10-Q 1 d10q.htm FORM 10-Q Prepared by R.R. Donnelley Financial -- Form 10-Q
 
 
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, 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
 
 
CENTURY MAINTENANCE SUPPLY, INC.
(Exact name of registrant as specified in its charter)
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
     
76-0542935
(I.R.S. Employer
Identification No.)
10050 Cash Road, Suite 1
Stafford, Texas
(Address of Principal Executive Offices)
     
77477
(Zip Code)
(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 12,190,498 on May 13, 2002.
 

 
CENTURY MAINTENANCE SUPPLY, INC. AND SUBSIDIARIES
 
Quarter Ended March 31, 2002
 
T ABLE OF CONTENTS
 
         
Page
PART I.
   
FINANCIAL INFORMATION
     
Item 1.
      
2
       
3
       
4
       
5
       
6
       
7
Item 2.
      
10
Item 3.
      
14
PART II.
   
OTHER INFORMATION
     
Item 1.
      
15
Item 2.
      
15
Item 3.
      
15
Item 4.
      
15
Item 5.
      
15
Item 6.
      
15
  
16
 

1

 
PART I FINANCIAL INFORMATION
 
MAINTENANCE SUPPLY, INC. AND SUBSIDIARIES (UNAUDITED)
 
Century Maintenance Supply, Inc. and Subsidiaries
 
(In thousands)
 
    
December 31, 2001
     
March 31, 2002
  
           
(Unaudited)
  
Assets
              
Current assets:
                  
Cash and cash equivalents
   
$
770
 
   
$
201
 
Trade accounts receivable, net
   
 
26,635
 
   
 
29,342
 
Inventory, net
   
 
35,878
 
   
 
37,369
 
Deferred income taxes
   
 
880
 
   
 
880
 
Prepaid expenses and other current assets
   
 
5,242
 
   
 
5,328
 
    
  
Total current assets
   
 
69,405
 
   
 
73,120
 
Goodwill, net
   
 
5,946
 
   
 
5,946
 
Deferred financing costs
   
 
2,000
 
   
 
2,137
 
Other assets
   
 
390
 
   
 
390
 
Property and equipment
   
 
9,896
 
   
 
10,186
 
Less accumulated depreciation
   
 
(6,468
)
   
 
(6,896
)
    
  
Net property and equipment
   
 
3,428
 
   
 
3,290
 
Deferred income taxes
   
 
344
 
   
 
344
 
    
  
Total assets
   
$
81,513
 
   
$
85,227
 
    
  
 
See accompanying notes.
 
(continued)

2

 
Century Maintenance Supply, Inc. and Subsidiaries
 
Condensed Consolidated Balance Sheets (continued)
(In thousands, except share data)
 
    
December 31, 2001
     
March 31, 2002
  
           
(Unaudited)
  
Current liabilities:
                  
Accounts payable, trade
   
$
9,966
 
   
$
13,451
 
Revolving credit facility
   
 
—
 
   
 
—
 
Income taxes payable
   
 
812
 
   
 
2,050
 
Accrued expenses
   
 
3,588
 
   
 
2,693
 
Current portion of long-term debt
   
 
13,600
 
   
 
14,100
 
Dividends payable
   
 
3,496
 
   
 
1,800
 
    
  
Total current liabilities
   
 
31,462
 
   
 
34,094
 
Long-term debt, less current portion
   
 
64,300
 
   
 
60,650
 
Redeemable exchangeable preferred stock, net $100 par value;
                  
2,000,000 shares authorized; 527,706 shares issued and outstanding at December 31, 2001 and 562,663 issued and outstanding at March 31, 2002
   
 
51,063
 
   
 
54,610
 
Stockholders’ deficit:
                  
Common Stock, $0.001 par value; 15,000,000 shares authorized; 12,590,536 and 12,610,536 shares issued at December 31, 2001 and March 31, 2002, respectively
   
 
13
 
   
 
13
 
Additional paid-in capital
   
 
71,176
 
   
 
71,376
 
Treasury stock, 420,061 shares at December 31, 2001 and March 31, 2002 at cost
   
 
(2,105
)
   
 
(2,105
)
Accumulated deficit
   
 
(134,396
)
   
 
(133,411
)
    
  
Total stockholders’ deficit
   
 
(65,312
)
   
 
(64,127
)
    
  
Total liabilities and stockholders’ deficit
   
$
81,513
 
   
$
85,227
 
    
  
 
See accompanying notes.

3

 
Century Maintenance Supply, Inc. and Subsidiaries
 
(In thousands)
 
    
Three months ended March 31,
    
2001
     
2002
    
(Unaudited)
Net sales
   
$
59,876
 
   
$
62,786
Cost of goods sold
   
 
43,490
 
   
 
45,470
    
  
Gross profit
   
 
16,386
 
   
 
17,316
Selling, general, and administrative expenses
   
 
11,198
 
   
 
11,530
    
  
Operating income
   
 
5,188
 
   
 
5,786
Interest expense
   
 
2,202
 
   
 
1,145
    
  
Income before income taxes
   
 
2,986
 
   
 
4,641
Provision for income taxes
   
 
1,161
 
   
 
1,805
    
  
Net income
   
 
1,825
 
   
 
2,836
Other comprehensive income (loss), net of tax of $87
   
 
(135
)
   
 
—
    
  
Comprehensive income
   
$
1,690
 
   
$
2,836
    
  
 
See accompanying notes.

4

 
Century Maintenance Supply, Inc. and Subsidiaries
 
For the Three Months Ended March 31, 2002
(In thousands, except share data)
 
    
Number of Shares Issued and Outstanding
   
Common Stock
   
Additional Paid-In Capital
   
Treasury Stock
     
Accumulated Deficit
     
Total Stockholders’ Deficit
  
Balances at December 31, 2001
   
12,590,536
   
$
13
   
$
71,176
   
$
(2,105
)
   
$
(134,396
)
   
$
(65,312
)
Preferred dividends accrued (unaudited)
   
—
   
 
—
   
 
—
   
 
—
 
   
 
(1,851
)
   
 
(1,851
)
Issuance of common stock (unaudited)
   
20,000
   
 
—
   
 
200
   
 
—
 
   
 
—
 
   
 
200
 
Net income (unaudited)
   
—
   
 
—
   
 
—
   
 
—
 
   
 
2,836
 
   
 
2,836
 
    
  
  
  
  
  
Balances at March 31, 2002 (unaudited)
   
12,610,536
   
$
13
   
$
71,376
   
$
(2,105
)
   
$
(133,411
)
   
$
(64,127
)
    
  
  
  
  
  
 
See accompanying notes.

5

 
Century Maintenance Supply, Inc. and Subsidiaries
 
(In thousands)
 
    
Three months ended March 31,
  
    
2001
     
2002
  
    
(Unaudited)
  
Operating activities:
                  
Net income
   
$
1,825
 
   
$
2,836
 
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
483
 
   
 
428
 
Bad debt expense
   
 
182
 
   
 
167
 
Changes in operating assets and liabilities:
                  
Accounts receivable
   
 
(252
 
   
 
(2,874
)
Inventory
   
 
(533
)
   
 
(1,491
)
Prepaid expenses and other assets
   
 
1,267
 
   
 
(123
)
Accounts payable
   
 
1,291
 
   
 
3,485
 
Accrued expenses
   
 
(664
)
   
 
(895
)
Income taxes payable
   
 
1,149
 
   
 
1,238
 
    
  
Net cash provided by operating activities
   
 
4,748
 
   
 
2,771
 
Investing activities:
                  
Purchases of property and equipment
   
 
(249
)
   
 
(290
)
Financing activities:
                  
Net repayments under revolving line of credit
   
 
(2,500
)
   
 
—
 
Repayments of long-term debt
   
 
(1,900
)
   
 
(3,150
)
Proceeds of sale of common stock
   
 
—
 
   
 
100
 
    
  
Net cash used in financing activities
   
 
(4,400
)
   
 
(3,050
)
    
  
Net increase (decrease) in cash and cash equivalents
   
 
99
 
   
 
(569
)
Cash and cash equivalents at beginning of period
   
 
4
 
   
 
770
 
    
  
Cash and cash equivalents at end of period
   
$
103
 
   
$
201
 
    
  
 
See accompanying notes.

6

 
Century Maintenance Supply, Inc. and Subsidiaries
(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 March 31, 2002 and the condensed consolidated statements of income, changes in stockholders’ deficit, and cash flows for the interim periods ended March 31, 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 13¼% 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

7

Century Maintenance Supply, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

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 214,236 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 13¼% 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, 2002 the Company has accreted $50,102 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 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, the Revolving Credit Facility and the Revolving Credit Facility commitment fee (described in the following sentence) 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, 2002 the Company recognized amortization expense of $195,580.
 
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 has entered into interest rate swap agreements to hedge their exposure which terminated on September 28, 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 requires 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 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 three months ended March 31, 2001, the Company recorded a $135,000 net of tax loss in OCI related to its interest rate swap agreements.

8

Century Maintenance Supply, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements—(Continued)
(Unaudited)

 
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 No. 141 had no effect on the Company’s consolidated financial position or results of operations. The Company has not completed its assessment of SFAS No. 142 as of March 31, 2002. However, management does not believe SFAS No. 142 will have a significant effect on our 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.
 

9

 
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, 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.
 
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 March 31,
    
2001
   
2002
    
(unaudited)
(dollars in thousands)
Net sales
   
$
59,876
   
$
62,786
Cost of goods sold
   
 
43,490
   
 
45,470
    
  
Gross profit
   
 
16,386
   
 
17,316
Selling, general and administrative expenses
   
 
11,198
   
 
11,530
    
  
Operating income
   
 
5,188
   
 
5,786
Interest expense
   
 
2,202
   
 
1,145
    
  
Income before income taxes
   
 
2,986
   
 
4,641
Provision for income taxes
   
 
1,161
   
 
1,805
    
  
Net income
   
$
1,825
   
$
2,836
    
  

10

 
    
Three Months Ended March 31,
  
    
2001
     
2002
  
    
(unaudited)
         
Net sales
   
100.0
%
   
100.0
%
Cost of goods sold
   
72.6
 
   
72.4
 
    
  
Gross profit
   
27.4
 
   
27.6
 
Selling, general and administrative expenses
   
18.8
 
   
18.4
 
    
  
Operating income
   
8.6
 
   
9.2
 
Interest expense
   
3.7
 
   
1.8
 
    
  
Income before income taxes
   
4.9
 
   
7.4
 
Provision for income taxes
   
1.9
 
   
2.9
 
    
  
Net income
   
3.0
%
   
4.5
%
    
  
 
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
 
Net sales for the quarter ended March 31, 2002 were $62.8 million, an increase of $2.9 million or 4.9% over the quarter ended March 31, 2001. This increase in net sales was primarily due to comparable center growth.
 
The Company’s gross profit for the quarter ended March 31, 2002 was $17.3 million, an increase of $0.9 million or 5.7% over the quarter ended March 31, 2001 primarily due to the increase in net sales discussed above. As a percentage of net sales, the Company’s gross profit increased slightly to 27.6% for the quarter ended March 31, 2002 from 27.4% for the quarter ended March 31, 2001.
 
Selling, general and administrative expense, consisting primarily of payroll, occupancy and vehicle expenses, totaled $11.5 million for the quarter ended March 31, 2002, an increase of $0.3 million or 2.9% over the quarter ended March 31, 2001. As a percentage of net sales, selling, general and administrative expense decreased to 18.4% for the quarter ended March 31, 2002 from 18.8% in the quarter ended March 31, 2001. This decrease was primarily due to a leveraging of certain expenses.
 
Interest expense for the quarter ended March 31, 2002 was $1.1 million, a decrease of $1.1 million or 48.0% from the quarter ended March 31, 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 three months of 2002, net cash provided by operating activities was $2.8 million, decreasing from $4.7 million of net cash used in the first three months of 2001 primarily due to increases in accounts receivable, inventory, and accounts payable in the quarter ended March 31, 2002, and a decrease in prepaid and other current assets in the quarter ended March 31, 2001. Net cash used by investing activities in the first three months of 2002 was $0.3 million, increasing slightly from $0.2 million of net cash used in the first three months of 2001. Net cash used in financing activities in the first three months of 2002 was $3.1 million, decreasing from net cash used of $4.6 million in the first three months of 2001 primarily due to the repayment under the revolving line of credit in the first quarter of 2001.
 
The Company currently anticipates that its capital expenditures, excluding potential acquisitions, for 2002 and 2003 will be approximately $2.0 million for each year. Inventories were $37.4 million as of March 31, 2002

11

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 inventory levels will continue to increase primarily to support higher sales volumes and new center openings. Trade accounts receivable, net of allowances were $29.2 million at March 31, 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 $74.8 million under the Term Loan Facility. The Company has access to a total of $25.0 million through the Revolving Credit Facility. As of May 13, 2002, the Company had $2.5 million 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 $10.5 million, $18.8 million, $28.5 million and $17.0 million over the next four 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. 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 and the commitment fee have been reduced in increments as agreed. At May 13, 2002 the interest rate for the Revolving Credit Facility was 5.75%, the Tranche A Facility ranges from 3.9375% to 4.8125% and the Tranche B Facility ranges from 4.6875% to 4.8125%. 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

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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 May 13, 2002, with the provisions of the Credit Facility.
 
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 13¼% 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 214,236 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.
 
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 Standard
 
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 No. 141 had no effect on our consolidated financial position or results of operations. The Company has not completed its assessment of SFAS No. 142 as of March 31, 2002. However, we do not believe SFAS No. 142 will have a significant effect on our 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 our consolidated financial position or results of operations.

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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.

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PART II.    OTHER INFORMATION
 
 
None.
 
 
In January 2002, the Company sold 20,000 shares of its 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 promissory note for $100,000 bearing interest at a rate of 2.75% with a fifteen month term and $100,000 in cash. The sale was exempt from registration pursuant to Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
 
 
Not applicable.
 
 
None.
 
 
None.
 
 
 
(a)
 
Exhibits
 
 
10.22
 
Amendment No. 2 to Credit Agreement dated as of December 31, 2001 by and among the Company, the lenders party thereto, Salomon Brothers Inc. and Citicorp.
 
 
10.23
 
Secured Promissory Note, dated January 21, 2002 made by Joseph Semmer in favor of the Company.
 
 
10.24
 
Stock Pledge Agreement, date January 21, 2002 by and between the Company and Joseph Semmer.
 
 
(b)
 
Reports on Form 8–K
 
None.

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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
May 14, 2002
      
By:
  
/s/    RICHARD E. PENICK        
               
Richard E. Penick
Chief Financial Officer, Vice President and Assistant Secretary
(Duly Authorized Officer and Principal Financial Officer)
 

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