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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 June 30, 2002
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
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CENTURY MAINENANCE 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
Stafford, Texas 77477
(Address of Principal Executive Offices) (Zip Code)
(281) 208-2600
(Registrant's telephone number, including area code)
No 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 12,190,498 on August
12, 2002.
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CENTURY MAINTENANCE SUPPLY, INC. AND SUBSIDIARIES
Quarter Ended June 30, 2002
TABLE OF CONTENTS
Page
----
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, 2001 and June 30, 2002 ....................... 2
Condensed Consolidated Statements of Income for the Three Months and Six Months Ended
June 30, 2001 and June 30, 2002........................................................................ 4
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) for the
Six Months Ended June 30, 2002......................................................................... 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and June 30, 2002........................................................................ 6
Notes to Condensed Consolidated Financial Statements................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10
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
1
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)
December 31, June 30,
2001 2002
---------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents.................................................. $ 770 $ 38
Trade accounts receivable, net............................................. 26,635 38,623
Inventory, net............................................................. 35,878 43,785
Deferred income taxes...................................................... 880 560
Prepaid expenses and other current assets.................................. 5,242 5,299
---------- -----------
Total current assets.......................................................... 69,405 88,305
Goodwill, net................................................................. 5,946 5,946
Deferred financing costs...................................................... 2,000 1,903
Other assets.................................................................. 390 390
Property and equipment........................................................ 9,896 10,500
Less accumulated depreciation.............................................. (6,468) (7,326)
---------- -----------
Net property and equipment.................................................... 3,428 3,174
Deferred income taxes......................................................... 344 91
---------- -----------
Total assets.................................................................. $ 81,513 $ 99,809
========== ===========
See accompanying notes.
(continued)
2
Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share data)
December 31, June 30,
2001 2002
------------ ----------------
(Unaudited)
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable............................................... $ 9,966 $ 17,350
Revolving credit facility...................................... -- 5,000
Income taxes payable........................................... 812 4,509
Accrued expenses............................................... 3,588 3,924
Current portion of long-term debt.............................. 13,600 14,600
Dividends payable.............................................. 3,496 3,728
------------ ----------------
Total current liabilities................................... 31,462 49,111
Long-term debt, less current portion.............................. 64,300 57,000
Redeemable exchangeable preferred stock, net $100 par value;
2,000,000 shares authorized; 527,706 shares issued and
outstanding at December 31, 2001 and 532,197 shares
issued and outstanding at June 30, 2002........................ 51,063 54,659
Stockholders' equity (deficit):
Common Stock, $0.001 par value; 15,000,000 shares
authorized; 12,590,536 shares issued and outstanding at
December 31, 2001 and 12,610,536 shares issued and
outstanding at June 30, 2002................................... 13 13
Additional paid-in capital..................................... 71,176 71,376
Treasury stock, 420,038 shares at December 31, 2001 and
June 30, 2002, at cost......................................... (2,105) (2,105)
Accumulated deficit............................................ (134,396) (130,145)
Note receivable from officer................................... -- (100)
------------ ----------------
Total stockholders' equity (deficit).............................. (65,312) (60,961)
------------ ----------------
Total liabilities and stockholders' deficit....................... $ 81,513 $ 99,809
============ ================
See accompanying notes.
3
Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands)
Three months ended Six months ended
June 30, June 30,
--------------------- ----------------------
2001 2002 2001 2002
---------- --------- ---------- ----------
(Unaudited) (Unaudited)
Net sales....................................................... $ 75,369 $ 78,635 $ 135,245 $ 141,421
Cost of goods sold.............................................. 54,811 56,790 98,300 102,262
---------- -------- ----------- ----------
Gross profit.................................................... 20,558 21,845 36,945 39,159
Selling, general, and administrative expenses................... 11,342 12,104 22,543 23,633
---------- -------- ----------- ----------
Operating income................................................ 9,216 9,741 14,402 15,526
Interest expense................................................ 2,100 1,159 4,303 2,304
---------- -------- ----------- ----------
Income before income taxes...................................... 7,116 8,582 10,099 13,222
Provision for income taxes...................................... 2,769 3,338 3,929 5,143
---------- --------- ----------- ----------
Net income...................................................... 4,347 5,244 6,170 8,079
Other comprehensive income (loss), net of tax................... (576) -- (711) --
---------- --------- ----------- ----------
Comprehensive Income............................................ $ 3,771 $ 5,244 $ 5,459 $ 8,079
========== ========= =========== ==========
See accompanying notes.
4
Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit)
For the Six Months Ended June 30, 2002
(In thousands, except share data)
Number of Note Total
Shares Additional Receivable Stockholders'
Issued and Common Paid-In Treasury Accumulated From Equity
Outstanding Stock Capital Stock Deficit Officer (Deficit)
----------- -------- ----------- -------- ----------- ---------- ------------
Balances at December 31,
2001 ............................. 12,590,536 $ 13 $ 71,176 $ (2,105) $ (134,396) $ -- $ (65,312)
Preferred dividends accrued
(unaudited) ...................... -- -- -- -- (3,828) -- (3,828)
Issuance of common stock
(unaudited) ...................... 20,000 -- 200 -- -- -- 200
Note receivable (unaudited) ......... -- -- -- -- -- (100) (100)
Net income (unaudited) .............. -- -- -- -- 8,079 -- 8,079
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balances at June 30, 2002
(unaudited) ...................... 12,610,536 $ 13 $ 71,376 $ (2,105) $ (130,145) $ (100) $ (60,961)
========== ========== ========== ========== ========== ========== ==========
See accompanying notes.
5
Century Maintenance Supply, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
Six months ended
June 30,
---------------------------
2001 2002
-------- ----------
(Unaudited)
Operating activities:
Net income ............................................................................... $ 6,170 $ 8,079
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes ............................................................... -- 573
Depreciation and amortization ....................................................... 963 865
Provision for bad debts ............................................................. 390 378
Changes in operating assets and liabilities:
Accounts receivable ................................................................. (9,163) (12,366)
Inventory ........................................................................... (2,023) (7,907)
Prepaid expenses and other assets ................................................... 333 40
Accounts payable .................................................................... 1,277 7,384
Accrued expenses .................................................................... 263 336
Income taxes payable ................................................................ 1,889 3,697
-------- --------
Net cash provided by operating activities ........................................ 99 1,078
Investing activities:
Purchases of property and equipment ...................................................... (498) (610)
Financing activities:
Net borrowings under revolving line of credit ............................................ 4,200 5,000
Repayments of long-term debt ............................................................. (3,800) (6,300)
Proceeds on sale of common stock ......................................................... -- 100
-------- --------
Net cash provided by (used in) financing activities ................................. 400 (1,200)
-------- --------
Net increase (decrease) in cash ............................................................. 1 (732)
Cash and cash equivalents at beginning of period ............................................ 4 770
-------- --------
Cash and cash equivalents at end of period .................................................. $ 5 $ 38
======== ========
See accompanying notes.
6
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 accounting
principles generally accepted in the United States of America 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, 2001 has been
derived from the audited financial statements at that date but does not include
all of the information or footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. The
Company's condensed consolidated balance sheet at June 30, 2002 and the
condensed consolidated statements of income, changes in stockholders' equity
(deficit), and cash flows for the interim periods ended June 30, 2001 and 2002
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 accounting principles generally accepted
in the United States of America 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, 2001.
2. Income Taxes
The Company's interim provisions for income taxes were computed using its
estimated effective tax rate for the year.
3. Stockholders' Equity
On January 12, 2002, the Company granted to its newly appointed Chief
Executive Officer a non-qualified option to purchase up to 190,000 shares of
common stock of the Company. 40,000 shares subject to the option are immediately
exercisable at an exercise price of $10.00 per share. The remaining shares
subject to the option become exercisable over the next three years on the
anniversary of the date of grant at exercise prices between $10.00 and $15.00
per share. The option will terminate on the seven-year anniversary of the grant
date. Additionally, in January 2002, the Company sold 20,000 shares of Common
Stock to the Company's Chief Executive Officer pursuant to its Stock
Subscription Plan for an aggregate purchase price of $200,000 payable with a
secured promissory note for $100,000 and $100,000 in cash. The promissory note
bears interest at 2.75% per annum and is payable in full on April 15, 2003.
4. Preferred Stock
In 1998, 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
7
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. Since January 1, 1999, the Company has issued
251,512 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
and six month periods ended June 30, 2002 the Company has accreted $50,102 and
$100,205, respectively, to retained earnings as part of dividends accrued.
5. Credit Facility
In 1998, 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 September 30, 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
and six-month periods ended June 30, 2002 the Company recognized amortization
expense of $233,934 and $429,514, respectively. The Company is in compliance, as
of June 30, 2002, with the provisions of the Credit Facility.
The credit facility has been amended twice to allow the Company more
flexibility in meeting minimum leverage ratio, interest coverage ratio, fixed
charge ratio and minimum EBITDA covenants thereunder.
6. Derivative Instruments and Hedging Activities
The Company is exposed to variability of future cash flows related to
interest rate risk on its existing long-term debt and had entered into interest
rate swap agreements to hedge their exposure which terminated on September 30,
2001.
The Company adopted Statement of Financial Accounting Standard ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," on January
1, 2001. SFAS No. 133 required that all derivatives be recognized as either
assets or liabilities and measured at fair value, and changes in the fair value
of derivatives are reported in current earnings, unless the derivative is
designated and effective as a hedge. If the intended use of the derivative is to
hedge the exposure to changes in the fair value of an asset, a liability or a
firm commitment, then changes in the fair value of the derivative instrument
will generally be offset in the income statement by changes in
8
the hedged item's fair value. However, if the intended use of the derivative is
to hedge the exposure to variability in expected future cash flows, then changes
in the fair value of the derivative instrument will generally be reported in
Other Comprehensive Income ("OCI"). The gains and losses on the derivative
instrument that are reported in OCI will be reclassified in earnings in the
periods in which earnings are impacted by the hedged item.
There was no impact on the Company's results of operations from the January
1, 2001 implementation of SFAS No. 133. For the six months ended June 30, 2001,
the Company recorded a $711,000 net of tax loss in OCI related to its interest
rate swap agreements.
7. New Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes
new standards for accounting and reporting requirements for business
combinations and requires the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. SFAS No. 142 establishes new
standards for goodwill acquired in a business combination and eliminates
amortization of goodwill and instead sets forth methods to periodically evaluate
goodwill for impairment. The Company adopted this statement on January 1, 2002.
The adoption of SFAS Nos. 141 and 142 had no effect on the Company's
consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
The Company adopted this statement during the first quarter of 2002. The
adoption of this statement had no effect on the Company's consolidated financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, among other things, amends SFAS No. 4 and SFAS No.
64 to require that gains and losses from the extinguishment of debt generally be
classified within continuing operations. The provisions of SFAS No. 145 are
effective for fiscal years beginning after May 15, 2002. Management does not
believe the adoption of SFAS No. 145 will have a significant impact on the
Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
believe that the adoption of SFAS 146 will have a significant impact on its
financial statements.
9
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. As part of its
strategy of expanding into new geographic markets, the Company opened 22 new
distribution centers from 1994 through the quarter ended June 30, 2002.
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.
10
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 Six Months Ended
(unaudited) (unaudited)
---------------------- ---------------------
June 30, June 30, June 30, June 30,
2001 2002 2001 2002
---------------------- ----------------------
(dollars in thousands) (dollars in thousands)
Net sales............................................................. $ 75,369 $ 78,635 $135,245 $141,421
Cost of goods sold.................................................... 54,811 56,790 98,300 102,262
---------- --------- --------- ---------
Gross profit...................................................... 20,558 21,845 36,945 39,159
Selling, general and administrative expenses.......................... 11,342 12,104 22,543 23,633
---------- --------- --------- ---------
Total operating expenses.......................................... 11,342 12,104 22,543 23,633
---------- --------- --------- ---------
Operating income...................................................... 9,216 9,741 14,402 15,526
Interest expense...................................................... 2,100 1,159 4,303 2,304
---------- --------- --------- ---------
Income before income taxes............................................ 7,116 8,582 10,099 13,222
Provision for income taxes............................................ 2,769 3,338 3,929 5,143
---------- --------- --------- ---------
Net income............................................................ $ 4,347 $ 5,244 $ 6,170 $ 8,079
========== ========= ========= =========
Three Months Ended Six Months Ended
(unaudited) (unaudited)
---------------------- -----------------------
June 30, June 30, June 30, June 30,
2001 2002 2001 2002
---------- ---------- ----------- -----------
Net sales........................................................ 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................................... 72.7 72.2 72.7 72.3
--------- --------- --------- ---------
Gross profit................................................. 27.3 27.8 27.3 27.7
Selling, general and administrative expenses..................... 15.0 15.4 16.6 16.7
--------- ---------- --------- ---------
Total operating expenses..................................... 15.0 15.4 16.6 16.7
--------- --------- --------- ---------
Operating income................................................. 12.3 12.4 10.7 11.0
Interest expense................................................. 2.8 1.5 3.2 1.6
--------- --------- --------- ---------
Income before income taxes....................................... 9.5 10.9 7.5 9.3
Provision for income taxes....................................... 3.7 4.2 2.9 3.7
--------- --------- --------- ---------
Net income....................................................... 5.8% 6.7% 4.6% 5.7%
========= ========= ========= =========
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net sales for the three months ended June 30, 2002 were $ 78.6 million,
an increase of $3.3 million or 4.3% over the three months ended June 30, 2001.
This increase in net sales was primarily due to comparable center growth, a
deeper penetration of management companies and increased sales from sales
initiatives introduced in prior periods.
11
The Company's gross profit for the three months ended June 30, 2002 was
$21.8 million, an increase of $1.3 million or 6.3% over the quarter ended June
30, 2001 primarily due to the increase in net sales discussed above. As a
percentage of net sales, the Company's gross profit increased to 27.8% for the
quarter ended June 30, 2002 compared to 27.3% for the quarter ended June 30,
2001. This increase was primarily due to product mix and lower procurement cost.
Selling, general and administrative expenses, consisting primarily of
payroll, occupancy and vehicle expenses, totaled $12.1 million for the quarter
ended June 30, 2002, an increase of $0.7 million or 6.7% over the quarter ended
June 30, 2001. As a percentage of net sales, selling, general and administrative
expense increased to 15.4% for the three months ended June 30, 2002 from 15.0%
in the quarter ended June 30, 2001. This increase was primarily due to an
increase in payroll and payroll related expenses attributable to an increase in
wage levels and an increase in employee related insurance cost.
Interest expense for the three months ended June 30, 2002 was $1.2
million, a decrease of $0.9 million or 44.8% from the quarter ended June 30,
2001, primarily due to a decrease in market interest rates and average
outstanding balance owed on the Company's credit facility.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net sales for the six months ended June 30, 2002 were $141.4 million, an
increase of $6.2 million or 4.6% over the six months ended June 30, 2001. This
increase in net sales was primarily due to comparable center growth, a deeper
penetration of management companies and increased sales from sales initiatives
introduced in prior periods.
The Company's gross profit for the six months ended June 30, 2002 was
$39.2 million, an increase of $2.2 million or 6.0% over the six months ended
June 30, 2001 primarily due to the increase in net sales discussed above. As a
percentage of net sales, the Company's gross profit increased to 27.7% for the
six months ended June 30, 2002 from 27.3% for the six months ended June 30,
2001. This increase was primarily due to product mix and lower procurement cost.
Selling, general and administrative expenses, consisting primarily of
payroll, occupancy and vehicle expenses, totaled $23.6 million for the six
months ended June 30, 2002, an increase of $1.1 million or 4.8% over the six
months ended June 30, 2001. As a percentage of net sales, selling, general and
administrative expense increased slightly to 16.7% for the six months ended June
30, 2002 from 16.6% in the six months ended June 30, 2001.
Interest expense for the six months ended June 30, 2002 was $2.3 million,
a decrease of $2.0 million or 46.4% from the six months ended June 30, 2001,
primarily due to a decrease in market interest rates and average outstanding
balance owed on the Company's credit facility.
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. The Company
has financed its growth through a combination of internally generated funds and
borrowings.
In the first six months of 2002, net cash provided by operating
activities was $1.1 million, increasing from $0.1 million of net cash provided
in the first six months of 2001. Net cash used by investing activities in the
first six months of 2002 was $0.6 million, increasing from $0.5 million of net
cash used in the first six months of 2001 and was due to an increase in capital
expenditures. Net cash used by financing activities in the first six months of
2002 was $1.2 million, decreasing from net cash provided of $0.4 million in the
first six months of 2001 primarily due to the repayments of long-term debt.
The Company currently anticipates that its capital expenditures,
excluding potential acquisitions, for 2002 and 2003 will be approximately $2.0
million in each year. Inventories were $43.8 million as of June 30, 2002 and
$35.9 million at December 31, 2001. 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
12
inventory levels will continue to increase primarily to support higher sales
volumes and new center openings. Trade accounts receivable, net of allowances
were $38.6 million at June 30, 2002 and $26.6 million at December 31, 2001. 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
$71.6 million under the Term Loan Facility. The Company has access to a total of
$25.0 million through the Revolving Credit Facility. As of August 12, 2002, the
Company had $10.0 million of outstanding borrowings under the Revolving Credit
Facility. 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 $7.3 million, $18.8 million, $28.5
million and $17.0 million over the next four years. The Revolving Credit
Facility will mature on September 30, 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. Pursuant to the
terms of the Credit Facility, because the Company achieved certain performance
goals, rates under the Tranche A Term Facility and the Revolving Credit Facility
have been reduced in increments as agreed. At August 12, 2002 the interest rate
for the Revolving Credit Facility was 5.75%, the Tranche A Facility was at
3.8125% and the Tranche B Facility ranges from 4.5625% to 4.875%. A commitment
fee of 0.375% per annum will be charged on the unused portion of the Credit
Facility. The loans under the Credit Facility are collateralized by a first
priority security interest in substantially all tangible and intangible assets
of the Company and its subsidiaries (including the capital stock of the
subsidiaries).
Borrowings under the Credit Facility are required to be prepaid with (a)
75% (or 50% upon satisfaction of a debt to adjusted EBITDA ratio) of the
Company's Excess Cash Flow, (b) 100% of the net proceeds of issuances of debt
obligations of the Company and its subsidiaries, (c) 100% of the net cash
proceeds from asset dispositions of the Company and its subsidiaries, (d) 50% of
the net proceeds of issuances of equity of the Company and its subsidiaries,
except that if an equity issuance occurs other than as part of a Public Equity
Offering (as defined) of the Company's common stock, then 100% of the net
proceeds of such offering are required to be applied to prepay the Credit
Facility, and (e) 100% of the net proceeds from insurance recoveries over $1.0
million and condemnations, after application of such insurance recoveries or
condemnation proceeds to repair the property involved. "Excess Cash Flow," for
any period, means EBITDA (as defined) for such period, less the sum of (a)(i)
permitted capital expenditures, (ii) taxes, (iii) consolidated interest expense,
(iv) increases in Adjusted Working Capital (as defined) for such period, (v)
scheduled and mandatory payments of debts, (vi) voluntary prepayments of the
Term Loan Facility, (vii) payments in connection with purchases of the Company's
Capital Stock, (viii) cash consideration paid for certain permitted acquisitions
(but excluding cash consideration funded by a borrowing under the Revolving
Credit Facility), and (ix) cash dividends paid on the Exchange Preferred Stock
to the extent permitted by the Credit Facility, plus the sum of: (b)(i)
decreases in adjusted working capital for such period, (ii) refunds of taxes
paid in prior periods, and (iii) proceeds of certain indebtedness.
The Credit Facility contains covenants restricting the ability of the
Company and the Company's subsidiaries to, among 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. On July 14, 2000 and December 31, 2001, the Credit Facility was
amended to provide more flexibility in meeting the maximum leverage ratio,
interest coverage ratio, fixed charge ratio, and minimum EBITDA covenants
thereunder. The Company is in compliance, as of June 30, 2002, with the
provisions of the Credit Facility.
13
In 1998, 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. Since January 1, 1999, the
Company has issued 251,512 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. In September 2000, the Company
repurchased 51,573 shares of its redeemable exchangeable preferred stock for
$3,906,655.
Under the terms of the Exchange Preferred Stock, at the election of the
Company, dividends may be paid in kind until January 1, 2003 and thereafter must
be paid in cash commencing in July 2003. Under the Credit Agreement, the Company
may only pay cash dividends if it meets specified financial ratios. Based on
current projections, the Company believes that it is likely that it will not be
permitted by the Credit Agreement to pay cash dividends to the holders of the
Exchange Preferred Stock when required by the terms of the Exchange Preferred
Stock. In the event that the Company is unable to pay cash dividends to the
holders of Exchange Preferred Stock for six or more periods (whether or not
consecutive), the sole remedy of the holders is the ability to elect two members
to the Company's Board of Directors.
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.
The Company or its affiliates may, from time to time depending on market
conditions, purchase, refinance or otherwise retire certain of the Company's
outstanding debt and/or equity securities in the open market or by other means
through open market purchases, privately negotiated purchases or exchanges,
redemptions or otherwise, in each case, without public announcement or prior
notice to the holders thereof, and if initiated or commenced, such purchases or
offers to purchase may be discontinued at any time.
New Accounting Standards
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes
new standards for accounting and reporting requirements for business
combinations and requires the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited. The adoption of SFAS No. 141 had no
effect on our consolidated financial position or results of operations.
SFAS No. 142 establishes new standards for goodwill acquired in a business
combination and eliminates amortization of goodwill and instead sets forth
methods to periodically evaluate goodwill for impairment. The Company adopted
this statement on January 1, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment and disposal of long-
14
lived assets. The Company adopted this statement during the first quarter of
2002. The adoption of this statement had no effect on our consolidated financial
position or results of operations.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145, among other things, amends SFAS No. 4 and SFAS No. 64 to require
that gains and losses from the extinguishment of debt generally be classified
within continuing operations. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002. We do not believe adoption of SFAS
No. 145 will have a significant impact on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 replaces Emerging
Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. We do not believe that
the adoption of SFAS 146 will have a significant impact on our financial
statements.
15
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, 2001.
16
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
None.
(b) Reports on Form 8-K
None.
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTURY MAINTENANCE SUPPLY, INC.,
a Delaware corporation
August 13, 2002 By: Richard E. Penick
-------------------------------------
Richard E. Penick
Chief Executive Officer
(Duly Authorized Officer and
Principal Financial Officer)
Each of the undersigned hereby certifies in his capacity as an officer of
the Company that the Quarterly Report of the Company on Form 10-Q for the period
ended June 30,2002 fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that the information contained
in such report fairly presents, in all material respects, the financial
condition and results of operations of the Company for such period.
CENTURY MAINTENANCE SUPPLY, INC.,
a Delaware corporation
August 13, 2002 By: /s/ Joseph Semmer
--------------------------------------
Joseph Semmer
Chief Executive Officer
By: /s/ Richard E. Penick
--------------------------------------
Richard E. Penick
Chief Financial Officer,
Vice President and Assistant Secretary
18