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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 September 30, 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, $0.001 par value, outstanding (the
only class of common stock of the Company outstanding) was 12,352,513 on
November 15, 1999.
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CENTURY MAINTENANCE SUPPLY, INC. AND SUBSIDIARIES
Quarter Ended September 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION> Page
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements of Century Maintenance Supply, Inc. and Subsidiaries
(Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1998 and September 30, 1999 ................... 2
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 1998 and September 30, 1999............................................................... 4
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
Nine Months Ended September 30,1999..................................................................... 5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and September 30, 1999............................................................... 6
Notes to Condensed Consolidated Financial Statements.................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk ..................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 19
Item 2. Changes in Securities ........................................................................ 19
Item 3. Defaults Upon Senior Securities................................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders........................................... 19
Item 5. Other Information............................................................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................................................. 19
SIGNATURE............................................................................................. 20
</TABLE>
1
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CENTURY
MAINTENANCE SUPPLY, INC. AND SUBSIDIARIES (UNAUDITED)
Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash.......................................................... $ 3,643 $ 821
Accounts receivable:
Trade, net................................................ 19,132 31,982
Related parties........................................... 170 37
Inventory, net................................................ 34,714 37,098
Deferred income taxes......................................... 918 918
Prepaid expenses and other current assets..................... 3,321 3,468
---------------- ----------------
Total current assets............................................... 61,898 74,324
Goodwill, net...................................................... 5,350 6,273
Other assets....................................................... 641 101
Deferred financing costs........................................... 3,437 2,871
Property and equipment............................................. 5,808 8,066
Less accumulated depreciation................................. (3,267) (3,798)
---------------- ----------------
Net property and equipment......................................... 2,541 4,268
---------------- ----------------
Total assets....................................................... $ 73,867 $ 87,837
================ ================
</TABLE>
See accompanying notes.
(continued)
2
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Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(In Thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Liabilities and Stockholders' equity (deficit) Current liabilities:
Trade accounts payable.............................................. $ 10,474 $ 13,366
Revolving credit facility........................................... -- 5,500
Income taxes payable................................................ 2,280 2,529
Accrued expenses.................................................... 4,076 5,061
Current portion of long-term debt................................... 4,600 5,350
Dividends payable................................................... 2,547 1,515
Total current liabilities................................................ 23,977 33,321
---------------- ----------------
Long-term debt, less current portion..................................... 94,100 89,900
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
and 453,650 at September 30, 1999.......................... 37,309 42,849
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 12,352,513 at September 30,
1999, respectively..................................... 12 12
Additional paid-in capital...................................... 70,759 70,759
Treasury stock, at cost......................................... (500) (1,225)
Retained earnings (deficit)..................................... (152,087) (148,076)
---------------- ----------------
Total stockholders' equity (deficit)..................................... (81,816) (78,530)
---------------- ----------------
Total liabilities and stockholders' equity (deficit)..................... $ 73,867 $ 87,837
================ ================
</TABLE>
See accompanying notes.
3
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Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1999 1998 1999
----------- ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales..................................................... $ 59,975 $ 69,715 $ 154,157 $ 177,578
Cost of goods sold............................................ 43,759 51,169 112,357 128,964
----------- ---------- ----------- ----------
Gross profit.................................................. 16,216 18,546 41,800 48,614
Selling, general, and administrative expenses................. 7,909 9,754 22,091 27,458
Recapitalization expenses..................................... 8,702 -- 8,702 --
Stock based compensation charge............................... 4,092 -- 4,092 74
----------- ---------- ----------- ----------
Operating income (loss)....................................... (4,487) 8,792 6,915 21,082
Interest expense.............................................. 2,244 2,359 2,963 6,994
----------- ---------- ----------- ----------
Income (loss) before income taxes ............................ (6,731) 6,433 3,952 14,088
Provision for income taxes.................................... 236 2,544 4,381 5,568
----------- ---------- ----------- ----------
Net income (loss)............................................. $ (6,967) $ 3,889 $ (429) $ 8,520
=========== ========== =========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit)
For the Nine Months Ended September 30, 1999
(In Thousands, except share data)
<TABLE>
<CAPTION>
Total
Number of Additional Retained Stockholders'
Shares Common Paid-In Treasury Earnings Equity
Outstanding Stock Capital Stock (Deficit) (Deficit)
-------------- ---------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1998.................. 12,443,147 $ 12 $ 70,759 $ (500) $ (152,087) $ (81,816)
Purchase of treasury
stock at cost (unaudited)........ (90,634) (725) (725)
Preferred dividends
accrued (unaudited).............. (4,509) (4,509)
Net income (unaudited)............. 8,520 8,520
-------------- ---------- ------------ ---------- ------------ --------------
Balances at
September 30, 1999 (unaudited)..... 12,352,513 $ 12 $ 70,759 $ (1,225) $ (148,076) $ (78,530)
============== ========== ============ ========== ============ ==============
</TABLE>
See accompanying notes.
5
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Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------
1998 1999
---------- ---------
(Unaudited)
<S> <C> <C>
Operating activities
Net income (loss)...................................................................... $ (429) $ 8,520
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization..................................................... 703 953
Bad debt expense.................................................................. 292 328
Changes in operating assets and liabilities:
Accounts receivable........................................................... (9,787) (13,045)
Inventory..................................................................... (8,637) (2,384)
Prepaid expenses and other assets............................................. (5,240) 959
Accounts payable.............................................................. 6,337 2,892
Accrued expenses.............................................................. 3,359 985
Income taxes payable.......................................................... (787) 249
---------- ---------
Net cash used by operating activities.................................................. (14,189) (543)
Investing activities
Purchases of property and equipment.................................................... (780) (2,510)
Proceeds from sale of property and equipment........................................... 100 --
Cash paid for acquisition - net........................................................ -- (1,094)
---------- ---------
Net cash used by investing activities.................................................. (680) (3,604)
Financing activities
Net borrowings (repayments) under revolving credit facility............................ (8,800) 5,500
Proceeds from long-term debt........................................................... 100,000 --
Repayments of long-term debt........................................................... (10,197) (3,450)
Purchase of stock options, net of compensation expense................................. (387) --
Sale of common stock................................................................... 68,326 --
Sale of preferred stock, net........................................................... 37,215 --
Purchase of treasury stock, at cost.................................................... (174,464) (725)
---------- ---------
Net cash provided by financing activities......................................... 11,693 1,325
---------- ---------
Net decrease in cash................................................................... (3,176) (2,822)
Cash at beginning of period............................................................ 6,599 3,643
---------- ---------
Cash at end of period.................................................................. $ 3,423 $ 821
========== =========
</TABLE>
See accompanying notes.
6
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Century Maintenance Supply, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Century Maintenance Supply, Inc. and subsidiaries (collectively, the
"Company") distribute general maintenance supplies and air conditioning and
heating equipment and parts to apartment complexes throughout the United States.
The condensed 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 condensed consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
The condensed 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 condensed
consolidated balance sheet at September 30, 1999 and the condensed consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the interim periods ended September 30, 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). 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 condensed 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 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 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.
7
<PAGE>
. 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.
. The Company obtained new secured term loan facilities with an aggregate
principal amount of $100,000,000 (see Note 6).
. 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 $8,702,000 was expensed through September 30, 1998 and the
remainder, which 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
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.
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.
Effective June 1, 1999, the Company repurchased from a stockholder 90,634
shares of common stock for $725,072 and options to purchase 11,503 shares of
common stock for $74,381. The repurchased shares have been placed in treasury
stock, and the repurchased options have been cancelled and the purchase price
expensed.
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
8
<PAGE>
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 September 30, 1999, no
compensation expense has been recorded.
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 September 30, 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
Company's 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. On January 1, 1999, the Company issued
25,469 shares of additional preferred stock as payment-in-kind for dividends on
the Company's existing preferred stock. On July 1, 1999, the Company issued
28,187 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 stock 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 nine
months ended September 30, 1999 the Company has accreted $175,160 to retained
earnings as part of dividends accrued.
9
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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 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 certain performance goals, rates
under the 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-month and nine-month periods ended September 30, 1999 the Company
recognized amortization expense of $188,587 and $565,761, respectively.
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.
7. Champion Acquisition
In April 1999, the Company acquired 100% of the common stock of Champion
Blind and Drapery, Inc. (the "Champion Acquisition") in a business combination
accounted for as a purchase. The purchase price was $1,550,000, which was paid
in cash, and resulted in goodwill of approximately $1,100,000 being recorded.
The historical operations of Champion Blind and Drapery, Inc. for periods prior
to the acquisition are not material to the operations of the Company.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of Century Maintenance Supply, Inc. and its
subsidiaries' (collectively, the "Company" or "Century") condensed consolidated
historical results of operations and financial condition should be read in
conjunction with the condensed 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 fact included in this Report, including without
limitation, certain statements under this Item 2 and the Company's condensed
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
acquisitions of Nationwide Apartment Supply, Inc. in July 1997 (the "Nationwide
Acquisition") and Champion Blind and Drapery, Inc. in April 1999 (the "Champion
Acquisition"). As part of its strategy of expanding into new geographic markets,
the Company opened 21 new distribution centers from 1994 through the quarter
ended September 30, 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 certain existing
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
11
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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 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 Nine Months Ended
(unaudited) (unaudited)
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C>
Net sales.............................. $ 59,975 $ 69,715 $ 154,157 $ 177,578
Cost of goods sold..................... 43,759 51,169 112,357 128,964
------------- ------------- ------------- -------------
Gross profit......................... 16,216 18,546 41,800 48,614
Selling, general and administrative
expenses............................. 7,909 9,754 22,091 27,458
Recapitalization expenses.............. 8,702 -- 8,702 --
Stock based compensation charge........ 4,092 -- 4,092 74
------------- ------------- ------------- -------------
Total operating expenses............. 20,703 9,754 34,885 27,532
------------- ------------- ------------- -------------
Operating income (loss)................ (4,487) 8,792 6,915 21,082
Interest expense....................... 2,244 2,359 2,963 6,994
------------- ------------- ------------- -------------
Income (loss) before income taxes...... (6,731) 6,433 3,952 14,088
Provision for income taxes............. 236 2,544 4,381 5,568
------------- ------------- ------------- -------------
Net income (loss)...................... $ (6,967) $ 3,889 $ (429) $ 8,520
============= ============= ============= =============
</TABLE>
12
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales.............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 73.0 73.4 72.9 72.6
------------- ------------- ------------- -------------
Gross profit......................... 27.0 26.6 27.1 27.4
Selling, general and administrative
expenses............................. 13.2 14.0 14.3 15.5
Recapitalization
expenses............................. 14.5 -- 5.6 --
Stock based compensation charge........ 6.8 -- 2.7 .0
------------- ------------- ------------- -------------
Total operating expenses............. 34.5 14.0 22.6 15.5
------------- ------------- ------------- -------------
Operating income (loss)................ (7.5) 12.6 4.5 11.9
Interest expense....................... 3.7 3.4 1.9 4.0
------------- ------------- ------------- -------------
Income (loss) before income taxes...... (11.2) 9.2 2.6 7.9
Provision for income taxes............. 0.4 3.6 2.9 3.1
------------- ------------- ------------- -------------
Net income (loss)...................... (11.6)% 5.6% (0.3)% 4.8%
============= ============= ============= =============
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net sales for the quarter ended September 30, 1999 were $69.7 million, an
increase of $9.7 million or 16.2% over the quarter ended September 30, 1998.
This increase in net sales was primarily due to comparable center growth of
13.8% and the opening of new distribution centers in Jacksonville and Nashville
(first quarter 1999), Milwaukee (second quarter 1999) and the Champion
Acquisition.
The Company's gross profit for the quarter ended September 30, 1999 was
$18.6 million, an increase of $2.3 million or 14.4 % over the quarter ended
September 30, 1998. As a percentage of net sales, the Company's gross profit
decreased to 26.6% for the quarter ended September 30, 1999 from 27.0% for the
quarter ended September 30, 1998. This decrease in gross profit as a percentage
of net sales was primarily due to an increase in indirect costs associated with
the new center openings.
Selling, general and administrative expense, consisting primarily of
payroll, occupancy and vehicle expenses, totaled $9.8 million for the quarter
ended September 30, 1999, an increase of $1.9 million or 23.3% over the quarter
ended September 30, 1998. As a percentage of net sales, selling, general and
administrative expense increased to 14.0% for the quarter ended September 30,
1999 from 13.2% in the quarter ended September 30, 1998. This increase was
primarily attributable to the opening of four new centers, 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.
13
<PAGE>
Interest expense for the quarter ended September 30, 1999 was $2.4 million,
an increase of $0.1 million or 5.1% from the quarter ended September 30, 1998,
primarily due to the increase in working capital needs related to the increase
in sales.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net sales for the nine months ended September 30, 1999 were $177.6 million,
an increase of $23.4 million or 15.2% over the nine months ended September 30,
1998. This increase in net sales was primarily due to comparable center growth
of 12.5% and the opening of new distribution centers in Miami, Oklahoma City,
Jacksonville, Nashville and Milwaukee and the Champion Acquisition.
The Company's gross profit for the nine months ended September 30, 1999 was
$48.6 million, an increase of $6.8 million or 16.3% over the nine months ended
September 30, 1998. As a percentage of net sales, the Company's gross profit
increased to 27.4% for the nine months ended September 30, 1999 from 27.1% for
the nine months ended September 30, 1998. This increase in gross profit as a
percentage of net sales was primarily due to improved purchasing and vendor
relationships and the leveraging of indirect cost as sales increased.
Selling, general and administrative expense, consisting primarily of
payroll, occupancy and vehicle expenses, totaled $27.5 million for the nine
months ended September 30, 1999, an increase of $5.4 million or 24.3% over the
nine months ended September 30, 1998. As a percentage of net sales, selling,
general and administrative expense increased to 15.5% for the nine months ended
September 30, 1999 from 14.3% for the nine months ended September 30, 1998. This
increase was primarily attributable to the opening of six 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 nine months ended September 30, 1999 was $7.0
million, an increase of $4.0 million or 136.1% from the nine months ended
September 30, 1998, primarily due to the additional debt incurred in connection
with the Recapitalization.
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 September 30, 1999, the Company opened twelve new distribution
centers. The Company has financed its growth through a combination of internally
generated funds and borrowings.
In April 1999, the Company acquired 100% of the common stock of Champion
Blind and Drapery, Inc. (the "Champion Acquisition") in a business combination
accounted for as a purchase. The purchase price was $1,550,000, which was paid
in cash, and resulted in goodwill of approximately $1,100,000 being recorded.
The historical operations of Champion Blind and Drapery, Inc. for periods prior
to the acquisition are not material to the operations of the Company.
In the first nine months of 1999, net cash used by operating activities was
$0.5 million, decreasing from $14.2 million of net cash used in the first nine
months of 1998 due primarily to the expenses incurred in 1998 related to the
Recapitalization and from the increased interest expense related to the
Recapitalization.
14
<PAGE>
Net cash used by investing activities in the first nine months of 1999 was $3.6
million, increasing from $0.7 million of net cash used in the first nine months
of 1998 and was due to an increase in capital expenditures and the Champion
Acquisition. Net cash provided by financing activities in the first nine months
of 1999 was $1.3 million, decreasing from net cash provided of $11.7 million in
the first nine months of 1998 primarily due to the net proceeds received from
the Recapitalization in 1998.
The Company currently anticipates that its capital expenditures, excluding
potential acquisitions, for 1999 and 2000 will be approximately $2.6 and 2.0
million, respectively. Inventories were $37.1 million as of September 30, 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 $32.0
million at September 30, 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 $95.3
million under the Term Loan Facility. The Company has access to a total of $25.0
million through the Revolving Credit Facility. As of November 15, 1999, the
Company had $4.0 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. At
November 15, 1999 the interest rate for the Revolving Credit Facility was 9.75%,
the Tranche A Facility was 8.062% and the Tranche B Facility was 8.3125%. The
interest rate for the portion of the Term Loan Facility under the interest rate
swap is 8.54% for $18.0 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
15
<PAGE>
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 other things, (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 November 15, 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. On January 1, 1999, the Company issued 25,469 shares of additional
preferred stock as payment-in-kind for dividends on the Exchange Preferred
Stock. On July 1, 1999, the Company issued 28,187 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.
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
16
<PAGE>
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 and
implementation 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 installed and in place. The total cost of the new
computer system is approximately $1.2 million, all of which has been expended,
and $900,000 of which has been capitalized. 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. In 1999, the Company 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 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 after reviewing such responses, the Company
does not feel there are any significant Year 2000 issues or problems with regard
to these third parties.
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 arrangements with back-up suppliers who are Year 2000
compliant. 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 will not have a material adverse effect on
the Company.
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 personnel and other resources dedicated to
Year
17
<PAGE>
2000 issues, 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 DISCLOSURE ABOUT MARKET RISK
There have been no material changes in the Company's market risk
exposure from that reported in the Company's 10-K for the fiscal year ended
December 31, 1998.
18
<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
None.
19
<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
November 15, 1999 By: /s/ Richard E. Penick
----------------------------------
Richard E. Penick
Chief Financial Officer, Vice President and
Assistant Secretary
(Duly Authorized Officer and Principal
Financial Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 821
<SECURITIES> 0
<RECEIVABLES> 33,385
<ALLOWANCES> 1,403
<INVENTORY> 37,098
<CURRENT-ASSETS> 74,324
<PP&E> 8,066
<DEPRECIATION> 3,798
<TOTAL-ASSETS> 87,837
<CURRENT-LIABILITIES> 33,321
<BONDS> 89,900
42,849
0
<COMMON> 12
<OTHER-SE> (78,542)
<TOTAL-LIABILITY-AND-EQUITY> 87,837
<SALES> 177,578
<TOTAL-REVENUES> 177,578
<CGS> 121,094
<TOTAL-COSTS> 128,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 328
<INTEREST-EXPENSE> 6,994
<INCOME-PRETAX> 14,088
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<DISCONTINUED> 0
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<CHANGES> 0
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<EPS-BASIC> 0
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</TABLE>
