income (loss) before income
taxes and minority interest............ 530 1,180 (246) 1,464 (3,962) (2,498)
Provision (benefit) for income
taxes.................................. 2,139 507 (64) (f)
295 (g) 2,877 (1,585) (j) 1,292
----- ------- ------- -------
Income before minority interest.......... (1,609) 673 (477) (1,413) (2,377) (3,790)
Minority interest in earnings of
subsidiaries........................... 848 - (848) - - -
------- ------- ----- ------- ------- -------
Net income (loss)........................ $(2,457) $ 673 $ 371 $(1,413) (2,377) (3,790)
======= ======= ===== =======
Preferred stock dividends................ (2,766) (k) (2,766)
------- -------
Net loss available to common
stock.................................. $(5,143) $(6,556)
======= =======
</TABLE>
See accompanying notes.
P-10
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Unaudited)
June 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma consolidated statement of operations (the
"Pro Forma Financial Statements") is based on adjustments to the historical
consolidated financial statements of Century Maintenance Supply, Inc. (the
"Company"), to give effect to the acquisitions described in Note 2 (the
"Acquisitions") and the transaction described in Note 3 ("Recapitalization").
The pro forma consolidated statement of operations assumes the Acquisitions
described in Note 2 and the Recapitalization described in Note 3 were
consummated at the beginning of the period presented. The pro forma consolidated
statement of operations is not necessarily indicative of results that would have
occurred had the Acquisitions and Recapitalization been consummated as of the
beginning of the period presented or that might be attained in the future.
Certain information normally included in financial statements prepared in
accordance with generally accepted accounting principles has been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The Pro Forma Financial Statements should be read in conjunction
with the historical consolidated financial statements of the Company, the
historical financial statements of the entity acquired in the Acquisition and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Registration Statement.
2. ACQUISITIONS AND TRANSACTIONS AMONG ENTITIES UNDER COMMON CONTROL
On June 30, 1997, the Company acquired all of the outstanding minority
shareholder interests in each of the Company's subsidiaries with common stock of
the Company. The exchanges were completed at fair value, resulting in the
Company's distributing 1,681,324 shares of common stock. This acquisition
resulted in compensation expense of $6,343,536.
On June 30, 1997, the Company purchased all of the assets of the general
maintenance supply operations of Century Airconditioning Supply, Inc. ("CAC"),
an affiliated company, which were located in San Antonio and Austin, Texas
(acquired assets to be called "SA/A"), with 1,702,703 shares of the Company's
common stock. CAC was an S corporation and was not subject to federal income
taxes. Also, on June 30, 1997, the Company sold one of its subsidiaries in the
heating and air conditioning business to CAC for $215,000. The transactions were
conducted between the Company and CAC, which were under common control and, as
such, the transactions were recorded at historical cost in a manner similar to a
pooling of interests. All periods in the consolidated historical financial
statements have been restated to reflect the transactions.
On July 11, 1997, the Company acquired all of the issued and outstanding
common stock of Nationwide Apartment Supply, Inc., and Fairview Wholesale
Supply, Inc. (collectively, "Nationwide"), for approximately $9,160,000. The
seller also received 140,000 options to purchase common stock of the Company at
$7.00 per share. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of these companies have
been included in the consolidated results of operations of the Company from the
date of acquisition. This acquisition resulted in goodwill of approximately
$5,787,000. The historical combined statement of operations for Nationwide prior
to the acquisition, from January 1, 1997 to June 30, 1997, is included as part
of the pro forma information.
3. TRANSACTION
On July 8, 1998, the Company consummated a recapitalization pursuant to an
Agreement and Plan of Merger (the "Recapitalization Agreement"). Under the terms
of the Recapitalization Agreement, Century Acquisition Corporation, an entity
formed by affiliates of Freeman, Spogli & Co. LLC ("FS&Co.") merged with and
into the Company, with the Company as the surviving corporation.
P-11
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(continued)
Pursuant to the Recapitalization, affiliates of FS&Co. invested $67.5 million,
a prospective director of the Company invested $750,000, and a third-party
invested $125,000 in cash for common stock of the Company (the "Common Stock
Investment") and the stockholders, that existed prior to the Recapitalization
(after the Recapitalization, called "Continuing Stockholders"), retained common
stock with a value of $54.2 million (based on the valuation of the Company used
in the Recapitalization). As part of the Recapitalization, Senior Exchangeable
PIK Preferred Stock (with a dividend rate of 13.25%), due 2010, of the Company
with an aggregate liquidation preference of $28.0 million was sold to third
parties, and additional preferred stock with an aggregate liquidation preference
of $12.0 million was sold to two affiliates of the Company in a private
placement ("Sales of Preferred").
The Company entered into the New Credit Facility, providing for $100.0 million
of secured term loan facilities (the "Term Loan Facility"), which was funded in
connection with the consummation of the Recapitalization, and a $25.0 million
revolving loan facility (the "Revolving Credit Facility").
Century Acquisition Corporation merged into the Company with the Company being
the surviving entity and the Century Acquisition Corporation common stock was
converted into 2,969,820 newly issued shares of the Company's common stock. The
Company applied the proceeds from the Common Stock Investment, the Sales of
Preferred, and $100.0 million of the Term Loan Facility to pay cash
consideration of $179.3 million to the Continuing Stockholders and option
holders, repay existing indebtedness, and pay transaction fees and expenses
(including bonuses). In connection with the Recapitalization, 7,561,355 shares
of common stock and 240,750 options to purchase shares of common stock were
converted into the right to receive cash. In connection with the cancellation of
common stock options in the Recapitalization, the Company recognized a one-time
compensation charge of approximately $2.4 million, net of taxes. Immediately
following consummation of the Recapitalization, FS&Co. and the Continuing
Stockholders beneficially own approximately 55.2% and 44.2%, respectively, of
the outstanding common stock of the Company.
The Pro Forma Consolidated Financial Statements give effect to the Common
Stock Investment, the Sales of Preferred, and the Recapitalization as if these
transactions occurred as of January 1, 1997 for purposes of the consolidated
statement of operations.
4. ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the historical
consolidated statement of operations as if the Acquisitions described in Note 2
and the Recapitalization described in Note 3 were consummated as of the
beginning of the period presented:
(a) To reduce cost of goods sold to eliminate the change in the LIFO
reserve for the period prior to acquisition to conform the accounting method
of Nationwide to the Company's accounting method.
(b) To reflect additional amortization of goodwill related to the purchase
of Nationwide, which is being amortized on a straight-line basis over 30
years, for the period from January 1, 1997 to date of acquisition.
(c) To reduce lease expense due to contractual reductions in monthly lease
expense as a result of the Nationwide acquisition.
(d) To reduce expenses for reductions in salary expense in connection with
the Nationwide acquisition.
(e) To reflect additional interest expense related to the purchase of
Nationwide, for the period from January 1, 1997 to date of acquisition.
P-12
<PAGE>
CENTURY MAINTENANCE SUPPLY, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(f) To reflect the change in taxes related to the above pro forma
adjustments based on an effective rate of 40% (considering goodwill and stock
compensation as nondeductible).
(g) To record the effect of taxes as if SA/A operating assets had been
part of the C corporation since the beginning of the period presented.
(h) To reflect the acquisition of minority shares as if the transaction
had occurred on January 1, 1997.
(i) To reflect the adjustment to interest expense and amortization of
deferred financing costs as follows (amounts in thousands):
<TABLE>
<S> <C>
Elimination of interest expense on existing debt....................................... $ (669)
Interest expense on new bank facility at an approximate interest
rate of 8.5%........................................................................ 4,250
Amortization of deferred financing costs (6.2-year life)............................... 381
------
Total.................................................................................. $3,962
======
</TABLE>
(j) To reflect the change in taxes related to the Recapitalization pro
forma adjustment based on an effective rate of 40%.
(k) To reflect the payment-in-kind preferred stock dividends at a rate of
13.25% due semiannually.
5. USE OF ESTIMATES IN THE PRO FORMA FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
P-13
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE INITIAL
PREFERRED STOCK BY ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING THE
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
-----------------
TABLE OF CONTENTS
PAGE
----
Summary............................................................ 1
Risk Factors....................................................... 16
Use of Proceeds.................................................... 23
Dividend Policy.................................................... 23
Capitalization..................................................... 24
The Exchange Offer................................................. 26
Selected Historical and Pro Forma Consolidated Financial
Information....................................................... 34
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 37
Business........................................................... 43
Management......................................................... 51
Security Ownership of Certain Beneficial Owners.................... 56
Certain Transactions............................................... 57
Description of New Credit Facility................................. 60
Description of the Exchange Preferred Stock........................ 62
Description of the Exchange Debentures............................. 87
Certain U.S. Federal Income Tax Considerations..................... 103
Description of Capital Stock....................................... 112
Plan of Distribution............................................... 113
Experts............................................................ 113
Legal Matters...................................................... 113
Index to Consolidated Financial Statements......................... F-1
Pro Forma Consolidated Financial Statements........................ P-1
================================================================================
================================================================================
280,000 SHARES
CENTURY MAINTENANCE
SUPPLY, INC.
13 1/4% SENIOR EXCHANGEABLE
PIK PREFERRED STOCK
DUE 2010
___________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article XI
of the Certificate of Incorporation of the Company, as amended, attached as
Exhibit 3.1 to this Registration Statement (the "Certificate of Incorporation")
provides that no director of the Company shall be personally liable for monetary
damages for a breach of his duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware Corporation Law for any unlawful payment of a dividend or unlawful
stock purchase or redemption, or (iv) for any transaction from which the
director derived an improper personal benefit.
The Certificate of Incorporation further provides that if the Delaware
General Corporation Law is amended to authorize further elimination or
limitation of the liability of directors, then the liability of a director of
the Company shall be limited to the fullest extent permitted by the amended
Delaware law. The Certificate of Incorporation requires the Company to
indemnify its directors and officers against liabilities that may arise by
reason of their status or service as directors, officers, employees or agents of
the Company to the full extent permitted by Delaware law or any other applicable
law as may from time to time be in effect.
Pursuant to Section 145 of the Delaware Corporation Law, Article X, Section
8 of the Amended and Restated Bylaws of the Company, attached as Exhibit 3.2 to
this Registration Statement (the "Bylaws"), provides that each director,
officer, and former director or officer of the Company, and any person who may
have served or who may in the future serve at the request of the Company as a
director or officer of another corporation in which the Company owns shares of
capital stock or of which it is a creditor, is indemnified by the Company
against expenses actually and necessarily incurred by him or her in connection
with the defense of any action, suit or proceeding in which he or she is made a
party by reason of being or having been such director or officer, except in
relation to matters as to which he or she shall be adjudged in such action, suit
or proceeding to be liable for negligence or misconduct in the performance of
duty and except as otherwise provided by law. Such indemnification will not be
deemed exclusive of any other rights to which such director, officer or other
person may be entitled under any agreement, vote of stockholders, or otherwise.
The indemnification provision in the Bylaws shall not limit the indemnification
provisions in the Certificate of Incorporation.
Reference is made to the Registration Rights Agreement (attached as Exhibit
4.2 to this Registration Statement) which provides for indemnification by each
Holder of securities (as defined therein) of the Company, its directors and
officers and each person controlling the Company, but only with reference to
information relating to such Holder furnished to the Company in writing by such
Holder expressly for use in any registration statement or prospectus.
Reference is also made to that certain Preferred Stock Registration Rights
Agreement between FS Equity Partners IV, LP, Dennis C. Bearden and the Company
(attached as Exhibit 10.10 to this Registration Statement) which provides for
indemnification by each Selling Holder (as defined therein) of the Company, its
directors and officers and each person controlling the Company, but only with
reference to information relating to such Selling Holder furnished in writing by
such Selling Holder or on such Selling Holder's behalf expressly for use in any
registration statement or prospectus.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted with respect to directors, officers or persons controlling
the Registrant pursuant to the foregoing provisions, the Registrant has been
informed that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
The foregoing discussion of the Certificate of Incorporation, Bylaws and
the Delaware Corporation Law is not intended to be exhaustive and is qualified
in its entirety by the Certificate of Incorporation, Bylaws and the relevant
provisions of the Delaware Corporation Law.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1.1* Purchase Agreement dated July 1, 1998 between Century Maintenance
Supply, Inc. (the "Company" or "Century") and Salomon Brothers Inc .
2.1* Agreement and Plan of Merger dated as of May 5, 1998 among Century Acquisition Corporation,
Dennis C. Bearden ("Bearden"), FS Equity Partners IV, LP ("FSEP IV"), the Company, and the
shareholders of the Company.
2.2* First Amendment to Agreement and Plan of Merger dated June 19, 1998 among Century
Acquisition Corporation, Bearden, FSEP IV, the Company, and the shareholders of the Company.
3.1* Amended and Restated Certificate of Incorporation of Century.
3.2* Amended and Restated Bylaws of Century.
3.3* Certificate of Designation by Century dated July 8, 1998.
4.1* Exchange Indenture dated as of July 8, 1998 between Century and United States Trust Company
of New York, as Trustee, with respect to the 13 1/4% Senior Subordinated Exchange Debentures due
2010 (including form of 13 1/4% Senior Subordinated Exchange Debenture due 2010).
4.2* Registration Agreement dated July 8, 1998 between Century and Salomon Brothers Inc.
5.1* Opinion of Riordan & McKinzie as to the legality of securities registered hereunder.
10.1* Credit Agreement dated as of July 8, 1998 among the Company, the lenders party thereto, Salomon
Brothers Inc and Citicorp USA, Inc. ("Citicorp").
10.2* Security Agreement dated as of July 8, 1998 between the Company and Citicorp.
10.3* Pledge Agreement dated as of July 8, 1998 between the Company and Citicorp.
10.4* Subsidiary Guarantee Agreement dated as of July 8, 1998 between the Company and Citicorp.
10.5* Indemnity, Subrogation and Contribution Agreement dated as of July 8, 1998 between the Company
and Citicorp.
10.6* Amended and Restated Stockholders' Agreement dated as of May 5, 1998 among FSEP IV,
Bearden, the Company and certain of its stockholders and their spouses.
10.7* Second Amended and Restated Stockholders' Agreement dated as of July 8, 1998 among FSEP IV,
Bearden, the Company and certain of its stockholders and their spouses.
10.8* Stockholders Agreement dated July 8, 1998 among FSEP IV, William C. Johnson ("Johnson"), The
Parthenon Group, Bearden, Century Airconditioning Supply, Inc. ("Century AC") and the
Company.
10.9* Registration Rights Agreement dated July 8, 1998 among FSEP IV, Bearden, Century AC, the
Company and certain stockholders of the Company.
10.10* Preferred Stock Registration Rights Agreement dated July 8, 1998 among FSEP IV, Bearden and
the Company.
10.11* Preferred Stock Subscription Agreement dated July 8, 1998 among the Company, FSEP IV and
Bearden.
10.12* 1998 Nonqualified Stock Option Plan.
10.13* 1997 Incentive Stock Plan.
10.14* Form of Nonqualified Stock Option Agreement for 1998 Nonqualified Stock Option Plan.
10.15* Form of Agreement for 1997 Incentive Stock Plan.
10.16* Executive Employment Agreement dated July 8, 1998 between Century Maintenance Supply, Inc.
and Bearden.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.17* Executive Employment Agreement dated July 8, 1998 between Century Maintenance Supply, Inc.
and Richard E. Penick.
10.18* Non-competition Agreement dated July 8, 1998 among Bearden, Century AC, Air Management
Supply, Inc. and Century.
12.1* Statement re Computation of Earnings to Fixed Charges Ratio.
21.1* Subsidiaries of Century.
23.1* Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1* Power of Attorney (included on the signature pages hereof).
25.1* Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of
United States Trust Company of New York.
27.1* Financial Data Schedule.
99.1* Form of Letter of Transmittal with respect to the Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery with respect to the Exchange Offer.
</TABLE>
- --------------
* Previously Filed.
(b) FINANCIAL STATEMENT SCHEDULE
*Schedule I - Valuation and Qualifying Accounts and Reserves.
- --------------
* Previously Filed.
No other schedules have been included because the information
required to be set forth therein is not applicable.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-3
<PAGE>
4. To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
5. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
6. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
7. To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Act of 1933, as amended, the
undersigned Registrant has duly caused Amendment No. 1 to this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Houston, Texas, on October 26, 1998.
CENTURY MAINTENANCE SUPPLY,INC.
By: /s/ Richard E. Penick
----------------------------------
Richard E. Penick
Chief Financial Officer, Vice President
and Assistant Secretary
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this Registration Statement has been signed below by the following person in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
* Chief Executive Officer and October 26, 1998
- ------------------------- Director (Principal Executive Officer)
Dennis C. Bearden
* Chief Operating Officer and Director October 26, 1998
- -------------------------
Charles L. Littlepage
* Chief Financial Officer and Director October 26, 1998
- -------------------------
Richard E. Penick
* Director October 26, 1998
- -------------------------
Mark J. Doran
* Director October 26, 1998
- -------------------------
William C. Johnson
* Director October 26, 1998
- -------------------------
Jon D. Ralph
* Director October 26, 1998
- -------------------------
J. Frederick Simmons
* Director October 26, 1998
- -------------------------
Ronald P. Spogli
</TABLE>
By: /s/ Richard E. Penick
---------------------
Richard E. Penick
Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1.1* Purchase Agreement dated July 1, 1998 between Century Maintenance Supply, Inc. (the
"Company" or "Century") and Salomon Brothers Inc.
2.1* Agreement and Plan of Merger dated as of May 5, 1998 among Century Acquisition Corporation,
Dennis C. Bearden ("Bearden"), FS Equity Partners IV, LP ("FSEP IV"), the Company, and the
shareholders of the Company.
2.2* First Amendment to Agreement and Plan of Merger dated June 19, 1998 among Century
Acquisition Corporation, Bearden, FSEP IV, the Company, and the shareholders of the Company.
3.1* Amended and Restated Certificate of Incorporation of Century.
3.2* Amended and Restated Bylaws of Century.
3.3* Certificate of Designation by Century dated July 8, 1998.
4.1* Exchange Indenture dated as of July 8, 1998 between Century and United States Trust Company
of New York, as Trustee, with respect to the 13 1/4% Senior Subordinated Exchange Debentures due
2010 (including form of 13 1/4% Senior Subordinated Exchange Debenture due 2010).
4.2* Registration Agreement dated July 8, 1998 between Century and Salomon Brothers Inc.
5.1* Opinion of Riordan & McKinzie as to the legality of securities registered hereunder.
10.1* Credit Agreement dated as of July 8, 1998 among the Company, the lenders party thereto, Salomon
Brothers Inc and Citicorp USA, Inc. ("Citicorp").
10.2* Security Agreement dated as of July 8, 1998 between the Company and Citicorp.
10.3* Pledge Agreement dated as of July 8, 1998 between the Company and Citicorp.
10.4* Subsidiary Guarantee Agreement dated as of July 8, 1998 between the Company and Citicorp.
10.5* Indemnity, Subrogation and Contribution Agreement dated as of July 8, 1998 between the Company
and Citicorp.
10.6* Amended and Restated Stockholders' Agreement dated as of May 5, 1998 among FSEP IV,
Bearden, the Company and certain of its stockholders and their spouses.
10.7* Second Amended and Restated Stockholders' Agreement dated as of July 8, 1998 among FSEP IV,
Bearden, the Company and certain of its stockholders and their spouses.
10.8* Stockholders Agreement dated July 8, 1998 among FSEP IV, William C. Johnson ("Johnson"), The
Parthenon Group, Bearden, Century Airconditioning Supply, Inc. ("Century AC") and the
Company.
10.9* Registration Rights Agreement dated July 8, 1998 among FSEP IV, Bearden, Century AC, the
Company and certain stockholders of the Company.
10.10* Preferred Stock Registration Rights Agreement dated July 8, 1998 among FSEP IV, Bearden and
the Company.
10.11* Preferred Stock Subscription Agreement dated July 8, 1998 among the Company, FSEP IV and
Bearden.
10.12* 1998 Nonqualified Stock Option Plan.
10.13* 1997 Incentive Stock Plan.
10.14* Form of Nonqualified Stock Option Agreement for 1998 Nonqualified Stock Option Plan.
10.15* Form of Agreement for 1997 Incentive Stock Plan.
10.16* Executive Employment Agreement dated July 8, 1998 between Century Maintenance Supply, Inc.
and Bearden.
10.17* Executive Employment Agreement dated July 8, 1998 between Century Maintenance Supply, Inc.
and Richard E. Penick.
10.18* Non-competition Agreement dated July 8, 1998 among Bearden, Century AC, Air Management Supply,
Inc. and Century.
12.1* Statement re Computation of Earnings to Fixed Charges Ratio.
21.1* Subsidiaries of Century.
23.1* Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
24.1* Power of Attorney (included on the signature pages hereof).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
25.1* Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939 of
United States Trust Company of New York.
27.1* Financial Data Schedule.
99.1* Form of Letter of Transmittal with respect to the Exchange Offer.
99.2* Form of Notice of Guaranteed Delivery with respect to the Exchange Offer.
</TABLE>
__________
* Previously Filed
II-7
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 31, 1998 with respect to the consolidated
financial statements of Century Maintenance Supply, Inc., and dated August 25,
1997 with respect to the combined financial statements of Nationwide Apartment
Supply, Inc. and Fairview Wholesale Supply, Inc. (collectively, "Nationwide") in
the Registration Statement (Form S-4) and related Prospectus of Century
Maintenance Supply, Inc.
/s/ Ernst & Young LLP
Houston, Texas
October 26, 1998
