<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period from __________ to __________
Commission file number - 333-62635
_____________________
CENTURY MAINTENANCE SUPPLY, INC.
(Exact name of registrant as specified in its charter)
_____________________
Delaware 76-0542935
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10050 Cash Road, Suite 1 77477
Stafford, Texas (Zip Code)
(Address of Principal Executive Offices)
(281) 208-2600
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock, $.001 par value, outstanding (the
only class of common stock of the Company outstanding) was 12,443,147 on May 13,
1999.
================================================================================
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CENTURY MAINTENANCE SUPPLY, INC. AND SUBSIDIARIES
Quarter Ended March 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements of Century Maintenance Supply, Inc. (Unaudited)
<S> <C> <C>
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999...................................... 2
Consolidated Statements of Operations for the Three Months Ended
March 31, 1998 and March 31, 1999........................................................................... 4
Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the Three Months
Ended March 31, 1999........................................................................................ 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and March 31, 1999........................................................................... 6
Notes to Consolidated Financial Statements.................................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 18
Item 2. Changes in Securities................................................................................ 18
Item 3. Defaults Upon Senior Securities...................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................................. 18
Item 5. Other Information.................................................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................................................... 18
SIGNATURE........................................................................................................... 19
</TABLE>
1
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Century Maintenance Supply, Inc.
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
----------- ----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash.......................................... $ 3,643 $ 4,151
Accounts receivable:
Trade, net................................. 19,132 20,875
Related parties............................ 170 --
Inventory, net................................ 34,714 37,730
Deferred income taxes......................... 918 918
Prepaid expenses and other current assets..... 3,321 3,285
------- -------
Total current assets............................ 61,898 66,959
Goodwill, net................................... 5,350 5,303
Other assets.................................... 641 642
Deferred financing costs........................ 3,437 3,248
Property and equipment.......................... 5,808 6,858
Less accumulated depreciation................ (3,267) (3,403)
------- -------
Net property and equipment...................... 2,541 3,455
------- -------
Total assets.................................... $73,867 $79,607
======= =======
</TABLE>
See accompanying notes.
(continued)
2
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Century Maintenance Supply, Inc.
Consolidated Balance Sheets (continued)
(In Thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
----------- ----------
<S> <C> <C>
(Unaudited)
Liabilities and stockholders' equity (deficit)
Current liabilities:
Trade accounts payable....................................... $ 10,474 $ 11,986
Accounts payable--related party.............................. -- 142
Revolving credit facility.................................... -- 5,000
Income taxes payable......................................... 2,280 523
Accrued expenses............................................. 4,076 4,402
Current portion of long-term debt............................ 4,600 4,600
Dividends payable............................................ 2,547 1,390
----------- ----------
Total current liabilities...................................... 23,977 28,043
Long-term debt, less current portion........................... 94,100 92,950
Deferred income taxes.......................................... 297 297
Redeemable, exchangeable preferred stock, $100 par value:
Authorized shares--2,000,000;
Shares issued and outstanding--400,000 at December 31, 1998 37,309 39,915
and 425,470 at March 31, 1999
Stockholders' equity (deficit):
Common stock, $0.001 par value:
Authorized shares--15,000,000;
Shares issued and outstanding--12,443,147 at
December 31, 1998 and at March 31, 1999,
respectively............................................. 12 12
Additional paid-in capital................................ 70,759 70,759
Treasury stock, at cost................................... (500) (500)
Retained earnings (deficit)............................... (152,087) (151,869)
----------- ----------
Total stockholders' equity (deficit)........................... (81,816) (81,598)
----------- ----------
Total liabilities and stockholders' equity (deficit)........... $ 73,867 $ 79,607
=========== ==========
</TABLE>
See accompanying notes.
3
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Century Maintenance Supply, Inc.
Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1998 1999
----------- ----------
<S> <C> <C>
(Unaudited)
Net sales...................................... $ 40,514 $ 46,798
Cost of goods sold............................. 29,257 33,472
----------- --------
Gross profit................................... 11,257 13,326
Selling, general, and administrative expenses.. 6,711 8,349
----------- --------
Operating income............................... 4,546 4,977
Interest expense............................... 345 2,277
----------- -------
Income before income taxes..................... 4,201 2,700
Provision for income taxes..................... 1,631 1,034
----------- -------
Net income..................................... $ 2,570 $ 1,666
=========== =======
</TABLE>
See accompanying notes.
4
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Century Maintenance Supply, Inc.
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(In Thousands, except share data)
<TABLE>
<CAPTION>
Number of Common Additional Treasury Retained Total
Shares Stock Paid-In Stock Earnings Stockholders'
Outstanding Capital (Deficit) Equity
(Deficit)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1998.......... 12,443,147 $ 12 $70,759 $ (500) $(152,087) $(81,816)
Preferred dividends
accrued (unaudited)....... (1,448) (1,448)
Net income (unaudited)..... 1,666 1,666
---------- ----- ------- ----- --------- --------
Balances at 12,443,147 $ 12 $70,759 $(500) $(151,869) $(81,598)
March 31, 1999 (unaudited).... ========== ===== ======= ===== ========= ========
</TABLE>
See accompanying notes.
5
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Century Maintenance Supply, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1998 1999
---------------------
<S> <C> <C>
(Unaudited)
Operating activities
Net income......................................................................................... $ 2,570 $ 1,666
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization................................................................... 246 310
Bad debt expense................................................................................ 76 90
Changes in operating assets and liabilities:
Accounts receivable.......................................................................... (956) (1,521)
Inventory.................................................................................... (4,670) (3,016)
Prepaid expenses and other assets............................................................ (23) 224
Accounts payable............................................................................. 4,839 1,512
Accrued expenses............................................................................. 218 327
Income taxes payable......................................................................... 322 (1,757)
------ --------
Net cash provided by (used in) operating activities................................................ 2,622 (2,165)
Investing activities
Purchases of property and equipment................................................................ (260) (1,177)
Proceeds from sale of property and equipment....................................................... 40 --
------ --------
Net cash used in investing activities.............................................................. (220) (1,177)
Financing activities
Net borrowings (repayments) under revolving credit facility........................................ (1,100) 5,000
Repayments of long-term debt....................................................................... (712) (1,150)
Purchase of treasury stock, at cost................................................................ (500) --
------ --------
Net cash provided by (used in) financing activities............................................. (2,312) 3,850
------ --------
Net increase in cash............................................................................... 90 508
Cash at beginning of period........................................................................ 6,599 3,643
------ --------
Cash at end of period.............................................................................. $ 6,689 $ 4,151
====== ========
</TABLE>
See accompanying notes.
6
<PAGE>
Notes to Consolidated Financial Statements
(unaudited)
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, 1998 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
March 31, 1999 and the consolidated statements of operations, changes in
stockholders' equity, and cash flows for the interim periods ended March 31,
1998 and 1999 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 July 8, 1998, the Company completed a 2.30068 to 1 common stock split in
connection with the recapitalization (see below) of the Company. This
transaction has been reflected in the financial statements.
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, 1998.
2. Recapitalization
Effective July 8, 1998, the Company completed a recapitalization of the
company pursuant to an agreement and plan of the merger ("Recapitalization").
The transaction occurred as follows:
. FS Equity Partners IV, L.P. ("FSEP IV"), formed Century Acquisition
Corporation, a Delaware corporation ("Acquisition Co.") on April 21, 1998.
. FSEP IV made an equity contribution of $67,451,190 to Acquisition Co. and
two other investors contributed at a total of $875,000 to Acquisition Co.
(the "Equity Investment"). All of the outstanding capital stock of
Acquisition Co. was held by FSEP IV and such other investors.
. The Company issued $40,000,000 of Senior Exchangeable PIK Preferred Stock
(the "Preferred Stock"), $12,000,000 of which was purchased by affiliated
parties.
7
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. The Company obtained new secured term loan facilities with an aggregate
principal amount of $100,000,000 (see Note 8).
. Acquisition Co. was merged into the Company (with the Company as the
surviving corporation) and Acquisition Co.'s outstanding capital stock was
converted into 2,969,820 newly issued shares of the Company.
. Pursuant to the merger, the Company applied the proceeds of the Equity
Investment of $68,326,190, proceeds of the secured term loan facilities of
$100,000,000 and the proceeds of the Preferred Stock of $40,000,000 to
convert 7,561,355 shares of the Company held by the primary shareholder
(Dennis C. Bearden) and the Management Owners (certain management employees
of the Company) (collectively, the "Continuing Shareholders") and 236,950
options into cash of approximately $178,300,000, and paid certain costs and
expenses associated with the Recapitalization which totaled approximately
$14,280,000. Of the approximately $14,280,000 of costs and expenses,
approximately $7,982,000 was expensed and the remainder, related to the
Preferred Stock and the new credit facility, was offset against proceeds or
capitalized as deferred financing costs (see below). The purchase of the
options to purchase shares of common stock from employees resulted in a
compensation charge of approximately $4,092,000.
3. 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.
4. 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.
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.
In connection with the Recapitalization, the Company adopted the 1998
Nonqualified Stock Option Plan, pursuant to which options may be granted to
eligible employees of the Company for the purchase of an aggregate of 1,642,500
shares of common stock of the Company. The 1998 Nonqualified Stock Option Plan
is administered by the Board of Directors (the "Board"). On July 9, 1998, the
Company granted 692,000 non-qualified stock options to purchase common stock
with an exercise price of $10.00 per common share with an expiration date of
seven years after the date of grant. The stock options granted become
exercisable over a four-year period based on the Company meeting certain
financial goals each year or on a cumulative basis over the four-year period as
set forth in the stock option agreement. The grant is being recorded using
variable plan accounting and as of March 31, 1999, no compensation expense has
been recorded.
8
<PAGE>
In connection with the Recapitalization, the Company granted to a new
director of the Company 50,000 non-qualified stock options to purchase common
stock of the Company. The stock options have an exercise price of $10.00 per
common share with an expiration of seven years after the grant date and are
fully vested and exercisable.
In connection with the Recapitalization, the Company granted a primary
shareholder 180,000 non-qualified stock options to purchase common stock of the
Company with an exercise price of $10.00 per common share with an expiration of
seven years after the grant date. The stock options become exercisable over a
three-year period based on the Company meeting certain financial goals each year
or on a cumulative basis over the three-year period as set forth in the stock
option agreement. The grant is being recorded using variable plan accounting and
as of March 31, 1999, no compensation expense has been recorded.
5. Preferred Stock
As part of the Recapitalization the Company sold $40.0 million of 13 1/4%
Senior Exchangeable PIK (Payment-in-kind) Preferred Stock of which $12.0 million
was sold to affiliates of the Company. The preferred stock is due in 2010 with
an aggregate liquidation preference of $40.0 million or $100 per share.
Dividends are payable semi-annually in cash, except that on each dividend
payment date on or prior to July 1, 2003, dividends may be paid, at the
Company's option, by issuance of additional shares of preferred stock. The New
Credit Facility currently prohibits the payment of cash dividends on the
preferred stock. The preferred stock is subject to mandatory redemption at its
liquidation preference, plus accumulated and unpaid dividends, on July 1, 2010.
The Company may redeem the preferred stock in accordance with certain redemption
provisions at a date earlier than July 1, 2010. If the Company elects to redeem
the preferred stock on or before July 1, 2003 the redemption price will be
113.25% of the liquidation preference price of $100 per share. Holders of
preferred stock have no voting rights. During the quarter ended March 31, 1999,
the Company issued 25,469.6 shares of additional preferred stock as payment-in-
kind for dividends on the Company's existing preferred stock.
At any time, the Company may, at its option, exchange all of the shares of
preferred then outstanding for Exchange Debentures in a principal amount equal
to the liquidation preference of the shares being exchanged. The exchange
debentures would have interest of 13 1/4% and would be due in 2010. The
Company's credit facility currently prohibits the Company from exchanging the
preferred stock. The Company incurred $2,803,000 of costs as part of the sale of
the preferred stock which has been offset against the proceeds. For the three
months ended March 31, 1999 the Company has accreted $58,387 to retained
earnings as part of dividends accrued.
6. Credit Facility
On July 8, 1998, as part of the Recapitalization, the Company entered into
a new credit facility, providing for $100.0 million of secured term loan
facilities and a $25.0 million revolving loan facility (the "Revolving Credit
Facility"). The term loan facility consists of a $40.0 million Tranche A Term
Facility and a $60.0 million Tranche B Term Facility (collectively called the
"Term Loan Facility"). The Term Loan Facility will amortize over a five-year
period for the Tranche A Term Facility and a seven-year period for the Tranche B
Term Facility, and the Revolving Credit Facility will mature on July 8, 2003.
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 plus 2.75% (for
the Tranche B Term Facility) per annum. If the Company achieves certain
performance goals, rates under the
9
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Tranche A Term Facility and the Revolving Facility will be reduced. A commitment
fee of 0.5% per annum will be charged on the unused portion of the new Revolving
Credit Facility.
The new credit facility contains certain non-financial and financial
covenants. The Company incurred $4,552,000 of costs as part of obtaining the new
credit facility which have been recorded as deferred financing costs. The
Company amortizes the costs over the average life of the new credit facility.
For the three months ended March 31, 1999 the Company recognized amortization
expense of $188,587.
Effective September 30, 1998, the Company entered into two three-year
interest rate swap agreements to reduce a portion of its interest rate exposure
on its new credit facility. Under the terms of the first agreement, the Company
pays 8.81% on notional principal of $29,925,000 and receives LIBOR plus 2.75% on
the notional balance. Under the terms of the second agreement, the Company pays
8.54% on a notional balance of $20,000,000, which declines to $13,000,000 in
2001, and receives LIBOR plus 2.5% on the notional balance.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of Century Maintenance Supply, Inc.'s (the
"Company") 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 Form 10-Q.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains certain "forward-looking statements" as defined
in the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical facts included in this Report, including without
limitation, certain statements under this Item 2 and the Company's financial
statements and notes thereto contained elsewhere in this Report 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 Report and in the Company's
Registration Statement on Form S-4, as amended, effective January 21, 1999 (File
Number 333-62635).
General
Century has grown through a combination of increasing sales at its existing
distribution centers, by opening new distribution centers and through the
acquisition of Nationwide Apartment Supply, Inc. in July 1997 (the "Nationwide
Acquisition"). As part of its strategy of expanding into new geographic markets,
the Company opened 19 new distribution centers from 1994 through the quarter
ended March 31, 1999. Historically, a typical center breaks even within three
years of opening, and operating margins continue to improve as the center's
revenue grows. The Nationwide Acquisition added 11 distribution centers
principally in the midwestern United States, three of which were consolidated
into existing Century centers.
The Recapitalization
On July 8, 1998, the Company completed a recapitalization (the
"Recapitalization") pursuant to which affiliates of Freeman Spogli & Co. LLC
("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 (the "Initial
Preferred Stock") with an aggregate liquidation preference of $28.0 million
were sold in a private placement to institutional investors. In addition,
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 sale of the Initial
Preferred Stock (the "Private Placement" and, together with the sale of the
Initial Preferred Stock, 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
11
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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 of the Company.
On July 8, 1998, the Company entered into a credit agreement (the "Credit
Facility") providing for a $100.0 million secured term loan facility (the "Term
Loan Facility"), which was funded in connection with the consummation of the
Recapitalization, and a $25.0 million revolving loan facility (the "Revolving
Credit Facility"). The Revolving Credit Facility will be available to the
Company and its subsidiaries (i) for future working capital and general
corporate purposes, (ii) to finance certain permitted acquisitions, and (iii)
for issuing commercial and standby letters of credit.
The sale of the Initial Preferred Stock and the Private Placement and the
application of the net proceeds from each, the payments to the Continuing
Stockholders and to option holders under the Recapitalization Agreement, the
Common Stock Investment and the related borrowings under the Credit Facility are
collectively referred to herein as the "Recapitalization."
On February 19, 1999, the Initial Preferred Stock was exchanged for
Century's Series C 13 1/4% Senior Exchangeable PIK Preferred Stock (the
"Exchange Preferred Stock"), which was registered under the Securities Act
pursuant to Century's Registration Statement on Form S-4, as amended, effective
January 21, 1999 (File Number 333-62635).
Results of Operations
The following tables set forth, for the periods indicated, certain income
and expense items expressed in dollars and as a percentage of the Company's net
sales.
<TABLE>
<CAPTION>
Three Months Ended
(unaudited)
------------------------
March 31, March 31,
1998 1999
----------- ----------
<S> <C> <C>
(dollars in thousands)
Net sales.......................................$ 40,514 $ 46,798
Cost of goods sold.............................. 29,257 33,472
----------- ----------
Gross profit................................. 11,257 13,326
Selling, general and administrative expenses.... 6,711 8,349
----------- ----------
Total operating expenses..................... 6,711 8,349
----------- ----------
Operating income................................ 4,546 4,977
Interest expense................................ 345 2,277
----------- ----------
Income before income taxes...................... 4,201 2,700
Provision for income taxes...................... 1,631 1,034
----------- ----------
Net income......................................$ 2,570 $ 1,666
=========== ==========
</TABLE>
12
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<TABLE>
<CAPTION>
Three Months Ended
--------------------
March 31, March 31,
1998 1999
---------- ---------
<S> <C> <C>
Net sales...................................... 100.0% 100.0%
Cost of goods sold............................. 72.2 71.5
--------- -------
Gross profit................................ 27.8 28.5
Selling, general and administrative expenses... 16.6 17.8
--------- -------
Total operating expenses.................... 16.6 17.8
--------- -------
Operating income............................... 11.2 10.7
Interest expense............................... 0.9 4.9
--------- -------
Income before income taxes..................... 10.3 5.8
Provision for income taxes..................... 4.0 2.2
--------- -------
Net income..................................... 6.3% 3.6%
========= =======
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net sales for the quarter ended March 31, 1999 were $46.8 million, an
increase of $6.3 million or 15.5% over the quarter ended March 31, 1998. This
increase in net sales was primarily due to comparable center growth of 13.6% and
the opening of new distribution centers in Miami and Oklahoma City (third
quarter of 1998) and Jacksonville and Nashville (first quarter 1999).
The Company's gross profit for the quarter ended March 31, 1999 was $13.3
million, an increase of $2.1 million or 18.4% over the quarter ended March 31,
1998. As a percentage of net sales, the Company's gross profit increased to
28.5% for the quarter ended March 31, 1999 from 27.8% for the quarter ended
March 31, 1998. This increase in gross profit as a percentage of net sales was
primarily due to improved purchasing and vendor relationships.
Selling, general and administrative expense, consisting primarily of
payroll, occupancy related and vehicle base expenses totaled $8.3 million for
the quarter ended March 31, 1999, an increase of $1.6 million or 24.4% over the
quarter ended March 31, 1998. As a percentage of net sales, selling, general
and administrative expense increased to 17.8% for the quarter ended March 31,
1999 from 16.6% in the quarter ended March 31, 1998. This increase was
primarily attributable to the opening of four new centers, acceleration of a
planned sales force increase, the establishment of the Company's new corporate
headquarters, costs associated with the centralization of administrative
functions, and the relocation of several distribution centers into larger
facilities.
Interest expense for the quarter ended March 31, 1999 was $2.3 million, an
increase of $1.9 million or 560.0% from the quarter ended March 31, 1998,
primarily due to the additional debt incurred in connection with the
Recapitalization.
13
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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 1996 to
the quarter ended March 31, 1999, the Company has opened ten new distribution
centers. The Company has financed its growth through a combination of
internally generated funds and borrowings.
In the first three months of 1999, net cash used in operating activities
was $2.2 million, decreasing from $2.6 million of net cash provided in the first
three months of 1998 due primarily to increased sales volume which resulted in
increased working capital needs and from the increased interest expense related
to the Recapitalization. Net cash used for investing activities in the first
three months of 1999 was $1.2 million, increasing from $0.2 million of net cash
used in the first three months of 1998 and was due to an increase in capital
expenditures. Net cash provided by financing activities in the first three
months of 1999 was $3.9 million, increasing from net cash used of $2.3 million
in the first three months of 1998 due to increased borrowing.
The Company currently anticipates that its capital expenditures, excluding
potential acquisitions, for 1999 and 2000 will be approximately $2.0 million in
each year. Inventories were $37.7 million as of March 31, 1999 and $34.7 million
at December 31, 1998. 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 to support higher sales volumes and new center openings.
Trade accounts receivable, net of allowances were $20.9 million at March 31,
1999 and $19.1 million at December 31, 1998. 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 new occupants. Also, hot summer months translate into a
higher volume of HVAC sales due to the need for air conditioning parts.
The Company has outstanding indebtedness consisting of borrowings of $97.6
million under the Term Loan Facility. The Company has access to a total of
$25.0 million through the Revolving Credit Facility. As of May 13, 1999, the
Company had $5.0 million of outstanding borrowings under the Revolving Credit
Facility, which the Company anticipates repaying during 1999. 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 on each
anniversary of initial borrowing will be $3.6 million, $4.6 million, $7.6
million, $12.6 million, $14.6 million, $23.0 million and $34.0 million. The
Revolving Credit Facility will mature on the fifth anniversary of the Credit
Facility. The interest rate under the 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 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, which became effective September 30, 1998.
14
<PAGE>
At May 13, 1999 the interest rate for the Revolving Credit Facility was 9.25%,
the Tranche A Facility was 7.8125% and the Tranche B Facility was 8.0625%. The
interest rate for the portion of the Term Loan Facility under the interest rate
swap is 8.54% for $19.0 million under the Tranche A Facility and 8.81% for $29.9
million under the Tranche B Facility. A commitment fee of 0.5% per annum will be
charged on the unused portion of the Credit Facility. The loans under the 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).
Borrowings under the 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 (as defined) of the Company's common stock, then 100% of the net
proceeds of such offering are required to be applied to prepay the 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 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.
The 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, (b) a fixed charge coverage
ratio, (c) a maximum leverage ratio, (d) a minimum EBITDA and (e) an interest
coverage ratio. The Company is in compliance, as of May 13, 1999, with the
material provisions of the Credit Facility.
In connection with the Recapitalization, the Company issued 280,000 shares
of its Initial Preferred Stock with an aggregate liquidation preference of $28.0
million, and 120,000 shares of preferred stock issued pursuant to the Private
Placement, with an aggregate liquidation preference of $12.0 million. On
February 19, 1999, the Initial Preferred Stock was exchanged for the Company's
Series C 13 1/4% Senior Exchangeable PIK Preferred Stock due 2010 which has been
registered under the Securities Act pursuant to the Company's Registration
Statement on Form S-4, as amended, effective January 21, 1999 (File Number 333-
62635). At the election of the Company, dividends on the Exchange Preferred
Stock may be paid in kind until July 1, 2003 and thereafter must be paid in
cash. During the quarter ended March 31, 1999, the Company issued 25,469.6
shares of additional preferred stock as payment-in-kind for dividends on the
Exchange Preferred Stock. The 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.
15
<PAGE>
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 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.
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 12 months.
Year 2000 Compliance
The following discussion about the implementation of the Company's Year
2000 program, the costs expected to be associated with the program and the
results the Company expects to achieve constitute forward-looking information.
As noted below, there are many uncertainties involved in the Year 2000 issue,
including the extent to which the Company will be able to adequately provide for
contingencies that may arise, as well as the broader scope of the Year 2000
issue as it may affect third parties. Accordingly, the costs and results of the
Company's Year 2000 program and the extent of any impact on the Company's
results of operations could vary materially from that stated herein.
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 fall 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 has implemented 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 has developed a
survey and distributed it to its vendors and customers to assess its Year 2000
risk based on the Year 2000 issues of these third parties. The Company has
received the majority of the responses and is in the process of analyzing them.
The Company does not expect the cost of the survey procedure to be material.
The Company believes the worst case scenario in the event of a Year-2000
related failure would be the lack of Year 2000 compliance on the part of certain
of the Company's vendors. The Company is continuing to develop contingency
plans in the event such a business interruption caused by Year 2000 problems
should occur, including investigating back-up suppliers who are Year 2000
compliant. The
16
<PAGE>
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.
The Company has expended approximately $1.2 million related to the new
computer system, $900,000 of which was capitalized.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures. The Company is exposed to certain market risks
inherent in its financial instruments. These instruments arise from
transactions entered into in the normal course of business and, in some cases,
relate to the Company's acquisitions of related businesses. Certain of the
Company's financial instruments are fixed rate, short-term investments which are
held to maturity. The Company is subject to interest rate risk on its existing
long-term debt and any future financing requirements. The Company's variable
rate debt relates to borrowings under the Credit Facility (see "Item 2.
Management's Discussion and Analysis and Results of Operations--Liquidity and
Capital Resources"). Notional amounts related to interest rate swaps are used
to calculate cash flows to be exchanged under the swap agreement.
Qualitative Disclosures. The Company's primary exposure relates to (1)
interest rate risk on long-term and short-term borrowings, (2) the Company's
ability to pay or refinance long-term borrowings at maturity at market rates,
(3) the impact of interest rate movements on the Company's ability to meet
interest expense requirements and exceed financial covenants and (4) the impact
of interest rate movements on the Company's ability to obtain adequate financing
to fund future acquisitions. The Company manages interest rate risk on its
outstanding long-term and short-term debt through the use of variable rate debt
and interest rate swaps. While the Company can not predict or manage its
ability to refinance existing debt or the impact interest rate movements will
have on its existing debt, management evaluates the Company's financial position
on an ongoing basis.
Changes in the long term debt instruments and the interest rate swaps have
not been material since December 31, 1998.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on May 10, 1999, reporting the change in the Company's
certifying accountant as Item 4 therein.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CENTURY MAINTENANCE SUPPLY, INC.,
a Delaware corporation
May 13, 1999 By: /s/ Richard E. Penick
---------------------
Richard E. Penick
Chief Financial Officer, Vice President and
Assistant Secretary
(Duly Authorized Officer and Principal
Financial Officer)
19
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