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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 March 31, 2000
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 12,061,639 on May 15,
2000.
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CENTURY MAINTENANCE SUPPLY, INC. AND SUBSIDIARIES
Quarter Ended March 31, 2000
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, 1999 and March 31, 2000............ 2
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 1999 and March 31, 2000........................................................... 4
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
Three Months Ended March 31, 2000........................................................... 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and March 31, 2000........................................................... 6
Notes to Condensed Consolidated Financial Statements (Unaudited)............................ 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................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 17
Item 2. Changes in Securities....................................................................... 17
Item 3. Defaults Upon Senior Securities............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders......................................... 17
Item 5. Other Information........................................................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................................ 17
SIGNATURE............................................................................................. 18
</TABLE>
1
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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, March 31,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 3,499 $ 199
Trade accounts receivable, net................... 26,087 26,504
Inventory, net................................... 33,547 42,392
Deferred income taxes............................ 748 748
Prepaid expenses and other current assets........ 3,262 3,827
---------- ----------
Total current assets................................. 67,143 73,670
Goodwill, net........................................ 6,367 6,305
Deferred financing costs............................. 2,682 2,494
Other assets......................................... 212 212
Property and equipment............................... 8,264 8,559
Less accumulated depreciation.................... (4,228) (4,495)
---------- ----------
Net property and equipment........................... 4,036 4,064
---------- ----------
Total assets......................................... $ 80,440 $ 86,745
========== ==========
</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>
December 31, March 31,
1999 2000
------------ ----------
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable.................................................... $ 10,792 $ 19,082
Income taxes payable................................................ 3,590 1,031
Accrued expenses.................................................... 3,525 3,595
Current portion of long-term debt................................... 6,100 6,850
Dividends payable................................................... 3,005 1,598
------------ ----------
Total current liabilities............................................... 27,012 32,156
Long-term debt, less current portion.................................... 88,000 86,100
Deferred income taxes................................................... 318 318
Redeemable exchangeable preferred stock, net $100 par value;
2,000,000 shares authorized; 453,650 shares issued and outstanding
at December 31, 1999 and 483,702 shares issued and outstanding at
March 31, 2000...................................................... 42,908 45,971
Stockholders' deficit:
Common Stock, $0.001 par value; 15,000,000 shares authorized;....... 12 12
12,443,147 shares issued and outstanding at December 31, 1999 and
March 31, 2000.....................................................
Additional paid-in capital...................................... 70,759 70,759
Treasury stock, at cost......................................... (1,225) (1,811)
Accumulated deficit............................................. (147,344) (146,760)
------------ ----------
Total stockholders' deficit............................................. (77,798) (77,800)
------------ ----------
Total liabilities and stockholders' deficit............................. $ 80,440 $ 86,745
============ ==========
</TABLE>
See accompanying notes.
3
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Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1999 2000
------------ -----------
(Unaudited)
<S> <C> <C>
Net sales................................................... $ 46,798 $ 55,998
Cost of goods sold.......................................... 33,472 40,157
------------ -----------
Gross profit................................................ 13,326 15,841
Selling, general, and administrative expenses............... 8,349 9,831
------------ -----------
Operating income............................................ 4,977 6,010
Interest expense............................................ 2,277 2,396
------------ -----------
Income before income taxes.................................. 2,700 3,614
Provision for income taxes.................................. 1,034 1,374
------------ -----------
Net income.................................................. $ 1,666 $ 2,240
============ ===========
</TABLE>
See accompanying notes.
4
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Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit)
For the Three Months Ended March 31, 2000
(In thousands, except share data)
<TABLE>
<CAPTION>
Number of Total
Shares Issued Additional Retained Stockholders'
and Common Paid-In Treasury Earnings Equity
Outstanding Stock Capital Stock (Deficit) (Deficit)
---------------- -------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at 12,443,147 $ 12 $ 70,759 $ (1,225) $ (147,344) $ (77,798)
December 31, 1999................
Purchase of treasury
stock at cost (unaudited)...... -- -- -- (586) -- (586)
Preferred dividends
accrued (unaudited)............ -- -- -- -- (1,656) (1,656)
Net income (unaudited)........... -- -- -- -- 2,240 2,240
---------------- -------- ----------- --------- ---------- ------------
Balances at
March 31, 2000 (unaudited)...... 12,443,147 $ 12 $ 70,759 $ (1,811) $ (146,760) $ (77,800)
================ ======== =========== ========= ========== ============
</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>
Three months ended
March 31,
-----------------------------
1999 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income...................................................................... $ 1,666 $ 2,240
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization................................................. 310 345
Bad debt expense.............................................................. 90 156
Changes in operating assets and liabilities net of effects of acquisitions:
Accounts receivable........................................................... (1,521) (573)
Inventory..................................................................... (3,016) (8,845)
Prepaid expenses and other assets............................................. 224 (376)
Accounts payable.............................................................. 1,512 8,290
Accrued expenses.............................................................. 327 70
Income taxes payable.......................................................... (1,757) (2,559)
------------ ----------
Net cash used in operating activities...................................... (2,165) (1,252)
Investing activities:
Purchases of property and equipment............................................ (1,177) (312)
Financing activities:
Net borrowings under revolving line of credit.................................. 5,000 --
Repayments of long-term debt................................................... (1,150) (1,150)
Repurchase of common stock..................................................... -- (586)
------------ ----------
Net cash provided by (used in) financing activities........................ 3,850 (1,736)
------------ ----------
Net increase (decrease) in cash.................................................. 508 (3,300)
Cash and cash equivalents at beginning of period................................. 3,643 3,499
------------ ----------
Cash and cash equivalents at end of period....................................... $ 4,151 $ 199
============ ==========
</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, 1999 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 March 31, 2000 and the condensed consolidated
statements of operations, changes in stockholders' equity, and cash flows for
the interim periods ended March 31, 1999 and 2000 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.
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, 1999.
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.
. 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.
7
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. 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 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 January 14, 2000, the Company repurchased 97,727 shares of
common stock from a stockholder for $586,362. These shares have been placed in
treasury.
On July 1, 1997, the Company granted 620,033 non-qualified, fully
vested stock options to purchase common stock, with an exercise price of $1.74
per common share and with an expiration date of three years after the date of
grant. On July 11, 1997, the Company granted 322,095 non-qualified, fully vested
stock options to purchase common stock, with an exercise price of $3.04 per
common share and 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, 2000, 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 March 31, 2000, no compensation expense has been recorded.
8
<PAGE>
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. On January 1, 2000, the Company issued
30,052 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 three months ended March 31, 2000 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 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 Credit 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 credit facility contains certain non-financial and financial
covenants. The Company incurred $4,552,000 of costs as part of obtaining the
credit facility which have been recorded as deferred financing costs. The
Company amortizes the costs over the average life of the credit facility. For
the three-month period ended March 31, 2000 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 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.
9
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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 22 new distribution centers from 1994
through the quarter ended March 31, 2000. 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 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
11
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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.
Three Months Ended
(unaudited)
----------------------
March 31, March 31,
1999 2000
----------- ---------
(dollars in thousands)
Net sales.......................................... $ 46,798 $ 55,998
Cost of goods sold................................. 33,472 40,157
----------- ---------
Gross profit..................................... 13,326 15,841
Selling, general and administrative expenses....... 8,349 9,831
----------- ---------
Total operating expenses......................... 8,349 9,831
----------- ---------
Operating income................................... 4,977 6,010
Interest expense................................... 2,277 2,396
----------- ---------
Income before income taxes......................... 2,700 3,614
Provision for income taxes......................... 1,034 1,374
----------- ---------
Net income......................................... $ 1,666 $ 2,240
=========== =========
12
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Three Months Ended
(unaudited)
------------------------
March 31, March 31,
1999 2000
---------- -----------
Net sales.......................................... 100.0% 100.0%
Cost of goods sold................................. 71.5 71.7
--------- ----------
Gross profit.................................... 28.5 28.3
Selling, general and administrative expenses....... 17.8 17.6
--------- ----------
Total operating expenses......................... 17.8 17.6
--------- ----------
Operating income................................... 10.7 10.7
Interest expense................................... 4.9 4.2
--------- ----------
Income before income taxes......................... 5.8 6.5
Provision for income taxes......................... 2.2 2.5
--------- ----------
Net income......................................... 3.6% 4.0%
========= ==========
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net sales for the quarter ended March 31, 2000 were $56 million, an
increase of $9.2 million or 19.6% over the quarter ended March 31, 1999. This
increase in net sales was primarily due to comparable center growth of 16.2%,
the opening of new distribution centers in Milwaukee and Philadelphia and the
Champion Acquisition.
The Company's gross profit for the quarter ended March 31, 2000 was
$15.8 million, an increase of $2.5 million or 18.9% over the quarter ended March
31, 1999 primarily due to the increase in net sales discussed above. As a
percentage of net sales, the Company's gross profit decreased to 28.3%
for the quarter ended March 31, 2000 from 28.5% for the quarter ended March 31,
1999.
Selling, general and administrative expense, consisting primarily of
payroll, occupancy and vehicle expenses, totaled $9.8 million for the quarter
ended March 31, 2000, an increase of $1.5 million or 17.8% over the quarter
ended March 31, 1999. As a percentage of net sales, selling, general and
administrative expense decreased to 17.6% for the quarter ended March 31, 2000
from 17.8% in the quarter ended March 31, 1999. This decrease was primarily
attributable to the leveraging of costs due to the increase in sales.
Interest expense for the quarter ended March 31, 2000 was $2.4
million, an increase of $.1 million or .5% from the quarter ended March 31,
1999, primarily due to an increase in market interest rates.
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, 2000 the Company opened 13 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.
13
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In the first three months of 2000, net cash used by operating
activities was $1.3 million, decreasing from $2.2 million of net cash used in
the first three months of 1999. Net cash used by investing activities in the
first three months of 2000 was $.3 million, decreasing from $1.2 million of net
cash used in the first three months of 1999 and was due to a decrease in capital
expenditures. Net cash used in financing activities in the first three months of
2000 was $1.7 million, decreasing from net cash provided of $3.9 million in the
first three months of 1999 primarily due to the net proceeds from the revolving
credit facility received in the first three months of 1999.
The Company currently anticipates that its capital expenditures,
excluding potential acquisitions, for 2000 and 2001 will be approximately $2.0
for each year. Inventories were $42.4 million as of March 31, 2000 and $33.5
million at December 31, 1999. 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 $26.5 million at
March 31, 2000 and $26.1 million at December 31, 1999. 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
$93 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 15, 2000, the
Company had $5.1 million of outstanding borrowings under the Revolving Credit
Facility, which the Company anticipates repaying during 2000. The Tranche A Term
Facility will mature on July 8, 2003 and the Tranche B Term Facility will mature
on July 8, 2005 . Annual required principal payments on the Term Loan Facility
are $7.6 million, $12.6 million, $14.6 million, $23.0 million and $34.0 million
over the next five years. 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 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 May
15, 2000 the interest rate for the Revolving Credit Facility was 10.50%, the
Tranche A Facility was 8.8125% and the Tranche B Facility was 9.0625%. The
interest rate for the portion of the Term Loan Facility under the interest rate
swap is 8.54% for $17.0 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
14
<PAGE>
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 May 15, 2000, with the
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 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. On
January 1, 2000, the Company issued 30,052 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 Credit Facility,
will be sufficient to fund its debt service obligations and implement its growth
strategy over the next 12 months.
New Accounting Standard
In 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 137, Accounting for
Derivative Instruments and Hedging Activities Deferral of the Effective Date of
FASB Statement No. 133. SFAS 137 defers the effective date of SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, to January 1,
2001. The Company is currently reviewing SFAS 133 and plans to adopt SFAS 133 as
of January 1, 2001, and has yet to quantify the effects of adoption on its
financial statements.
15
<PAGE>
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, 1999.
16
<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.
17
<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 15, 2000 By: /s/ Richard E. Penick
---------------------
Richard E. Penick
Chief Financial Officer, Vice
President and Assistant Secretary
(Duly Authorized Officer and Principal
Financial Officer)
18
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 199
<SECURITIES> 0
<RECEIVABLES> 27,685
<ALLOWANCES> 1,181
<INVENTORY> 42,392
<CURRENT-ASSETS> 73,670
<PP&E> 8,559
<DEPRECIATION> 4,495
<TOTAL-ASSETS> 86,745
<CURRENT-LIABILITIES> 32,156
<BONDS> 86,100
45,971
0
<COMMON> 12
<OTHER-SE> (77,812)
<TOTAL-LIABILITY-AND-EQUITY> 86,745
<SALES> 55,998
<TOTAL-REVENUES> 0
<CGS> 37,682
<TOTAL-COSTS> 40,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 156
<INTEREST-EXPENSE> 2,396
<INCOME-PRETAX> 3,614
<INCOME-TAX> 1,374
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,240
<EPS-BASIC> 0
<EPS-DILUTED> 0
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