<PAGE>
Filed pursuant to Rule 424(b)(4)
SEC File No. 333-11173
2,100,000 SHARES
[LOGO OF KEVCO KEVCO, INC.
INC. APPEARS HERE] COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by the
Company. Prior to this offering, there has been no public market for the
Common Stock. For information relating to the factors considered in
determining the initial public offering price, see "Underwriting." The Common
Stock has been approved for inclusion on the Nasdaq National Market, under the
symbol "KVCO."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $12.00 $0.84 $11.16
- --------------------------------------------------------------------------------
Total(2).................................. $25,200,000 $1,764,000 $23,436,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Before deducting estimated expenses of $500,000 payable by the Company.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 315,000 shares of Common Stock, solely to cover over-
allotments, if any. See "Underwriting." If the Underwriters exercise this
option in full, the total price to public, underwriting discount and
proceeds to Company will be $28,980,000, $2,028,600 and $26,951,400,
respectively.
----------------
The shares of Common Stock are offered severally by the Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that certificates
representing the shares will be ready for delivery at the offices of Rauscher
Pierce Refsnes, Inc., Dallas, Texas, on or about November 6, 1996.
RAUSCHER PIERCE REFSNES, INC. OPPENHEIMER & CO., INC.
----------------
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1996
<PAGE>
[MAP]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option and reflects a 0.47-for-1 reverse stock
split effected on August 29, 1996. Unless the context otherwise requires,
"Kevco" and the "Company" refer to Kevco, Inc. and its subsidiaries.
THE COMPANY
Kevco is a leading wholesale distributor of building products to the
manufactured housing and recreational vehicle (RV) industries. Through its 17
distribution centers, the Company distributes more than 10,000 different
inventory items to approximately 278 manufactured home and 148 RV manufacturing
facilities throughout the United States. Kevco is one of only a few companies
capable of providing national distribution of building products to the
manufactured housing and RV industries. In addition, the Company also
manufactures wood products for the manufactured housing industry in the
southeastern and southwestern United States. From 1991 to 1995, the Company's
net sales increased from $47.8 million to $182.5 million, a compound annual
growth rate of approximately 40%. Since its founding in 1964, the Company's
growth has been fueled by internal growth and acquisitions.
The Company believes that it provides a cost-effective form of distribution
that offers value to both the Company's suppliers and producers of manufactured
homes and RVs. Kevco believes that it provides significant benefits to its
suppliers by placing large orders at regular intervals, thereby enabling its
suppliers to achieve efficient and cost-effective production planning and
economies of scale. In addition, Kevco markets and sells its suppliers'
products directly to the manufactured housing and RV industries. As a result,
the Company believes it reduces its suppliers' inventory carrying, marketing
and distribution costs. The Company also provides significant benefits to its
customers as a result of its ability to respond on a same day shipment basis to
a majority of its customers' orders, thus reducing the amount of inventory they
must maintain. Furthermore, Kevco assists its customers in inventory
management, product support, training and implementing cost saving measures,
all of which are services that the Company believes most building products
manufacturers cannot provide in a cost-effective manner. The Company believes
that the specialized product knowledge and high level of service provided by
Kevco personnel result in strong relationships between Kevco and its suppliers
and customers.
The Company primarily distributes a full line of plumbing fixtures and
supplies as well as a variety of other building products, including insulation,
roof shingles, patio doors, aluminum and wood windows, vinyl siding, fireplaces
and electrical products. The Company distributes products of several nationally
recognized manufacturers, including Eljer, Crane Plumbing, Coastal(R) and
Nibco(R) plumbing products, State Industries water heaters, Owens-Corning
Fiberglas(R) insulation and shingles, Delta(R), Moen(R) and Phoenix(R) faucets,
CertainTeed(R) vinyl siding and Capri bath products. The Company's wood
products subsidiary manufactures roof trusses and lumber cut to customer
specifications. For the six months ended June 30, 1996, approximately 54% of
the Company's net sales were derived from plumbing products, 20% from wood
products and 26% from other building products.
BUSINESS STRATEGY
Kevco's primary objective is to become the leading national distributor of
building products to the manufactured housing and RV industries. The Company
intends to continue to pursue this objective through a combination of internal
growth and selective acquisitions. To achieve its objective, the Company has
adopted a strategy based on the following key elements:
Provide Superior Customer Service. The Company believes its success is
primarily attributable to its emphasis on customer service and that providing a
high level of customer service leads to long-term relationships
3
<PAGE>
with customers. The Company's operating philosophy is based on a commitment to
Total Quality Management, which emphasizes at every level an awareness of, and
accountability for, customer needs and effective communication both internally
and externally. Consistent with this commitment, the Company strives to achieve
maximum responsiveness to customer orders and to assist its customers in
controlling costs, improving their materials resource planning and facilitating
their just-in-time inventory procurement needs. The Company's sales
representatives, who have an average of approximately nine years of experience
with the Company, play an important role in training customers in the proper
installation of products and assisting in their inventory management.
Leverage National Distribution Network. Kevco will continue to use its
national distribution network as a platform for growth and profitability. The
Company believes that its national distribution network has allowed it to
develop close relationships with leading product manufacturers and to become
the exclusive supplier of certain product lines to the manufactured housing and
RV industries. In addition, the Company believes that its national presence
provides it with a significant competitive advantage due to its ability to
service effectively the building products needs of its customers' manufacturing
facilities, several of which are located in remote, rural areas. This
capability has led to several national customer accounts. As one of the leading
national distributors of building products in the United States to the
manufactured housing and RV industries, the Company has substantial purchasing
power and is able to realize economies of scale.
Increase Customer Penetration and Product Offerings. Kevco currently supplies
approximately 92% of all manufactured housing plants in the United States with
one or more product lines. This established customer base provides the Company
with a significant opportunity to supply a greater portion of its customers'
building products needs as the customers seek to reduce the number of their
suppliers. The Company also intends to add new product lines through internal
growth and acquisitions. With its existing national distribution
infrastructure, the Company believes that additional product lines can be
offered to customers without significant additional cost.
Geographically Expand Wood Products Business. The Company intends to expand
its wood products business primarily by increasing the number of its wood
products manufacturing facilities. The Company currently manufactures wood
products, primarily roof trusses, in three locations in the southeastern and
southwestern United States. This segment of the wood products industry is
highly fragmented, and the Company believes there are significant opportunities
to grow this business internally and through acquisitions.
Pursue Vertical Integration Opportunities. The Company intends to selectively
explore the acquisition of manufacturers of building products. By manufacturing
its own products, the Company will seek to achieve greater profitability from
its sales, while obtaining direct control over product availability and
quality.
MANUFACTURED HOUSING AND RECREATIONAL VEHICLE INDUSTRIES
For the six months ended June 30, 1996, approximately 88% of the Company's
net sales were to producers of manufactured homes and 10% were to producers of
RVs. In 1995, reported sales of new manufactured homes totaled approximately
$12.3 billion (at retail). Approximately 340,000 manufactured homes were
reported as shipped in 1995 (which would represent approximately 33.7% of all
new single family homes sold in 1995). Reported shipments of new manufactured
homes experienced compound annual growth of approximately 18.8% for the four
years ended December 31, 1995. The Company believes that recent industry growth
primarily reflects greater consumer acceptance of manufactured housing, greater
availability of financing for manufactured housing consumers and steady
employment growth. RV shipments to retailers reportedly totaled approximately
$12.1 billion (at retail) in 1995. Although reported RV shipments declined
approximately 8.4% in 1995, the RV industry has experienced compound annual
growth in reported shipments of approximately 12.8% since 1991.
4
<PAGE>
The Company distributes products to each of the ten highest volume producers
of manufactured homes in the United States. The ten highest volume producers of
manufactured homes in 1995 reportedly accounted for approximately 66.4% of
total manufactured home shipments in that year. Management believes that only a
few distributors are capable of distributing a broad line of building products
to meet the needs of these producers on a national basis.
ACQUISITION OF SERVICE SUPPLY
In June 1995, the Company acquired Service Supply Systems, Inc. ("Service
Supply"), a leading wholesale distributor of building products to the
manufactured housing industry in the southeastern United States, the only
region of the country not then served by the Company. The acquisition of
Service Supply enabled Kevco to become a national distributor of building
products to the manufactured housing and RV industries and significantly
enhanced the Company's competitive position. The Company benefits from Service
Supply's product mix, which, like Kevco's, is weighted toward plumbing
products, but also includes a variety of other building products. In
particular, through its acquisition of Service Supply's former subsidiary,
Sunbelt Wood Components, Inc., the Company has become a wood products
manufacturer for the manufactured housing industry in the southeastern and
southwestern United States. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition of Service Supply."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...... 2,100,000 shares
Common Stock to be outstanding after the
offering................................ 6,494,500 shares (1)
Use of proceeds.......................... To reduce indebtedness, including
the Prior S Corporation Earnings
Note to be issued in connection with
the S Corporation Distribution. See
"Prior S Corporation Status" and
"Use of Proceeds."
Nasdaq National Market symbol............ KVCO
</TABLE>
- --------
(1) Excludes an aggregate of 418,426 shares of Common Stock issuable upon
exercise of stock options outstanding at August 1, 1996 at a weighted
average exercise price of $10.58 per share under the Company's stock option
plans and 214,194 shares reserved at that date for future issuance under
the Company's 1995 Stock Option Plan. See "Management--Stock Option Plans."
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Certain factors that
might cause such differences include, but are not limited to, the "Risk
Factors" described herein. The safe harbors contained in Section 27A of the
Securities Act and Section 21E of the Exchange Act, which apply to certain
forward-looking statements, are not applicable to this offering.
----------------
The Company's principal executive offices are located at University Centre I,
1300 S. University Drive, Suite 200, Fort Worth, Texas 76107. The Company's
telephone number is (817) 332-2758.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -------------------
PRO FORMA
1991 1992 1993 1994 1995(1) 1995(2) 1995 1996(1)
------- ------- ------- ------- -------- --------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $47,782 $61,169 $80,257 $99,279 $182,519 $241,846 $56,301 $135,598
Gross profit............ 8,350 10,550 13,170 15,654 26,642 33,997 8,652 20,351
Operating income........ 636 2,293 3,894 4,779 8,363 10,989 2,256 8,083
Income before income
taxes.................. 98 1,959 3,552 5,298 7,026 8,888 2,096 7,025
Net income.............. 98 1,959 3,552 5,247 6,981 8,843 2,076 7,000
SUPPLEMENTAL INCOME
STATEMENT DATA(3):
Net income ............. $ 4,286 $ 5,422 $ 4,285
Earnings per share (4).. $ 0.87 $ 1.10 $ 0.90
Weighted average shares
outstanding (4)........ 4,946 4,946 4,778
As adjusted earnings per
share (5).............. $ 0.96 $ 0.72
<CAPTION>
JUNE 30, 1996
-------------------
AS FURTHER
ACTUAL ADJUSTED(6)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital......... $16,048 $16,048
Total assets............ 60,902 60,902
Total debt.............. 27,827 8,645
Stockholders' equity.... 10,443 29,625
</TABLE>
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(1) The Company acquired Service Supply on June 30, 1995. The acquisition was
accounted for as a purchase and, accordingly, the operating results of
Service Supply have been included in the operating results of the Company
since June 30, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisition of Service Supply."
(2) Pro forma as if the acquisition of Service Supply had occurred on January
1, 1995.
(3) Prior to this offering, the Company had elected to be treated as an S
corporation under the provisions of Subchapter S of the Internal Revenue
Code. As an S corporation, the Company was not subject to federal and
certain state income taxes. The supplemental data give effect to the income
taxes that would have been recorded had the Company been taxed as a C
corporation.
(4) Reflects the assumed issuance of 502,379 and 334,488 shares of Common Stock
at the initial public offering price of $12.00 per share, less underwriting
discount, to generate sufficient funds to pay an S corporation distribution
in an amount equal to undistributed earnings previously taxed at the
shareholder level existing at December 31, 1995 and June 30, 1996,
respectively. See "Prior S Corporation Status."
(5) As adjusted to give effect to the sale of the Common Stock offered hereby
and the application of the estimated net proceeds therefrom at the
beginning of the periods shown, including the elimination of interest
expense as if debt of $17.3 million and $19.2 million had been repaid on
January 1, 1995 and January 1, 1996, respectively. These amounts reflect
the portion of such net proceeds that would have been available to repay
debt after making an S corporation distribution in an amount equal to
undistributed earnings previously taxed at the shareholder level existing
at December 31, 1995 and June 30, 1996, respectively. See "Prior S
Corporation Status."
(6) As adjusted to give effect to (i) an S corporation distribution in an
amount equal to undistributed earnings previously taxed at the shareholder
level existing at June 30, 1996 and (ii) the sale of the Common Stock
offered hereby and the application of the estimated net proceeds therefrom.
No adjustment has been made to give effect to the distribution to the
Company's shareholders of an amount equal to any S corporation earnings for
the period from July 1, 1996 through the date immediately preceding the
date of the consummation of this offering, which will be taxed at the
shareholder level. Such amount, net of cash distributions declared and made
during such period, will be distributed as part of the S Corporation
Distribution in the form of the Future S Corporation Earnings Note. See
"Prior S Corporation Status."
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider the following factors in evaluating the
Company and its business before purchasing any of the shares of the Common
Stock offered hereby. This Prospectus contains forward-looking statements that
involve risks and uncertainties. Actual results could differ from those
discussed in the forward-looking statements as a result of certain factors,
including those set forth below and elsewhere in this Prospectus.
COMPETITION
The wholesale distribution industry relating to producers of manufactured
homes and RVs is highly competitive, and the barriers to entry are relatively
low. Competition exists in terms of price, product quality and features,
service, warranty terms and distribution facility location. The manufactured
roof truss industry is also highly competitive. There are numerous companies,
both public and private, that are in direct competition with the Company, and
many of these competitors have been operating longer and have substantially
greater financial and other resources than the Company. A downturn in the
manufactured housing or RV industries could result in increased competition
adversely affecting the Company's results of operations or financial
condition. In addition, there are certain product manufacturers that sell and
distribute their products directly to manufactured home and RV producers.
There can be no assurance that additional manufacturers of products
distributed by the Company will not elect to sell and distribute directly in
the future. No assurance can be given that the Company will be able to compete
effectively in the future. See "Business--Competition."
CYCLICAL NATURE AND SEASONALITY OF THE MANUFACTURED HOUSING AND RV MARKETS
Approximately 88% of the Company's net sales for the six months ended June
30, 1996 were to producers of manufactured homes. The manufactured housing
market historically has been cyclical and is influenced by many of the same
national and regional economic and demographic factors that affect the broader
housing market, including consumer confidence, interest rates, availability
and terms of financing, regional population and employment trends,
availability and cost of alternative housing and general economic conditions,
including recessions. The RV market has also historically been cyclical and is
also influenced by factors such as interest rates, availability and terms of
financing and general economic conditions, as well as gasoline prices. The
Company may be adversely affected by these factors. The Company's operating
results for the past few years do not reflect the seasonality that
historically has been seen in the manufactured housing and RV industries. See
"Business --Industry."
GROWTH THROUGH ACQUISITIONS
Part of the Company's business strategy is to grow through strategic
acquisitions. There can be no assurance that Kevco will be able to identify
attractive or willing acquisition candidates or that it will be able to
successfully integrate the operations of any companies it acquires. In
addition, there can be no assurance that such acquired companies would perform
in accordance with management's expectations or that the Company would not
encounter unanticipated problems or liabilities. Also, if Kevco does not have
sufficient cash resources for any acquisition, its growth could be limited.
There can be no assurance that Kevco will be able to obtain adequate financing
for any acquisition or that, if available, such financing will be on terms
acceptable to Kevco. The Company's credit facilities require the consent of
the Company's lenders prior to the consummation of any acquisition. There can
be no assurance such consents will be granted any time they are required or
that Kevco will be able to successfully implement its acquisition strategy.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and "Business--Business
Strategy."
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent upon the continued services of the
Company's senior management, particularly its Chairman of the Board, President
and Chief Executive Officer, Jerry E. Kimmel. The loss of the services of Mr.
Kimmel could have a material adverse effect on the Company and its business.
In
7
<PAGE>
addition, the Company's success and continued growth will depend upon its
ability to attract and retain experienced, quality management personnel. See
"Management."
DEPENDENCE ON PRINCIPAL CUSTOMERS
The Company's largest customer, Fleetwood Enterprises, Inc., accounted for
approximately 12% of Kevco's net sales in 1995. Two of the Company's large
customers, Champion Enterprises, Inc. ("Champion") and Redman Industries, Inc.
("Redman"), accounted for approximately 8% and 7%, respectively, of Kevco's
net sales in 1995. In August 1996, Champion and Redman announced that they had
entered into a definitive merger agreement under which Champion would acquire
Redman. On October 24, 1996, the merger was consummated. Although the Company
has ongoing supply relationships with these three customers, it does not have
a formal supply contract with these customers or most of its other customers.
The Company's business could be adversely affected if these customers, or
other major customers, substantially reduced or discontinued purchases from
the Company. Further, the Company can give no assurance that its sales to the
combined entity resulting from such merger will continue at historical levels.
See "Business--Sales and Marketing" and Note 1 to the Consolidated Financial
Statements of the Company.
DEPENDENCE ON KEY SUPPLIERS
There are numerous competing suppliers of most of the products that Kevco
purchases; however, if a particular supplier were to unexpectedly discontinue
sales of a product to the Company, the Company could experience temporary
shortages in that product until it obtains a replacement supplier. Such a
temporary shortage could have a negative impact on Kevco's relationships with
its customers, which could in turn result in the loss of one or more
customers. The loss of one or more major customers could have a material
adverse effect on the Company and its business. See "Business--Purchasing and
Suppliers."
FLUCTUATIONS IN PRICES OF LUMBER
The Company has experienced significant fluctuations in the cost of lumber
products from primary producers. A variety of factors over which the Company
has no control, including environmental regulations, weather conditions and
natural disasters, impact the market price of lumber products. The Company
anticipates that these fluctuations will continue in the future. While the
Company's purchase and resale practices seek to minimize the impact of
fluctuations in lumber prices, sharp increases or decreases in lumber prices
may have a material impact on the Company's inventory value and profitability.
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of this offering, Jerry E. Kimmel, the Chairman of the
Board, President and Chief Executive Officer of the Company, will own
approximately 57.9% of the outstanding Common Stock of the Company. As a
result, Mr. Kimmel will be able to control the management and policies of the
Company through the ability to determine the outcome of elections for the
Company's Board of Directors and other matters requiring the vote or consent
of shareholders of the Company. See "Principal Shareholders" and "Description
of Capital Stock."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Bylaws provide for a classified Board of Directors and require
that notice of shareholder director nominees be given to the Company not less
than 120 days prior to the anniversary date of the immediately preceding
annual meeting of shareholders of the Company (or not later than 10 days
following the mailing of notices of a special meeting at which directors are
to be elected), or, with respect to the first annual meeting of shareholders
following this offering, on or before January 1, 1997. Also, Mr. Kimmel, the
Chairman of the Board, President and Chief Executive Officer of the Company,
has entered into a rolling five year employment agreement with the Company
that can be terminated by the Company only for cause (as defined in such
agreement). These matters may inhibit a change of control of the Company. In
addition, the Company's Articles of Incorporation and Bylaws contain certain
provisions that may have anti-takeover effects and may delay, defer or prevent
a takeover attempt that a shareholder of the Company might consider to be in
the best interest of the Company or its shareholders. See "Management" and
"Description of Capital Stock--Certain Anti-Takeover Provisions."
8
<PAGE>
REGULATION
The Company's suppliers and customers are subject to a variety of federal,
state and local laws and regulations. The National Manufactured Housing
Construction and Safety Standards Act of 1974 and regulations promulgated
thereunder by the U.S. Department of Housing and Urban Development ("HUD")
impose comprehensive national construction standards for manufactured homes
and preempt conflicting state and local regulations. HUD has adopted
regulations that divide the United States into three "Wind Zones" and impose
more stringent construction standards for homes to be sold in areas designated
as Wind Zones II or III. These regulations have resulted in higher
manufacturing and dealer costs. The Company cannot predict if additional
regulations will be adopted or the effect that any such regulations would have
on the Company. To the extent regulations make manufactured housing less
competitive with other housing alternatives, the Company's operations could be
negatively impacted. See "Business--Regulation."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have outstanding
6,494,500 shares of Common Stock (6,809,500 if the Underwriters' over-
allotment option is exercised in full), of which the 2,100,000 shares sold in
this offering (2,415,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act, except for those held by "affiliates"
(as defined in the Securities Act) of the Company, which will be subject to
the resale limitations of Rule 144 under the Securities Act. In addition to
the shares offered hereby, holders of 4,394,500 shares of Common Stock will be
eligible to sell such shares pursuant to Rule 144 (subject to certain
limitations) under the Securities Act upon consummation of this offering;
however, the holders of substantially all of such shares are subject to a 180-
day lockup agreement described below. As of August 1, 1996, options to
purchase 418,426 shares of Common Stock were outstanding under the Company's
stock option plans (all of which will become immediately exercisable upon
consummation of this offering), and options for an additional 214,194 shares
were available for grant under one of such plans. See "Management--Stock
Option Plans." Shares of Common Stock issued upon exercise of options
currently outstanding will generally be eligible for resale pursuant to Rule
701 under the Securities Act commencing 90 days after the date of this
Prospectus. In addition, the Company may elect to file a registration
statement covering the shares issuable upon exercise of stock options granted
in the future under the Company's 1995 Stock Option Plan, in which case such
shares of Common Stock generally will be freely tradeable by non-affiliates in
the public market without restriction under the Securities Act. The Company,
its executive officers and directors and certain other shareholders have
agreed not to sell or otherwise dispose of shares of Common Stock for 180 days
after the date of this Prospectus without the prior approval of the
Underwriters (subject to certain limited exceptions including the Company's
right to issue shares of Common Stock upon the exercise of stock options
granted under its existing stock option plans). Following this offering, sales
of substantial amounts of Common Stock in the public market, pursuant to Rule
144, Rule 701 or otherwise, and the potential of such sales, could adversely
affect the prevailing market price of the Common Stock and impair the
Company's ability to raise additional capital through the sale of equity
securities. See "Shares Eligible for Future Sale" and "Underwriting."
DILUTION TO NEW INVESTORS
Investors purchasing shares of Common Stock in this offering will experience
immediate and substantial dilution in the net tangible book value of their
shares of Common Stock. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the shares of
the Company's Common Stock. Although the Common Stock has been approved for
inclusion on the Nasdaq National Market (subject to official notice of
issuance), there can be no assurance that an active market for the Common
Stock will develop or be sustained following this offering. The initial public
offering price for the shares of Common Stock sold in this offering was
determined through negotiations between the Company and the Underwriters and
does not necessarily reflect the market price for the Common Stock following
this offering. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price of the Common Stock. Market
prices for the Common Stock following this offering will be influenced by a
number of factors, including the
9
<PAGE>
Company's operating results and other factors affecting the Company
specifically and the industries to which the Company sells products and the
stock market generally, as well as the depth and liquidity of the market for
the Common Stock. The market price of the Common Stock could be subject to
significant fluctuations, including in response to variations in financial
results or announcements of material events by the Company or its customers or
competitors. Regulatory changes, developments in the manufactured housing or
RV industries or changes in general conditions in the economy or the financial
markets could also adversely affect the market price of the Common Stock.
PRIOR S CORPORATION STATUS
Prior to this offering, the Company had elected to be treated as an S
corporation under the provisions of Subchapter S of the Internal Revenue Code.
As an S corporation, the Company was not subject to federal and certain state
income taxes. As a result, the Company's earnings have been (and, until the
termination of the Company's S corporation status immediately prior to the
consummation of this offering, will be) taxed directly to the Company's
shareholders, rather than to the Company, for federal and certain state income
tax purposes.
The Company has historically made distributions to its shareholders in
amounts equal to at least the shareholders' tax liabilities attributable to
the Company's earnings. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." As of
June 30, 1996, the estimated amount of the Company's previously taxed but
undistributed S corporation earnings was approximately $3.7 million. The
Company intends to make a distribution equal to this amount, which will be
paid in the form of a promissory note (the "Prior S Corporation Earnings
Note"). The Company also intends to distribute an amount equal to its earnings
from July 1, 1996 through the day immediately preceding the consummation of
this offering, net of cash distributions declared and made during such period,
which will also be paid in the form of a promissory note (the "Future S
Corporation Earnings Note"). Both notes will bear interest at the applicable
federal rate on the date of the notes. The Company estimates that the
aggregate original principal amount of both notes, plus cash distributions
declared and made during the period from July 1, 1996 through the day
immediately preceding the consummation of this offering, will be between $7.0
and $10.0 million. The issuance of the Prior S Corporation Earnings Note and
the Future S Corporation Earnings Note is referred to in this Prospectus as
the "S Corporation Distribution." The Company intends to pay the Prior S
Corporation Earnings Note with a portion of the net proceeds of this offering
on the first business day following consummation of this offering and to pay
the Future S Corporation Earnings Note with cash generated from the Company's
earnings. It is expected that the Future S Corporation Earnings Note will be
paid on or before December 31, 1996. It is expected that the S Corporation
Distribution will be declared by the Board of Directors of the Company prior
to consummation of this offering and be payable to shareholders of record on
the declaration date. Purchasers of Common Stock in this offering will not be
entitled to receive any portion of the S Corporation Distribution.
10
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby, after deducting the underwriting discount and estimated
offering expenses, will be approximately $22.9 million ($26.5 million if the
Underwriters' over-allotment option is exercised in full).
In connection with the acquisition of Service Supply in June 1995, the
Company entered into a $35.0 million credit facility with a bank. The credit
facility consists of a revolving credit facility in the aggregate amount of
$20.0 million and a term loan of $15.0 million. Approximately $19.2 million of
the net proceeds of this offering will be used to reduce indebtedness under
such credit facility. The Company intends to use this amount first to pay down
the outstanding balance under the Company's revolving credit facility
(approximately $11.3 million outstanding at June 30, 1996) and the balance to
make a permanent reduction in the Company's term loan (approximately $14.5
million outstanding at June 30, 1996). The revolving credit facility currently
bears interest at a blend of the bank's prime rate and LIBOR plus 1.75% (7.49%
at June 30, 1996) and matures on June 30, 1998, subject to extension at the
option of the lenders. The term loan currently bears interest at a blend of
the bank's prime rate and LIBOR plus 1.75% (7.31% at June 30, 1996) and
matures on June 30, 2001. As of June 30, 1996, the Company could borrow an
aggregate of $20.0 million under the revolving credit facility, which is the
maximum amount that can be borrowed thereunder. The unused portion of the
revolving credit facility may be borrowed for general corporate purposes,
including, subject to prior consent by the Company's lenders, acquisitions.
The Company has no current commitments for any acquisitions, but will continue
to seek suitable acquisition candidates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Company will use approximately $3.7 million of the net proceeds to repay
the Prior S Corporation Earnings Note. The Prior S Corporation Earnings Note
will bear interest at the applicable federal rate and be payable on the first
business day following consummation of this offering. See "Prior S Corporation
Status."
DIVIDEND POLICY
Except for the S Corporation Distribution and a previously declared $0.3
million distribution (representing the balance of distributions necessary to
satisfy the existing shareholders' income tax liabilities attributable to the
Company's earnings through June 30, 1996), none of which will be paid to
purchasers of Common Stock in this offering, the Company does not anticipate
paying cash dividends on the Common Stock in the foreseeable future and
intends to retain its earnings to support operations and finance expansion.
Furthermore, the terms of the Company's bank credit facilities restrict the
Company's ability to pay dividends. The payment of any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's earnings, operations, capital requirements,
financial condition and restrictions in financing arrangements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 6 to the Consolidated
Financial Statements of the Company.
11
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1996, was $0.14
per share of Common Stock. Net tangible book value per share is determined by
dividing the tangible net worth of the Company (tangible assets less total
liabilities) by the number of outstanding shares of Common Stock. After giving
effect to (i) the distribution of the Prior S Corporation Earnings Note and
(ii) the sale by the Company of the 2,100,000 shares of Common Stock offered
hereby at the initial public offering price of $12.00 per share and the
application of the estimated net proceeds therefrom as set forth under "Use of
Proceeds," the net tangible book value of the Company as of June 30, 1996,
would have been $3.05 per share. This represents an immediate increase in the
net tangible book value to $3.05 per share to existing shareholders and an
immediate dilution to new investors purchasing Common Stock in this offering
of $8.95 per share. The following table illustrates the per share dilution to
new investors purchasing Common Stock in this offering:
<TABLE>
<S> <C> <C>
Initial public offering price per share (1)................ $12.00
Net tangible book value per share as of June 30, 1996...... $0.14
Decrease attributable to the Prior S Corporation Earnings
Note...................................................... 0.85
-----
Net tangible book value per share before this offering..... (0.71)
Increase per share attributable to new investors........... 3.76
-----
Net tangible book value per share after this offering...... 3.05
------
Dilution per share to new investors........................ $ 8.95
======
</TABLE>
- --------
(1) Before deducting underwriting discount and estimated expenses of the
offering payable by the Company.
The following table summarizes the differences between the existing
shareholders and the new shareholders with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price paid per share (without giving effect to the
underwriting discount and offering expenses):
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES PURCHASED TOTAL CONSIDERATION PER SHARE
-------------------- ---------------------- ---------
NUMBER PERCENTAGE AMOUNT PERCENTAGE
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders.... 4,394,500 67.7% $ 2,419,000 8.8% $ 0.55
New shareholders......... 2,100,000 32.3 25,200,000 91.2 $12.00
--------- ----- ----------- -----
Total................ 6,494,500 100.0% $27,619,000 100.0%
========= ===== =========== =====
</TABLE>
- --------
All of the calculations above exclude shares of Common Stock issuable upon
exercise of stock options under the Company's stock option plans. See
"Management--Stock Option Plans."
12
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at June 30, 1996, (i) on an actual basis, (ii) as adjusted to give
effect to the distribution of the Prior S Corporation Earnings Note and (iii)
as further adjusted to reflect the sale of the 2,100,000 shares of Common
Stock offered hereby and the application of the estimated net proceeds
therefrom as set forth under "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------
AS FURTHER
ACTUAL AS ADJUSTED(1) ADJUSTED
------- -------------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt:
Current portion of long-term debt......... $ 2,288 $ 2,288 $ 2,288
Prior S Corporation Earnings Note......... -- 3,733 --
------- ------- -------
Total short-term debt................... $ 2,288 $ 6,021 $ 2,288
======= ======= =======
Long-term debt:
Long-term debt, net of current portion.... $25,539 $25,539 $ 6,357
Stockholders' equity:
Common Stock, $0.01 par value, 100,000,000
shares authorized; 4,700,000 shares
issued (including 305,500 shares held in
treasury); 4,394,500 shares issued and
outstanding as adjusted; 6,494,500 shares
issued and outstanding as further
adjusted(2).............................. 47 44 65
Additional paid-in capital................ 3,120 6,666 29,560
Retained earnings(3)...................... 8,024 -- --
Treasury stock............................ (748) -- --
------- ------- -------
Total stockholders' equity.............. 10,443 6,710 29,625
------- ------- -------
Total capitalization.................... $35,982 $32,249 $35,982
======= ======= =======
</TABLE>
- --------
(1) Reflects the issuance of the $3.7 million Prior S Corporation Earnings
Note, which represents the estimated amount of undistributed earnings of
the Company previously taxed at the shareholder level existing at June 30,
1996. See "Prior S Corporation Status." Additionally, the amounts have
been adjusted for (i) the reclassification as additional paid-in capital
of the portion of the Company's retained earnings that will not be
distributed to shareholders through the S Corporation Distribution and
(ii) the retirement of the Company's treasury stock.
(2) Excludes shares of Common Stock issuable upon exercise of stock options
under the Company's stock option plans. See "Management--Stock Option
Plans."
(3) No adjustment has been made to give effect to the distribution to the
Company's shareholders of the Future S Corporation Earnings Note in the
amount of any S corporation earnings of the Company for the period from
July 1, 1996 through the date immediately preceding the date of the
consummation of this offering (net of cash distributions declared and made
during such period), which will be taxed at the shareholder level. Such
amount will be distributed as part of the S Corporation Distribution in
the form of the Future S Corporation Earnings Note. See "Prior S
Corporation Status."
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended December
31, 1995 are derived from the Company's audited consolidated financial
statements. The pro forma financial data presents the results of the Company
as if the acquisition of Service Supply had occurred on January 1, 1995 and
are derived from the unaudited pro forma consolidated statement of income
included elsewhere herein. The financial data for the six months ended
June 30, 1995 and 1996 are derived from the Company's unaudited consolidated
financial statements, which in the opinion of management reflect all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of results for such periods. Results for the six months
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the full year. The selected consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -----------------
PRO FORMA
1991 1992 1993 1994 1995(1) 1995(2) 1995 1996(1)
------- ------- ------- ------- -------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $47,782 $61,169 $80,257 $99,279 $182,519 $241,846 $56,301 $135,598
Cost of sales........... 39,432 50,619 67,087 83,625 155,877 207,849 47,649 115,247
------- ------- ------- ------- -------- -------- ------- --------
Gross profit............ 8,350 10,550 13,170 15,654 26,642 33,997 8,652 20,351
Commission income....... 993 1,234 1,274 1,066 2,610 3,993 512 2,700
------- ------- ------- ------- -------- -------- ------- --------
9,343 11,784 14,444 16,720 29,252 37,990 9,164 23,051
Selling, general and
administrative
expenses............... 8,707 9,491 10,550 11,941 20,889 27,001 6,908 14,968
------- ------- ------- ------- -------- -------- ------- --------
Operating income........ 636 2,293 3,894 4,779 8,363 10,989 2,256 8,083
Other income............ -- -- -- 800 -- -- -- --
Interest income......... -- -- 83 346 355 356 186 141
Interest expense........ (313) (334) (425) (627) (1,692) (2,457) (346) (1,199)
------- ------- ------- ------- -------- -------- ------- --------
Income before income
taxes and accounting
change................. 323 1,959 3,552 5,298 7,026 8,888 2,096 7,025
Accounting change....... 225 -- -- -- -- -- -- --
------- ------- ------- ------- -------- -------- ------- --------
Income before income
taxes.................. 98 1,959 3,552 5,298 7,026 8,888 2,096 7,025
State income taxes...... -- -- -- 51 45 45 20 25
------- ------- ------- ------- -------- -------- ------- --------
Net income.............. $ 98 $ 1,959 $ 3,552 $ 5,247 $ 6,981 $ 8,843 $ 2,076 $ 7,000
======= ======= ======= ======= ======== ======== ======= ========
SUPPLEMENTAL INCOME
STATEMENT DATA (3):
Net income.............. $ 4,286 $ 5,422 $ 4,285
Earnings per share (4).. $ 0.87 $ 1.10 $ 0.90
Weighted average shares
outstanding (4)........ 4,946 4,946 4,778
As adjusted earnings per
share (5).............. $ 0.96 $ 0.72
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
--------------------------------------- -------------------
AS FURTHER
1991 1992 1993(6) 1994 1995(1) ACTUAL ADJUSTED(7)
------- ------- ------- ------- ------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 4,077 $ 4,531 $ 4,050 $ 4,496 $18,926 $16,048 $16,048
Total assets............ 9,197 10,898 15,052 17,485 54,851 60,902 60,902
Total debt.............. 1,868 1,815 5,547 6,385 31,263 27,827 8,645
Stockholders' equity.... 4,483 5,060 3,537 5,512 8,738 10,443 29,625
</TABLE>
- -------
(1) The Company acquired Service Supply on June 30, 1995. The acquisition was
accounted for as a purchase and, accordingly, the operating results of
Service Supply have been included in the operating results of the Company
since June 30, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition of Service
Supply."
(2) Pro forma as if the acquisition of Service Supply had occurred on January
1, 1995.
(3) Prior to this offering, the Company had elected to be treated as an S
corporation under the provisions of Subchapter S of the Internal Revenue
Code. As an S corporation, the Company was not subject to federal and
certain state income taxes. The supplemental data give effect to the
income taxes that would have been recorded had the Company been taxed as a
C corporation.
(4) Reflects the assumed issuance of 502,379 and 334,488 shares of Common
Stock at the initial public offering price of $12.00 per share, less
underwriting discount, to generate sufficient funds to pay an
S corporation distribution in an amount equal to undistributed earnings
previously taxed at the shareholder level existing at December 31, 1995
and June 30, 1996, respectively. See "Prior S Corporation Status."
(5) As adjusted to give effect to the sale of the Common Stock offered hereby
and the application of the estimated net proceeds therefrom at the
beginning of the periods shown, including the elimination of interest
expense as if debt of $17.3 million and $19.2 million had been repaid on
January 1, 1995 and January 1, 1996, respectively. These amounts reflect
the portion of such net proceeds that would have been available to repay
debt after making an S corporation distribution in an amount equal to
undistributed earnings previously taxed at the shareholder level existing
at December 31, 1995 and June 30, 1996, respectively. See "Prior S
Corporation Status."
(6) During October 1993, the Company became wholly owned by the current
majority shareholder. This acquisition was accounted for as a purchase
transaction and resulted in a partial change in basis.
(7) As adjusted to give effect to (i) an S corporation distribution in an
amount equal to undistributed earnings previously taxed at the shareholder
level existing at June 30, 1996 and (ii) the sale of the Common Stock
offered hereby and the application of the estimated net proceeds
therefrom. No adjustment has been made to give effect to the distribution
to the Company's shareholders of an amount equal to any S corporation
earnings for the period from July 1, 1996 through the date immediately
preceding the date of the consummation of this offering, which will be
taxed at the shareholder level. Such amount, net of cash distributions
declared and made during such period, will be distributed as part of the S
Corporation Distribution in the form of the Future S Corporation Earnings
Note. See "Prior S Corporation Status."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
From 1991 through 1995, the Company experienced significant growth in sales
and earnings. This growth was the result of internal expansion, including the
opening of new distribution centers, as well as the acquisition of
distribution and manufacturing facilities from Service Supply in June 1995.
From 1991 to June 30, 1996, the Company opened seven new distribution centers.
Through the acquisition of Service Supply, the Company acquired five
distribution and three manufacturing facilities, bringing the number of its
distribution and manufacturing facilities to 17 and three, respectively. The
Company will seek to continue to grow through the acquisition and opening of
distribution and manufacturing facilities and through the expansion of the
product lines offered by the Company.
The Company recognizes revenues from product sales at the time of shipment
(or the time of product receipt, in the case of direct shipments from
suppliers to customers). In some cases the Company sells on a commission
basis. Commissions are recognized when earned and represent amounts earned in
selling, warehousing and delivering products for certain manufacturers of
building products with which the Company has distribution agreements.
Commission arrangements do not require inventory investments or receivable
financing, and therefore are significantly less expensive to the Company than
traditional sales. To the extent the volume of items warehoused and shipped
under commission arrangements increases faster or slower than the volume of
items related to traditional sales, changes in net sales may not be
representative of actual shipment volume increases or decreases.
ACQUISITION OF SERVICE SUPPLY
In June 1995, the Company acquired Service Supply for a purchase price of
approximately $17.7 million. The entire purchase price was paid in cash. The
fair value of assets acquired was approximately $32.4 million and the amount
of liabilities assumed was approximately $14.7 million. There was no material
affiliation between Service Supply and Kevco prior to such acquisition. The
acquisition of Service Supply enabled Kevco to achieve its primary strategic
objective at that time of becoming a national distributor of building products
to the manufactured housing and RV industries and significantly enhanced the
Company's competitive position. Service Supply's operations are located
primarily in the southeastern United States, the only region of the country
not served by the Company at the time of the acquisition. The Company benefits
from Service Supply's product mix, which is weighted toward plumbing products,
but also includes a variety of other building products. In particular, through
its acquisition of Service Supply's wood products subsidiary, the Company has
become a wood products manufacturer for the manufactured housing industry in
the southeastern and southwestern United States. The Company's wood products
business is conducted through its subsidiary, Sunbelt Wood Components, Inc.
("Sunbelt").
Since completing the Service Supply acquisition, the Company has primarily
focused on integrating and enhancing the performance of the acquired
operations and has achieved net sales growth of 17.3% from $115.6 million for
the six months ended June 30, 1995 (on a combined basis as if the acquisition
had occurred on January 1, 1995) to $135.6 million for the six months ended
June 30, 1996. Gross profit, as a percent of sales, on such a combined basis,
increased from 13.8% to 15.0% during the same time periods primarily as a
result of purchasing opportunities available to the Company following the
completion of the acquisition of Service Supply.
15
<PAGE>
The summary financial data for Service Supply for the four years ended
December 31, 1994 are derived from Service Supply's audited consolidated
financial statements. The financial data for Service Supply for the six months
ended June 30, 1995 are derived from Service Supply's unaudited consolidated
financial statements, which in the opinion of management reflect all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of results for such period. Such summary financial data
should be read in conjunction with the Consolidated Financial Statements of
Service Supply Systems, Inc. and Subsidiary and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
--------------------------------- ENDED JUNE
1991 1992 1993 1994 30, 1995
------- ------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SERVICE SUPPLY INCOME STATEMENT
DATA:
Net sales...................... $50,465 $59,804 $73,625 $100,910 $59,327
Gross profit................... 7,173 8,311 10,391 12,881 7,355
Operating income............... 119 1,246 2,265 2,935 2,834
Income (loss) before income
taxes......................... (371) 893 1,978 2,386 2,428
Net income (loss).............. (252) 563 1,246 1,515 1,585
</TABLE>
Because of the Service Supply acquisition, the Company's historical results
of operations and period-to-period comparisons of such results and certain
financial data may not be meaningful or indicative of future results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of Kevco's net sales.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE
DECEMBER 31, 30,
------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................ 83.6 84.2 85.4 84.6 85.0
----- ----- ----- ----- -----
Gross profit................................. 16.4 15.8 14.6 15.4 15.0
Commission income............................ 1.6 1.1 1.4 0.9 2.0
----- ----- ----- ----- -----
18.0 16.9 16.0 16.3 17.0
Selling, general and administrative.......... 13.1 12.0 11.4 12.3 11.0
----- ----- ----- ----- -----
Operating income............................. 4.9 4.9 4.6 4.0 6.0
Other income................................. 0.0 0.8 0.0 0.0 0.0
Interest income.............................. 0.1 0.3 0.2 0.3 0.1
Interest expense............................. (0.5) (0.6) (0.9) (0.6) (0.9)
----- ----- ----- ----- -----
Income before income taxes................. 4.5% 5.4% 3.9% 3.7% 5.2%
===== ===== ===== ===== =====
</TABLE>
16
<PAGE>
Comparison of Six Months Ended June 30, 1996 and 1995
Net sales increased by $79.3 million, or 140.9%, to $135.6 million for the
first six months of 1996 from $56.3 million for the comparable 1995 period.
The increase in net sales resulted primarily from the acquisition of Service
Supply. However, net sales, on a combined basis as if the acquisition of
Service Supply had occurred on January 1, 1995, also increased for the first
six months of 1996 to $135.6 million from $115.6 million for the comparable
1995 period, an increase of 17.3%. This increase in net sales on such a
combined basis primarily resulted from an increase in the volume and variety
of products sold. Management believes the increase in the volume and variety
of products sold was primarily the result of the establishment of national
plumbing products accounts with several customers, sales of Kevco product
lines to existing Service Supply customers (as well as sales of Service Supply
products to existing Kevco customers) and improved customer demand. The
increase in net sales compared favorably to the 9.6% increase in reported
manufactured home shipments for the first six months of 1996 compared to the
comparable 1995 period (approximately 182,000 homes reported shipped for the
first six months of 1996 compared to approximately 166,000 homes reported
shipped for the comparable 1995 period). Sales to the manufactured housing
industry represented approximately 88% of the Company's net sales for the six
months ended June 30, 1996.
Gross profit increased by $11.7 million, or 134.5%, to $20.4 million for the
first six months of 1996 from $8.7 million for the comparable 1995 period. The
increase in gross profit resulted primarily from the acquisition of Service
Supply. However, gross profit, on a combined basis as if the acquisition of
Service Supply had occurred on January 1, 1995, also increased for the first
six months of 1996 to $20.4 million from $16.0 million for the comparable 1995
period, an increase of 27.5%. This increase in gross profit on such a combined
basis resulted primarily from an overall increase in net sales. Actual gross
profit, as a percent of actual sales, decreased to 15.0% for the first six
months of 1996 from 15.4% for the comparable 1995 period. This decrease was
primarily the result of lower margins associated with Service Supply's sales.
Gross profit, as a percent of sales, on a combined basis as if the acquisition
of Service Supply had occurred on January 1, 1995, increased to 15.0% for the
first six months of 1996 from 13.8% for the comparable 1995 periods, an
increase which management believes was a result of the Company's ability to
take advantage of purchasing opportunities following the acquisition of
Service Supply.
Commission income increased by $2.2 million, or 440.0%, to $2.7 million for
the first six months of 1996 from $0.5 million for the comparable 1995 period.
Although a portion of the increase was attributable to the acquisition of
Service Supply, the most significant factor in the increase was that the
Company entered into commission-based distribution arrangements with two
manufacturers of component products.
Selling, general and administrative expenses increased by $8.1 million, or
117.4%, to $15.0 million for the first six months of 1996 from $6.9 million
for the comparable 1995 period. The increase was primarily attributable to the
acquisition of Service Supply and, to a lesser extent, increased sales volume.
Selling, general and administrative expenses, as a percent of sales, decreased
to 11.0% for the first six months of 1996 from 12.3% for the comparable 1995
period. The decrease was primarily a result of reducing redundant overhead and
warehousing costs associated with Service Supply and, generally, management's
ability to increase sales without a proportionate increase in related
operating expenses.
Net income increased by $4.9 million, or 233.3%, to $7.0 million for the
first six months of 1996 from $2.1 million for the comparable 1995 period. The
increase was primarily attributable to the acquisition of Service Supply,
along with the reduction in operating expenses as a percent of sales. Also,
the increase was net of additional interest expense incurred of $0.5 million
for the six months ended June 30, 1996 related to the term loan associated
with the acquisition of Service Supply.
Comparison of Years Ended December 31, 1995 and 1994
Net sales increased by $83.2 million, or 83.8%, to $182.5 million in 1995
from $99.3 million in 1994. The increase in net sales was primarily
attributable to the inclusion of six months of sales from the Service Supply
facilities in 1995. However, net sales, on a combined basis as if the
acquisition of Service Supply had occurred
17
<PAGE>
on January 1, 1994, also increased in 1995 to $241.8 million from $200.2
million in 1994, an increase of 20.8%. The increase in net sales on such a
combined basis primarily resulted from an increase in the volume and variety
of products sold. Management believes the increase in the volume and variety
of products sold was primarily the result of the establishment of national
plumbing products accounts with several customers, sales of Kevco product
lines to existing Service Supply customers (as well as sales of Service Supply
product lines to existing Kevco customers) and improved customer demand. The
increase in net sales, on such a combined basis, was in excess of the 11.8%
increase in reported manufactured home shipments in 1995 compared to 1994
(approximately 340,000 homes reported shipped in 1995 compared to
approximately 304,000 homes reported shipped in 1994). Sales to the
manufactured housing industry represented approximately 85% of the Company's
net sales in 1995.
Gross profit increased by $10.9 million, or 69.4%, to $26.6 million in 1995
from $15.7 million in 1994. This increase in gross profit was primarily
attributable to the inclusion of six months of gross profit from the Service
Supply facilities in 1995. Gross profit, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1994, increased in
1995 to $34.0 million from $28.5 million in 1994, an increase of 19.3%. This
increase in gross profit on such a combined basis resulted primarily from an
overall increase in the volume of net sales. Actual gross profit, as a percent
of actual sales, decreased to 14.6% in 1995 from 15.8% in 1994. This decrease
was primarily the result of lower margins associated with Service Supply's
sales. Gross profit, as a percent of sales, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1994, decreased to
14.1% in 1995 from 14.3% in 1994, a decrease which management believes was
primarily the result of competition from other suppliers attempting to
increase their market shares.
Commission income increased by $1.5 million, or 136.4%, to $2.6 million in
1995 from $1.1 million in 1994. A significant amount of the increase resulted
from the inclusion of six months of commission income from the Service Supply
facilities in 1995. An additional significant factor in this increase was the
increase in sales volume for which the Company is compensated on a commission
basis.
Selling, general and administrative expenses increased by $9.0 million, or
75.6%, to $20.9 million in 1995 from $11.9 million in 1994. The increase was
primarily related to the inclusion of six months of selling, general and
administrative expenses from the Service Supply facilities in 1995 and, to a
lesser extent, the increased expenses related to the overall net sales
increase. Selling, general and administrative expenses, as a percent of sales,
decreased to 11.4% in 1995 from 12.0% in 1994, reflecting the reduction of
redundant overhead and warehousing costs associated with Service Supply and,
generally, the Company's ability to increase sales without a proportionate
increase in related operating expenses.
Net income increased by $1.8 million, or 34.6%, to $7.0 million in 1995 from
$5.2 million in 1994. Excluding insurance proceeds of $0.8 million recognized
as income in 1994 related to a former officer's disability, the increase in
net income from 1994 to 1995 would have been 59.1%. The increase was primarily
a result of the inclusion of six months of gross profit from the Service
Supply facilities in 1995, and the remainder of the increase was attributable
to the increase in net sales without a proportionate increase in operating
expenses. Also, the increase in net income was net of additional interest
expense incurred of $0.6 million in 1995 related to the term loan associated
with the acquisition of Service Supply.
Comparison of Years Ended December 31, 1994 and 1993
Net sales increased by $19.0 million, or 23.7%, to $99.3 million in 1994
from $80.3 million in 1993. The increase in net sales was primarily
attributable to an increase in the volume and variety of products sold, which
management believes resulted primarily from effective marketing and improved
customer demand. The increase in net sales of 23.7% was in excess of the 19.7%
increase in reported manufactured home shipments in 1994 compared to 1993
(approximately 304,000 homes reported shipped in 1994 compared to
approximately 254,000 homes reported shipped in 1993). Sales to the
manufactured housing industry represented approximately 73% of the Company's
net sales in 1994.
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Gross profit increased by $2.5 million, or 18.9%, to $15.7 million in 1994
from $13.2 million in 1994. The increase in gross profit was primarily
attributable to the increased sales volume. Gross profit, as a percent of
sales, decreased to 15.8% in 1994 from 16.4% in 1993. Management believes the
decrease in gross profit, as a percent of sales, was primarily the result of
competition from other suppliers attempting to increase their market shares.
Commission income decreased by $0.2 million, or 15.4%, to $1.1 million in
1994 from $1.3 million in 1993. The decrease in commission income was
primarily a result of the loss of commissions in 1994 related to one supplier.
Selling, general and administrative expenses increased by $1.3 million, or
12.3%, to $11.9 million in 1994 from $10.6 million in 1993. The increase was
primarily attributable to increased sales volume. Selling, general and
administrative expenses, as a percent of sales, decreased to 12.0% in 1994
from 13.1% in 1993. The decrease was primarily a result of the Company's
ability to increase sales without a proportionate increase in related
operating expenses.
Net income increased by $1.6 million, or 44.4%, to $5.2 million in 1994 from
$3.6 million in 1993. Excluding insurance proceeds of $0.8 million recognized
as income in 1994 related to a former officer's disability, the increase in
net income from 1993 to 1994 would have been 22.2%. The increase was primarily
attributable to the increase in net sales without a proportionate increase in
operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's growth has been financed through cash flow from
operations, borrowings under its bank credit facilities and the expansion of
trade credit. Net cash provided by operating activities was $8.4 million for
the six months ended June 30, 1996, and increased to $8.4 million in 1995 from
$3.1 million in 1994. The Company's capital expenditures were $0.9 million for
the six months ended June 30, 1996 and $2.8 million and $0.4 million in 1995
and 1994, respectively. The Company anticipates that it will spend $0.1
million on the implementation of a new management information system in 1996.
None of the capital expenditures incurred in 1995 were attributable to the new
management information system. The Company is obligated to make payments on
various capital leases in varying amounts, maturing through 2007.
Additionally, the Company is obligated to make payments under noncompete and
consulting agreements, related to the Service Supply acquisition on June 30,
1995, in varying amounts, maturing through 1999. See Notes 4 and 6 to the
Company's Consolidated Financial Statements.
In connection with the Service Supply acquisition at June 30, 1995, the
Company arranged for a term loan and a revolving credit facility with a bank
in the aggregate amount of $35.0 million; the term loan comprising $15.0
million. The purchase price of Service Supply was $17.7 million, of which
$15.0 million was paid with proceeds from such term loan and the remaining
$2.7 million was paid with a combination of cash on hand and proceeds from the
revolving credit facility. The fair value of assets acquired was $32.4 million
and liabilities assumed were $14.7 million. Of the $14.7 million of
liabilities assumed, $8.1 million was paid with funds borrowed under the
Company's revolving credit facility. At June 30, 1996, the outstanding
principal balance under the term loan was $14.5 million and the outstanding
principal balance under the revolving credit facility was $11.3 million. A
portion of the net proceeds of this offering will be used to repay a
significant amount of the outstanding bank indebtedness. Borrowings under the
term loan require monthly, bi-monthly or quarterly interest payments
(depending on whether interest accrues based on the prime rate or LIBOR) and
quarterly principal payments of $0.6 million commencing on October 1, 1996
until maturity at June 30, 2001. Interest is currently paid on the term loan
at a blend of the bank's prime rate and LIBOR based on pricing options
selected by the Company plus a margin based on operating statistics of the
Company (7.31% at June 30, 1996). Borrowings under the revolving credit
facility are due June 30, 1998 (subject to the option of the lenders to grant
one or more twelve month extensions at Kevco's request), and require monthly,
bi-monthly or quarterly interest payments currently based on a blend of the
bank's prime rate and LIBOR based on pricing options selected by the Company
plus a margin determined by operating statistics of the Company (7.49% at June
30, 1996). The
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<PAGE>
borrower under the term loan and revolving credit facility is one of the
Company's operating subsidiaries, and the obligations thereunder are
guaranteed by the Company. The term loan and revolving credit facility are
secured by substantially all of the assets of the Company and its subsidiaries
as well as the capital stock of such subsidiaries. The related credit
agreement contains certain restrictions and conditions that include cash flow
and various financial ratio requirements, and limitations on incurrence on
debt or liens, acquisitions of property and equipment, distributions to
shareholders and certain events constituting a Change of Control (as defined
in such agreement).
Effective October 26, 1993, the Company repurchased 305,500 shares of Common
Stock from one of its then 50% shareholders for a purchase price of $747,500.
On the same date, Mr. Jerry E. Kimmel, who owned the remaining 50% of the
Common Stock then outstanding, purchased the remainder of such other
shareholder's 2,044,500 shares of Common Stock with $5.0 million in cash
borrowed from the Company. The balance of this note receivable of
approximately $3.1 million was eliminated in a non-cash transaction effective
June 30, 1996. As a result of these stock purchase transactions, the Company
became wholly owned by Mr. Kimmel at the time of the transactions, resulting
in a partial change in basis. Accordingly, the previously issued financial
statements of the Company have been restated to apply push down accounting as
required by Staff Accounting Bulletin Topic 5-J. The acquisition cost in
excess of the fair value of the net assets acquired has been accounted for as
goodwill and is being amortized over an estimated useful life of 40 years. The
results of operations of the Company would not have been significantly
different had these transactions occurred as of January 1, 1993. See
"Management--Compensation Committee Interlocks and Insider Participation--
Certain Business Relationships."
Since its election to be treated as an S corporation, the Company has made
distributions to its shareholders, including amounts equal to at least their
federal and state income tax liabilities attributable to the Company's
earnings. Distributions have generally been made on a quarterly basis as
needed to satisfy such tax liabilities. The Company made aggregate cash
distributions to its shareholders of approximately $4.0 million and $4.7
million in 1994 and 1995, respectively. The Company has made or declared
aggregate cash distributions to its shareholders of approximately $5.8 million
with respect to the six months ended June 30, 1996. See "Management--
Compensation Committee Interlocks and Insider Participation--Prior S
Corporation Status and Distributions to Shareholders."
Immediately prior to the consummation of this offering, the Company will
declare and make the S Corporation Distribution, consisting of the Prior S
Corporation Earnings Note in the principal amount of approximately $3.7
million and the Future S Corporation Earnings Note. See "Prior S Corporation
Status."
The Company intends to increase the number of its manufacturing, and to a
lesser extent, distribution facilities, primarily through acquisitions.
Management believes there are currently a number of acquisition opportunities
in the manufactured housing and RV industries, and from time to time
additional opportunities will arise. Possible acquisitions will vary in size
and the Company will consider larger acquisitions that could be material to
the Company. In order to finance any such possible acquisitions, the Company
may use cash flow from operations, may attempt to borrow additional amounts
under its credit arrangements, may seek to obtain additional debt or equity
financing or may use its equity securities as consideration. The availability
and attractiveness of any outside sources of financing will depend on a number
of factors, some of which will relate to the financial condition and
performance of the Company, and some of which will be beyond the Company's
control, such as prevailing interest rates and general economic conditions.
The Company's existing credit facilities require the Company to obtain the
prior consent of the lenders for any acquisition. There can be no assurance
that the Company will be able to acquire any manufacturing or distribution
facilities, or that any such facilities acquired will be or become profitable.
Management believes the net proceeds from this offering, together with cash
flow from operations and additional borrowings under its revolving credit
facility, will be adequate to fund the operations and expansion plans of the
Company during the remainder of 1996 and 1997. However, in order to provide
any additional funds necessary for the continued pursuit of the Company's
growth strategies, the Company may incur, from time to time, additional short-
and long-term bank indebtedness and may issue, in public or private
transactions, its
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<PAGE>
equity and debt securities, the availability and terms of which will depend
upon market and other conditions. There can be no assurance that such
additional financing will be available or, if available, will be on terms
acceptable to the Company.
ASSET MANAGEMENT
The Company actively manages its assets and liabilities. All corporate and
profit center managers participate in an incentive-based compensation plan
that measures the individual's effectiveness in net asset control and return
on net assets employed. Managers are rewarded for receivables collection,
inventory control and profits in relation to these and other net assets
employed.
For the six months ended June 30, 1996, days sales in average receivables
was approximately 21 days, days sales in average inventory was approximately
33 days and days sales in average payables was approximately 21 days.
INFLATION
Generally, inflation and changing prices have had a minimal impact on
Kevco's operating results, as increases in the sales prices of products have
closely followed increases in materials costs.
QUARTERLY RESULTS
The following table represents certain unaudited financial information for
the quarters indicated.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30,
1996(1):
Net sales.................... $64,234 $71,364
Operating income............. 3,557 4,526
Income before income taxes... 3,010 4,015
Supplemental net income(2)... 1,836 2,449
Supplemental earnings per
share(2)(3)................. 0.39 0.51
YEAR ENDED DECEMBER 31,
1995(1):
Net sales.................... $27,567 $28,734 $62,714 $63,504
Operating income............. 1,198 1,056 2,826 3,283
Income before income taxes... 1,151 943 2,173 2,759
Supplemental net income(2)... 702 575 1,326 1,683
Supplemental earnings per
share(2)(3)................. 0.14 0.12 0.27 0.34
YEAR ENDED DECEMBER 31, 1994:
Net sales.................... $22,311 $24,837 $26,399 $25,732
Operating income............. 1,249 1,189 1,481 860
Income before income taxes... 1,182 1,122 2,209 785
</TABLE>
- --------
(1) The Company acquired Service Supply on June 30, 1995. The acquisition was
accounted for as a purchase and, accordingly, the operating results of
Service Supply have been included in the operating results of the Company
since June 30, 1995. See "--Acquisition of Service Supply."
(2) Prior to this offering, the Company had elected to be treated as an S
corporation under the provisions of Subchapter S of the Internal Revenue
Code. As an S corporation, the Company was not subject to federal and
certain state income taxes. The supplemental data give effect to the
income taxes that would have been recorded had the Company been taxed as a
C corporation.
(3) Reflects the assumed issuance of 502,379 and 334,488 shares of Common
Stock at the initial public offering price of $12.00 per share, less
underwriting discount, to generate sufficient funds to pay an
S corporation distribution in an amount equal to undistributed earnings
previously taxed at the shareholder level existing at December 31, 1995
and June 30, 1996, respectively. See "Prior S Corporation Status."
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<PAGE>
BUSINESS
GENERAL
Kevco is a leading wholesale distributor of building products to the
manufactured housing and recreational vehicle (RV) industries. Through its 17
distribution centers, the Company distributes more than 10,000 different
inventory items to approximately 278 manufactured home and 148 RV
manufacturing facilities throughout the United States. Kevco is one of only a
few companies capable of providing national distribution of building products
to the manufactured housing and RV industries. In addition, the Company also
manufactures wood products for the manufactured housing industry in the
southeastern and southwestern United States. From 1991 to 1995, the Company's
net sales increased from $47.8 million to $182.5 million, a compound annual
growth rate of approximately 40%. Since its founding in 1964, the Company's
growth has been fueled by internal growth and acquisitions.
The Company believes that it provides a cost-effective form of distribution
that offers value to both the Company's suppliers and producers of
manufactured homes and RVs. Kevco believes that it provides significant
benefits to its suppliers by placing large orders at regular intervals,
thereby enabling its suppliers to achieve efficient and cost-effective
production planning and economies of scale. In addition, Kevco markets and
sells its suppliers' products directly to the manufactured housing and RV
industries. As a result, the Company believes it reduces its suppliers'
inventory carrying, marketing and distribution costs. The Company also
provides significant benefits to its customers as a result of its ability to
respond on a same day shipment basis to a majority of its customers' orders,
thus reducing the amount of inventory they must maintain. Furthermore, Kevco
assists its customers in inventory management, product support, training and
implementing cost saving measures, all of which are services that the Company
believes most building products manufacturers cannot provide in a cost-
effective manner. The Company believes that the specialized product knowledge
and high level of service provided by Kevco personnel result in strong
relationships between Kevco and its suppliers and customers.
The Company primarily distributes a full line of plumbing fixtures and
supplies as well as a variety of other building products, including
insulation, roof shingles, patio doors, aluminum and wood windows, vinyl
siding, fireplaces and electrical products. The Company distributes products
of several nationally recognized manufacturers, including Eljer, Crane
Plumbing, Coastal(R) and Nibco(R) plumbing products, State Industries water
heaters, Owens-Corning Fiberglas(R) insulation and shingles, Delta(R), Moen(R)
and Phoenix(R) faucets, CertainTeed(R) vinyl siding and Capri bath products.
The Company's wood products subsidiary manufactures roof trusses and lumber
cut to customer specifications. For the six months ended June 30, 1996,
approximately 54% of the Company's net sales were derived from plumbing
products, 20% from wood products and 26% from other building products.
Jerry E. Kimmel, the Company's Chairman of the Board, President and Chief
Executive Officer, has over 35 years of experience in the industry. The other
members of Kevco's senior management have an average of more than 10 years of
experience in the industry.
INDUSTRY
For the six months ended June 30, 1996, approximately 88% of the Company's
net sales were to producers of manufactured homes. A manufactured home is a
complete single-family residence that is built in a factory and transported to
a site. Manufactured homes offer most of the amenities of, and are generally
built with the same materials as, site-built homes.
Manufactured housing has historically served as one of the most affordable
alternatives for the home buyer. According to the U.S. Department of Commerce,
in 1995 the average cost per square foot was $23.95 for a single-section
manufactured home and $28.96 for a multi-section manufactured home, as
compared to an average cost of $60.55 per square foot for a site-built home,
each excluding land costs. In 1995, reported sales of new manufactured homes
totaled approximately $12.3 billion (at retail). Approximately 340,000
manufactured homes were reported as shipped in 1995 (which would represent
approximately 33.7% of all new single family homes
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<PAGE>
sold in 1995). Reported shipments of new manufactured homes experienced
compound annual growth of approximately 18.8% for the four years ended
December 31, 1995.
The Company believes steady employment growth, reduced inventories of
repossessed homes, greater availability of retail financing for the home buyer
and enhanced quality of manufactured homes have contributed to improved
industry conditions. Although the manufactured housing industry has
experienced significant growth over the past four years, the industry is
cyclical and is affected by many of the same factors that influence the
housing industry generally, including inflation, interest rates, availability
of financing, regional economic and demographic conditions and consumer
confidence levels, as well as the affordability and availability of
alternative housing, such as apartments, condominiums and conventional, site-
built homes.
The ten highest volume producers of manufactured homes in 1995 reportedly
accounted for approximately 66.4% of total manufactured home shipments in that
year. Management believes that only a few distributors are capable of
distributing a broad line of building products to meet the needs of these
manufacturers on a national basis.
For the six months ended June 30, 1996, approximately 10% of the Company's
net sales were to producers of RVs. RVs are motorized and non-motorized
vehicles that provide comfortable, self-contained living facilities for short
periods of time, but are not generally designed for permanent living. RV
shipments to retailers reportedly totaled approximately $12.1 billion (at
retail) in 1995. Although reported RV shipments declined approximately 8.4% in
1995, the RV industry has experienced compound annual growth in reported
shipments of approximately 12.8% since 1991. Historically, demand for RVs has
been influenced by a number of factors, including the availability and terms
of financing to dealers and retail purchasers, the abundance of motor vehicle
fuels and fuel prices, as well as general economic conditions.
BUSINESS STRATEGY
Kevco's primary objective is to become the leading national distributor of
building products to the manufactured housing and RV industries. The Company
intends to continue to pursue this objective through a combination of internal
growth and selective acquisitions. To achieve its objective, the Company has
adopted a strategy based on the following key elements:
Provide Superior Customer Service. The Company believes its success is
primarily attributable to its emphasis on customer service and that providing
a high level of customer service leads to long-term relationships with
customers. The Company's operating philosophy is based on a commitment to
Total Quality Management, which emphasizes at every level an awareness of, and
accountability for, customer needs and effective communication both internally
and externally. Consistent with this commitment, the Company strives to
achieve maximum responsiveness to customer orders and to assist its customers
in controlling costs, improving their materials resource planning and
facilitating their just-in-time inventory procurement needs. The Company's
sales representatives, who have an average of approximately nine years of
experience with the Company, play an important role in training customers in
the proper installation of products and assisting in their inventory
management.
Leverage National Distribution Network. Kevco will continue to use its
national distribution network as a platform for growth and profitability. The
Company believes that its national distribution network has allowed it to
develop close relationships with leading product manufacturers and to become
the exclusive supplier of certain product lines to the manufactured housing
and RV industries. The following manufacturers have represented to the Company
that the Company is the exclusive supplier of certain products to the
manufactured housing industry on a nationwide basis, including the indicated
products: (i) State Industries water heaters (except in the state of
Wisconsin), (ii) Phoenix Products, Inc. faucets and (iii) Elkay Manufacturing
Company stainless steel sinks. In addition, the Company believes that its
national presence provides it with a significant competitive advantage due to
its ability to service effectively the building products needs of its
customers' manufacturing facilities, several of which are located in remote,
rural areas. This capability has led to several national customer accounts.
23
<PAGE>
As one of the leading national distributors of building products in the United
States to the manufactured housing and RV industries, the Company has
substantial purchasing power and is able to realize economies of scale.
Increase Customer Penetration and Product Offerings. Kevco currently
supplies approximately 92% of all manufactured housing plants in the United
States with one or more product lines. This established customer base provides
the Company with a significant opportunity to supply a greater portion of its
customers' building products needs as the customers seek to reduce the number
of their suppliers. The Company also intends to add new product lines through
internal growth and acquisitions. With its existing national distribution
infrastructure, the Company believes that additional product lines can be
offered to customers without significant additional cost.
Geographically Expand Wood Products Business. The Company intends to expand
its wood products business primarily by increasing the number of its wood
products manufacturing facilities. The Company currently manufactures wood
products, primarily roof trusses, in three locations in the southeastern and
southwestern United States. This segment of the wood products industry is
highly fragmented, and the Company believes there are significant
opportunities to grow this business internally and through acquisitions.
Pursue Vertical Integration Opportunities. The Company intends to
selectively explore the acquisition of manufacturers of building products. By
manufacturing its own products, the Company will seek to achieve greater
profitability from its sales, while obtaining direct control over product
availability and quality.
SUPPLIER/CUSTOMER RELATIONSHIPS
Kevco acts with its suppliers and customers to provide value-added services
in the distribution of manufactured home and RV building products by managing
inventories, providing product support and training, introducing cost saving
measures and providing a marketing and distribution network with warehousing
capabilities. The Company believes that the specialized product knowledge and
high level of service provided by Kevco personnel results in strong ties
between Kevco and its customers and suppliers.
Inventory Management. Kevco's customers generally attempt to minimize
inventories and to maximize the use of their facilities for the assembly of
manufactured homes and RVs. For this reason, Kevco actively manages customers'
inventories of products supplied by Kevco. Kevco sales representatives
generally visit customers' plants weekly to count inventories, review
production schedules, prepare purchase orders and schedule deliveries in order
to achieve the Company's goal of being a just-in-time supplier. In addition,
because of their detailed awareness of existing building codes for
manufactured homes and RVs, Kevco's sales representatives are able to assist
customers in planning for, and maintaining product inventories in accordance
with, building code changes.
Product Support and Training. At their weekly visits, sales representatives
also take the opportunity to resolve product problems and train customer
employees in the proper installation of products. Kevco has found that its
willingness and availability to solve product problems has resulted in its
customers first turning to Company representatives, rather than Kevco's
suppliers, when they have problems with or questions about products. This
benefits both Kevco's customers and suppliers in that Kevco provides customer
support that the supplier might otherwise have to provide in order to achieve
the same level of customer satisfaction, and Kevco's customers receive support
from individuals with expertise in serving the manufactured housing and RV
industries. Kevco has also found that its customers benefit from the training
given by sales representatives in the proper installation of products, since
Kevco's sales representatives generally have significant expertise in the
installation and service of the products they sell. Sales representatives also
take the opportunity during their weekly visits to promote other Kevco
products, thus educating customers as to additional products the customers can
purchase from Kevco and receive similar product support.
Cost Saving Measures. Kevco's sales force also works with the Company's
customers and suppliers in suggesting and implementing cost saving measures.
Kevco actively works to find ways for producers of manufactured homes or RVs
to reduce the number of stock-keeping units ("SKUs") they use in production in
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<PAGE>
order to further reduce their inventories. In its wood products operations,
Kevco also builds steel forms to its customers' specifications to ensure the
dimensional tolerances of the roof trusses it manufactures, as strict
adherence to design specifications translates into reduced manufacturing costs
for Kevco's customers.
Marketing/Distribution Network. Kevco believes that its suppliers also
benefit by utilizing Kevco's extensive marketing and distribution network. The
Company also believes that it is generally not cost effective for its
suppliers to provide the same level of service and delivery responsiveness as
Kevco to producers of manufactured homes and RVs.
TOTAL QUALITY MANAGEMENT
Kevco is committed to maintaining Total Quality Management throughout its
operations. The key elements of this operating philosophy are (i) to increase
customer satisfaction by seeking to meet or exceed all customer requirements
and ensuring that all associates are "customer focused," which the Company
believes results in Kevco becoming the supplier of choice, (ii) to create the
mindset and awareness within all of its associates that each is responsible
and accountable for the results of Kevco's operations and (iii) to work with
Kevco's suppliers and customers to create an environment where all are working
together to improve the value of the product supplied to the manufactured home
or RV consumer. The Company's executive office and profit centers hold weekly
Total Quality Management meetings attended by all employees. The meetings
focus on training and on reaffirming Kevco's mission, quality and value
statements in order to achieve the goal of being the distributor, customer and
employer of choice. An integral part of the entire quality process is creating
a culture where communication can flourish among all internal and external
parties, including associates, customers and suppliers.
PRODUCTS
Kevco distributes more than 10,000 SKUs manufactured by more than 490
companies. The following is brief description of the products the Company
distributes:
Plumbing Products. Kevco distributes a wide variety of plumbing fixtures and
supplies including tubs, toilets, faucets, ABS pipe, connectors and fittings.
Kevco supplies substantially everything necessary to carry water into and out
of a manufactured home or RV. Principal brands of plumbing products include
Eljer, Crane Plumbing, Coastal(R) and Nibco(R) plumbing products, Delta(R),
Moen(R) and Phoenix(R) faucets and Capri bath products.
Wood Products. At its three manufacturing facilities, Kevco manufactures
roof trusses and lumber cut to customer specifications for use in manufactured
homes. Roof trusses are rectangular or triangular structures that form the
principal roof support for a manufactured home. Kevco also distributes plywood
and mill direct lumber.
Other Building Products. Kevco distributes other building products,
including insulation, roof shingles, patio doors, aluminum and wood windows,
vinyl siding, fireplaces, kitchen cabinetry, aluminum siding, water heaters
(under an exclusive arrangement with State Industries) and electrical products
(including load-centers, circuit breakers and copper wire). Principal brands
of building products include Owens-Corning Fiberglas(R) insulation and
shingles, CertainTeed(R) vinyl siding, Alcoa vinyl and aluminum siding, and
Merillat kitchen cabinets.
SALES AND MARKETING
Kevco's marketing programs center on fostering strong customer relationships
and providing superior customer service. Kevco believes its competitive
advantage lies in its breadth of product offerings and the knowledge and
expertise of its sales representatives, and its just-in-time delivery
capabilities, regular calling program, dedication to Total Quality Management
and competitive pricing.
25
<PAGE>
As of June 30, 1996, Kevco marketed its products through 66 direct sales
representatives consisting of 56 Kevco sales representatives and 10 Sunbelt
sales representatives. Because of the specific nature of the wood products
business, these sales forces generally work independently. Each sales
representative works within an assigned sales territory associated with one of
the Company's 17 distribution centers or three manufacturing facilities and is
actively supported by a manager at such distribution center or facility. To
certain producers of manufactured homes and RVs, Kevco is the sole provider of
certain core product lines on a national basis. National accounts are
supported by a profit center manager and by the Company's management. Each
potential customer within a distribution center's geographic reach is
regularly contacted by a sales representative, usually at the purchasing
manager level.
Sales representatives, consisting of salespersons and sales managers, are
all Kevco employees and are generally compensated on a salary and incentive
based compensation arrangement. The incentive portion of the salespersons's
compensation is based on a percentage of the profits of the sales region
"profit center" in which that salesperson operates. The incentive portion of
the sales manager's compensation is determined by a variety of factors, which
include the profit center's sales and return on assets and investments as well
as a discretionary element.
Kevco maintains active customer relationships with approximately 278
manufactured home production plants and approximately 148 RV production plants
in the 33 states that have manufactured home or RV production plants. The
Company's largest customer, Fleetwood Enterprises, Inc., accounted for
approximately 12% of Kevco's net sales in 1995. Two of the Company's large
customers, Champion and Redman, accounted for approximately 8% and 7%,
respectively, of Kevco's net sales in 1995. In August 1996, Champion and
Redman announced that they had entered into a definitive merger agreement
under which Champion would acquire Redman. On October 24, 1996, the merger was
consummated. Although the Company has ongoing supply relationships with these
three customers, it does not have a formal supply contract with these
customers or most of its other customers. The Company's business could be
adversely affected if these customers, or other major customers, substantially
reduced or discontinued purchases from the Company. Further, the Company can
give no assurance that its sales to the combined entity resulting from such
merger will continue at historical levels. The Company believes that it has
good relationships with each of its manufactured home and RV customers.
DISTRIBUTION
Kevco distributes products through 17 distribution centers. Currently, 16 of
the Company's distribution centers distribute primarily plumbing products and,
to varying extents, other building products. One distribution center, the
Company's IDC Limited division in Elkhart, Indiana, distributes only non-
plumbing building products. Kevco intends to use the supplier relationships
and product knowledge developed by its IDC Limited division to broaden the
product lines carried by its other distribution centers. The Company's
facilities are strategically located near its customers' manufacturing plants
in order to provide prompt delivery and responsive customer service. In most
cases, the Company's desired service area is within a 250-mile radius of each
distribution center. The Company generally uses a decentralized management
structure that emphasizes individual distribution center profit-and-loss
responsibility. A distribution center is typically comprised of warehouse and
receiving space, secure outdoor holding space and office space. Local sales
efforts are coordinated and supported at the distribution centers. The
remaining distribution center activities relate to receiving, storing and
delivering products.
All distribution centers are equipped with real-time management information
systems that allow the distribution centers to control and monitor inventory
levels, perform invoicing and order entry, and establish delivery schedules
and routes. Corporate management also uses the Company's information system to
monitor sales, inventory and profitability by distribution center. By
utilizing its computerized inventory management system, the Company is able to
accurately predict inventory turns and minimize inventory levels. Each
morning, management is supplied with detailed accounts receivable aging and
inventory status reports from each distribution center. The Company is
currently implementing an improved management information system with
26
<PAGE>
a particular focus on inventory management, which will allow managers to
create customized, Windows-based reports and to obtain faster access to
detailed inventory data. The Company anticipates that the upgrade will be
completed within the next two years.
Inventories are kept on the perpetual method, with daily physical counts of
at least five items in each warehouse. A complete physical inventory count is
performed twice a year. For book and tax purposes, the Company records
purchased inventories under the LIFO method.
In most cases, the Company warehouses products before distributing them to
customers. Kevco delivers the products it sells either by Company truck or
common carrier. Delivery is a key component of Kevco's dedication to customer
service and is a competitive requirement. In some instances, suppliers will
"drop ship" products directly to Kevco's customers, with Kevco retaining
responsibility for selling, billing and collection. Also, under certain
arrangements, the Company receives fees for warehousing, delivering, selling
or other services without taking title to the products. Kevco records such
fees as commission income.
PURCHASING AND SUPPLIERS
Kevco obtains its products from more than 490 different manufacturers. As a
distributor, Kevco plays a valued role in linking product manufacturers with
customers and provides the level of customer service and just-in-time delivery
its customers require. Kevco's position in the marketplace and financial
condition have enabled it to take advantage of volume discounts, product
promotions and other buying opportunities from suppliers, which allow the
Company to market a wide variety of products to its customers at attractive
prices.
The Company generally sells products from manufacturers on a non-exclusive
basis without geographical restrictions. In certain limited instances, a
supplier will grant Kevco the exclusive right to market its products in the
manufactured housing or RV industries. Management believes that its national
distribution capability will allow the Company to increase the number of
products it distributes on a national and/or exclusive basis.
The Company generally negotiates the price and other purchase terms with its
vendors on a company-wide or regional basis. Payment, discount and volume
purchase programs are negotiated directly by the Company with its major
suppliers, with a significant portion of the Company's purchases made from
suppliers offering these programs. Distribution center managers are
responsible for inventory selection and ordering on terms negotiated
centrally, so that the Company remains responsive to local market demand.
Distribution center managers are also responsible for inventory management.
Kevco continuously seeks to expand the variety of products it sells. While
the loss of a major supplier could have a material adverse effect on the
Company's business, the Company believes alternative suppliers for similar
products in each of its product lines are available. The Company believes its
relations with all of its suppliers are good.
The Company has established a Supplier Certification Program, in which the
Company identifies the performance level of a supplier to Kevco and benchmarks
such performance on a regular basis. Such benchmarking criteria include
minimum order fill rates and other factors.
MANUFACTURING
Kevco also, through its Sunbelt subsidiary, manufactures wood products for
distribution principally to producers of manufactured homes. Kevco's wood
products include roof trusses and lumber cut to customer specifications for
structural support within the manufactured home unit. Each of the Company's
roof trusses are built to meet the customer's specific requirements.
Kevco utilizes automated saws to reduce the cutting time needed to process
raw wood, and fabricates steel forms based on customer specifications in order
to ensure the dimensional tolerances of its roof trusses. The quality and
structural strength of roof trusses are monitored closely by manufactured home
producers. Wind zone
27
<PAGE>
construction standards require that roof trusses sold for use in certain
regions meet increased strength benchmarks. Roof trusses that meet exacting
specifications can reduce customer installation costs. The Company believes
that its ability to produce roof trusses of consistent quality that adhere to
customer specifications provides a competitive advantage.
The Company's wood products customers include producers of manufactured
homes as well as contract, "cut-to-order" customers outside of the
manufactured housing industry. Substantially all of Kevco's wood product sales
are to manufactured home producers. Kevco's wood products are sold through 10
sales representatives who are technically trained in lumber and roof truss
applications. Kevco has roof truss manufacturing facilities in Spruce Pine,
Alabama, Ashburn, Georgia, and Waco, Texas.
WARRANTY AND RETURNS
Kevco's customers generally rely on the warranties issued by the
manufacturer of the products sold by the Company. Kevco generally provides a
one year limited warranty on the products it sells, which warranty covers the
product and service calls. The Company's warranty on the product itself is
generally not utilized because the product manufacturer provides a more
comprehensive warranty. The Company's warranty expense in 1995 was negligible.
Kevco also has an informal, unwritten return policy under which, for one year
following sale, Kevco will generally accept the nonwarranty return of unused
products, after inspection by Kevco personnel, for a 20% restocking charge.
In the event a manufactured home experiences a failure of a roof truss
manufactured by the Company, the Company will inspect the home to determine
whether there is a covered defect in the roof truss. If a covered defect is
discovered, the Company generally pays to replace the roof truss and the roof.
The Company has only had one such claim in the past three years.
FACILITIES
The following table sets forth certain information with respect to the
Company's 17 distribution facilities and three roof truss manufacturing
facilities, all but four of which are leased. The Company also leases its
executive offices of approximately 9,200 square feet in Fort Worth, Texas.
Substantially all of the Company's assets, including its owned facilities and
its leasehold interests, are encumbered by liens granted under security
agreements in favor of the Company's lenders under the Company's term loan and
revolving credit facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET FUNCTION
-------- ----------- -------------
<S> <C> <C>
Alabama
Haleyville.......................... 86,000 Distribution
Spruce Pine*(1)..................... 54,000 Manufacturing
Arizona
Phoenix............................. 70,000 Distribution
California
San Bernardino...................... 42,000 Distribution
Woodland............................ 18,000 Distribution
Colorado
Fort Morgan......................... 13,000 Distribution
Florida
Ocala*.............................. 50,000 Distribution
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET FUNCTION
-------- ----------- -------------
<S> <C> <C>
Georgia
Ashburn*(1)......................... 100,000 Manufacturing
Cordele*............................ 60,000 Distribution
Idaho
Caldwell............................ 15,000 Distribution
Indiana
Elkhart............................. 61,000 Distribution
Elkhart............................. 90,000 Distribution
Kansas
Newton.............................. 38,000 Distribution
Minnesota
Round Lake.......................... 11,000 Distribution
North Carolina
Albemarle........................... 63,000 Distribution
Oregon
Tigard.............................. 23,000 Distribution
Pennsylvania
Leola............................... 26,000 Distribution
Tennessee
Cooksville.......................... 30,000 Distribution
Texas
Waco................................ 90,000 Distribution
Waco(1)............................. 135,000 Manufacturing
</TABLE>
- --------
* Company owned facility.
(1) Sunbelt facility.
In 1995, the Company purchased an aircraft for approximately $2 million in
cash to facilitate management visits to the Company's various manufacturing
and distribution locations and its customers. The Company carries aircraft
insurance (in the indicated amounts) for bodily injury and property damage
($100 million each occurrence), medical expenses ($10,000 per person), and
hull damage ($2 million). The Company has a strict policy limiting the use of
the aircraft for business purposes only, with limited exceptions as permitted
by the regulations promulgated under the Internal Revenue Code.
HISTORY
The Company's operations have historically been conducted through a Texas
corporation that was incorporated in 1975 (the "Operating Company") as the
successor to a business founded in 1964. The Operating Company, which is
currently named Kevco Texas, Inc., will be renamed Kevco Delaware, Inc. and
reincorporated by merger in Delaware prior to the consummation of this
offering. Also, prior to the consummation of this offering (i) the
shareholders of the Operating Company will exchange each of their outstanding
shares of the common stock of the Operating Company for one share of the
Common Stock of a new Texas corporation (the "Holding Company"), which was
incorporated in August 1996 (the registrant in this offering) and which will
be the parent holding company of the Operating Company and the Operating
Company's wholly-owned Delaware subsidiary, Sunbelt Wood Components, Inc.,
(ii) the Holding Company will adopt and assume the Operating Company's stock
option plans and assume the obligations under the outstanding options
thereunder and (iii) the Holding Company will guarantee the Operating
Company's obligations under the Operating Company's term loan and revolving
credit facility. In June 1995, the Operating Company acquired
29
<PAGE>
Service Supply and its subsidiaries in a merger transaction. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of Service Supply." Sunbelt will engage primarily in the wood
products manufacturing business previously conducted by Service Supply. Unless
the context otherwise requires, "Kevco" and the "Company" refer to the Holding
Company, its subsidiaries, Kevco Delaware, Inc. (as successor to the Operating
Company) and Sunbelt, and such references and this Prospectus as a whole
assume the consummation of the restructuring transactions described above.
COMPETITION
The building products wholesale distribution industry is highly competitive.
Numerous companies, both public and private, are in direct competition with
the Company and many of those competitors have longer operating histories and
greater financial and other resources than the Company. The Company believes
its prices, wide array of products and ability to deliver on short notice are
competitive.
The Company believes that its business strategy has permitted it to compete
effectively in its marketing areas. While price is an important competitive
factor in the Company's business, the Company believes that its sales are
principally dependent upon its service, technical expertise, reputation and
experience. The Company's principal competitive strengths include (i) quality
assurance, service and installation support, (ii) a wide array of products and
product availability due to the Company's ability to attract major product
manufacturers and (iii) the prompt and reliable delivery of products to
customers.
Certain product manufacturers sell and distribute their products directly to
producers of manufactured homes and RVs. However, the Company believes that,
for most product manufacturers, providing the same level of service and
offering the same delivery responsiveness as Kevco is not cost-effective.
EMPLOYEES
As of June 30, 1996, the Company employed 605 persons. The Company is a
party to one collective bargaining agreement, which covered, as of June 30,
1996, 12 employees at one of the Company's facilities in Elkhart, Indiana. The
Company has not experienced any work stoppages as a result of labor disputes
and the Company considers its employee relations to be good.
LITIGATION
The Company is, and may be in the future, party to litigation arising in the
course of its business. While the Company has no reason to believe that any
pending claims are material, there can be no assurance that the Company's
insurance coverage will be adequate to cover all liabilities arising out of
such claims or that any such claims will be covered by the Company's
insurance. Any material claim that is not covered by insurance may have an
adverse effect on the Company's business. Claims against the Company,
regardless of their merit or outcome, may also have an adverse effect on the
Company's reputation and business.
REGULATION
The Company's suppliers and customers are subject to a variety of federal,
state and local laws and regulations. The National Manufactured Housing
Construction and Safety Standards Act of 1974 and regulations promulgated
thereunder by HUD impose comprehensive national construction standards for
manufactured homes and preempt conflicting state and local regulations. HUD
has adopted regulations that divide the United States into three "Wind Zones"
and impose more stringent construction standards for homes to be sold in areas
designated as Wind Zones II or III. These regulations have resulted in higher
manufacturing and dealer costs. The Company cannot predict if additional
regulations will be adopted or the effect any such regulations would have on
the Company. To the extent regulations make manufactured housing less
competitive with other housing alternatives, the Company's operations could be
negatively impacted.
30
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the Company's
directors, certain officers, certain key employees and nominees. Each person
nominated (as indicated below) as a director or officer has agreed to become a
director or officer of the Company upon the consummation of this offering.
Inclusion in this list as an officer or officer nominee is not intended to act
as an admission that such individual is or will become subject to Section 16
under the Exchange Act.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Jerry E. Kimmel........ 59 Chairman of the Board, President, Chief Executive
Officer, Treasurer and Secretary
Clyde A. Reed, Jr. .... 61 Executive Vice President, Chief Operating Officer
and Director*
Ellis L. McKinley, Jr.. 44 Vice President, Chief Financial Officer, Treasurer*
and Director*
Richard S. Tucker...... 52 Secretary* and Director
Martin C. Bowen........ 53 Director*
Richard Nevins......... 49 Director*
C. Lee Denham.......... 48 Vice President, Sunbelt
Don R. Felten.......... 41 Vice President, Western Region
Dan R. Hardin.......... 38 Vice President of Sales, Service Supply division
C. Monroe Hunt......... 52 President, Service Supply division
Gregory G. Kimmel...... 28 Vice President
Tom G. Parish.......... 48 President, IDC Limited division
Mark J. Walker......... 40 Vice President, Purchasing
</TABLE>
- --------
* Nominee
Jerry E. Kimmel is a founder of the Company and has spent his entire career
in this industry. Mr. Kimmel has served as President of Kevco since 1978 and
has served as Chairman of the Board and Chief Executive Officer of the Company
since 1993. In 1992, Mr. Kimmel was inducted into the MH/RV Hall of Fame.
Mr. Kimmel served as the Chairman of the Board of Governors of the
Manufactured Housing Institute ("MHI"), a leading manufactured housing trade
group, in 1983 and 1984, and has served in various other MHI board capacities.
Clyde A. Reed joined the Company in 1965 and has served as Executive Vice
President since 1986 and Chief Operating Officer since 1991. From 1978 to
1986, Mr. Reed served as Vice President of the Company. Mr. Reed will become a
director of the Company upon consummation of this offering.
Ellis L. McKinley, Jr. joined the Company in 1995 as Vice President and
Chief Financial Officer. Mr. McKinley will become a director and the Treasurer
of the Company upon consummation of this offering. From 1994 to 1995, Mr.
McKinley was Vice President of Finance, Chief Financial Officer, Secretary and
Treasurer of Renters Choice, Inc. From 1976 until 1994, Mr. McKinley was
employed with Grant Thornton, a public accounting firm in Dallas, Texas, where
he served as an audit partner from 1987 through 1994. Mr. McKinley received
his B.B.A. in Accounting from the University of Texas in 1976.
Richard S. Tucker has been a director of the Company since 1976 and an
assistant secretary of the Company since 1988. Mr. Tucker will become the
Secretary of the Company upon consummation of this offering. Since 1995, Mr.
Tucker has been a partner in the law firm of Jackson & Walker, L.L.P., the
Company's outside legal counsel. From 1984 to 1995, Mr. Tucker was a member of
the law firm of Simon, Anisman, Doby, & Wilson, a
31
<PAGE>
Professional Corporation, located in Fort Worth, Texas. Mr. Tucker received
his B.B.A. in Accounting from the University of Texas in 1966 and his J.D.
from Southern Methodist University School of Law in 1969.
Martin C. Bowen will become a director of the Company upon consummation of
this offering. Mr. Bowen has served as President and Chief Executive Officer
of Performing Arts Fort Worth, Inc. since 1993, Vice President of Fine Line,
Inc. since January 1996 and as a director of Aztec Manufacturing Company since
November 1993. From 1989 to 1992 he was Chairman of the Fort Worth Region for
Team Bank. From 1987 to 1989, Mr. Bowen served as Chairman & CEO of Texas
American Bank/Houston. From 1985 to 1987 he served as Executive Vice President
of Texas American Bank/Fort Worth. Mr. Bowen received his B.B.A. in Finance
from Texas A&M University in 1964 and his Bachelor of Foreign Trade degree
from the American Institute of Foreign Trade, Phoenix, Arizona, in 1968.
Additionally, he received his J.D. from Baylor University School of Law in
1973.
Richard Nevins will become a director of the Company upon consummation of
this offering. Since 1992, Mr. Nevins has served as President of Richard
Nevins & Associates, a financial advisory firm. Mr. Nevins has served as a
director of Fruehauf Trailer Corporation ("Fruehauf") since 1995 and as
Chairman of Fruehauf's executive committee, since August 1996. On October 7,
1996, Fruehauf filed for relief under Chapter 11 of the Bankruptcy Code of the
United States. Together with the other two independent members of the Fruehauf
board, Mr. Nevins resigned his positions with Fruehauf effective October 9,
1996. During 1996, Mr. Nevins has served as acting Chief Operating Officer and
Chief Restructuring Officer for Sun World International, a California
agricultural firm, following the filing of a petition in bankruptcy by Sun
World International. From 1995 to 1996, Mr. Nevins served as a director of
Ampex Corporation and from 1993 to 1995 he served as a director of The Actava
Group (now Metromedia International Group). From 1990 to 1992 he was a
Managing Director of Smith Barney Harris Upham & Co. Mr. Nevins received his
B.A. in Economics from the University of California, Riverside in 1972 and his
M.B.A. from Stanford Graduate School of Business in 1975.
C. Lee Denham will serve as President of Kevco's Sunbelt subsidiary upon
consummation of this offering. Mr. Denham has served as Vice President of the
Sunbelt Wood Components division of Kevco since 1995. Mr. Denham was division
manager of Sunbelt Wood Components from 1991 to 1995. From 1981 to 1991,
Mr. Denham was President of Sunbelt Wood Components. From 1970 until founding
Sunbelt Wood Components in 1981, Mr. Denham was employed by Universal Forest
Products, Inc. Mr. Denham received his B.B.A. in Marketing from the University
of Georgia in 1970.
Don R. Felten has served as Vice President for Kevco's Western Region since
January 1996. From December 1994 to January 1996, Mr. Felten served as general
manager of the Western Region. From 1983 to December 1994, Mr. Felten served
as a profit center manager for the Company. Mr. Felten has worked in this
industry for 22 years.
Dan R. Hardin will serve as Vice President, Eastern Region upon consummation
of this offering. Mr. Hardin has served as the Vice President of Sales for the
Service Supply division of Kevco since July 1995. From 1991 to 1995, Mr.
Hardin served as National Sales Manager for Service Supply. Mr. Hardin
received his B.B.A. in Personnel Management from the University of Georgia in
1981.
C. Monroe Hunt has served as President of Kevco's Service Supply division
since 1995. From 1986 to 1995, Mr. Hunt served as President and Chief
Executive Officer of Service Supply.
Gregory G. Kimmel joined the Company in 1994 and has served as Vice
President since January 1996. Mr. Kimmel received his B.S. in Education from
McMurry University in 1994. Gregory G. Kimmel is the son of Jerry E. Kimmel,
the Chairman, President and Chief Executive Officer of the Company.
Tom G. Parrish has served as President of the IDC Limited division of Kevco
since August 1996. From 1995 to 1996, Mr. Parrish was President of Champion
Homebuilders, a wholly-owned subsidiary of Champion
32
<PAGE>
Enterprises, Inc. From 1986 to 1995, Mr. Parrish was President of Philips
Products, a division of Philips Industries. Mr. Parrish received his B.S. in
Management from the University of Detroit in 1971.
Mark J. Walker joined the Company in 1995 as Vice President, Purchasing.
From 1993 until joining the Company, Mr. Walker was employed by Builders
Square, a division of KMart Corporation, in the corporate office serving as a
divisional Purchasing Manager. From 1980 to 1993, Mr. Walker was a senior
buyer for the Hechinger Company. Mr. Walker received his B.S. in Psychology
from James Madison University in 1977.
BOARD OF DIRECTORS
Upon consummation of this offering, the Board of Directors of the Company
will be divided into three classes with two directors in each class. The term
of one class will expire at each annual meeting of shareholders of the
Company, commencing in 1997. At each annual meeting of shareholders, directors
of the class the term of which then expires will be elected for three year
terms by the holders of the Common Stock to succeed those directors whose
terms are expiring. The Company's Bylaws require that notice of shareholder
director nominees be given to the Company not less than 120 days prior to the
anniversary date of the immediately preceding annual meeting of shareholders
of the Company (or not later than 10 days following the mailing of notices of
a special meeting at which directors are to be elected), or, with respect to
the first annual meeting of shareholders following this offering, on or before
January 1, 1997.
The Company expects that the Board of Directors will establish an Audit
Committee and a Compensation Committee prior to the consummation of this
offering. The members of each committee are expected to be determined at the
first meeting of the Board of Directors following the consummation of this
offering.
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company will receive a fee of $1,000 for attendance at each Board of
Directors meeting and $500 for attendance at each Board committee meeting
(unless held on the same day as a Board of Directors meeting). All directors
of the Company are reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board of Directors or committees thereof, and for other out-
of-pocket expenses incurred in their capacity as directors of the Company.
33
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table presents information regarding the compensation for the
year ended December 31, 1995 awarded to or earned by the chief executive
officer of the Company and all other executive officers of the Company whose
salary and bonus exceeded $100,000 for services rendered in all capacities to
Kevco (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL AWARDS
COMPENSATION ------------
----------------- SECURITIES
NAME AND PRINCIPAL SALARY BONUS UNDERLYING ALL OTHER
POSITION YEAR ($) ($) OPTIONS COMPENSATION ($)
------------------ ---- -------- -------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Jerry E. Kimmel........... 1995 $398,470 $191,530 -- $19,463(1)
Chairman of the Board,
President and Chief
Executive Officer
Clyde A. Reed, Jr. ....... 1995 $179,737 $154,007 7,097 $26,440(2)
Executive Vice President
and Chief Operating
Officer
C. Lee Denham............. 1995 $ 39,000 $110,000 -- $ 4,292(3)
Vice President, Sunbelt
Roger J. Kollat........... 1995 $140,358 $ 81,500 3,548(4) $ 3,535(5)
</TABLE>
- --------
(1) Consists of $12,546, representing personal use of a Company supplied car,
$3,866, representing payments by the Company for medical insurance
premiums and $3,051, representing the Company's contribution to such
individual's 401(k) Plan account.
(2) Consists of $2,491, representing personal use of a Company supplied car,
$20,898, representing expense recognized by the Company in 1995 relating
to future payments to be made under a deferred compensation agreement and
$3,051, representing the Company's contribution to such individual's
401(k) Plan account.
(3) Consists of $1,241, representing personal use of a Company supplied car
and $3,051, representing the Company's contribution to such individual's
401(k) Plan account.
(4) All such options were cancelled upon Mr. Kollat's termination of his
employment with the Company on July 17, 1996.
(5) Consists of $484, representing personal use of a Company supplied car and
$3,051, representing the Company's contribution to such individual's
401(k) Plan account.
34
<PAGE>
OPTION GRANTS DURING 1995
The following table presents information regarding grants of stock options
to purchase shares of Common Stock during the year ended December 31, 1995 for
each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
------------------------------------------------ RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN BASE EXPIRATION -------------------
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ---- ----------- ------------ ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jerry E. Kimmel......... -- -- -- -- -- --
Clyde A. Reed, Jr. ..... 7,097(2) 14.8% $5.64(3) 6/19/04 $ 22,068 $ 54,355
C. Lee Denham........... -- -- -- -- -- --
Roger J. Kollat......... 3,548(4) 7.4% $5.64(3) 6/19/04(4) $ 11,032 $ 27,174
</TABLE>
- --------
(1) The dollar amounts in these columns represent potential value that might
be realized upon exercise of the options immediately prior to the
expiration of their term, assuming that the market price of the Common
Stock appreciates in value from the date of grant at the 5% and 10% annual
rates prescribed by regulation, and therefore are not intended to forecast
possible future appreciation, if any, of the price of the Common Stock.
(2) Options become exercisable upon consummation of this offering.
(3) The option exercise price may, in some cases, be paid in shares of Common
Stock owned by the executive officer or received upon exercise of such
option. The exercise price of each option was equal to the fair market
value of the Common Stock on the date of grant, as determined by the Board
of Directors.
(4) All such options were cancelled upon Mr. Kollat's termination of his
employment with the Company on July 17, 1996.
AGGREGATE 1995 YEAR END OPTION VALUES
The following table presents information regarding the value of stock
options outstanding at December 31, 1995 held by each of the Named Executive
Officers. No stock options were exercised by the Named Executive Officers in
1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (#) AT FY-END ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jerry E. Kimmel............. -- -- -- --
Clyde A. Reed, Jr. ......... -- 7,097(2) -- $39,246
C. Lee Denham............... -- -- -- --
Roger J. Kollat............. -- 3,548(3) -- 19,620(3)
</TABLE>
- --------
(1) On December 31, 1995, the fair market value of the Company's Common Stock,
as determined by the Board of Directors, was approximately $11.17 per
share. The value shown is calculated on the basis of the difference
between the option exercise price and $11.17, multiplied by the number of
shares of Common Stock underlying the option.
(2) Options become exercisable upon consummation of this offering.
(3) All such options were cancelled upon Mr. Kollat's termination of his
employment with the Company on July 17, 1996.
35
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Kimmel has entered into a five year employment agreement with Kevco
providing for an annual base salary of $250,000. In addition to base salary,
beginning in 1997, Mr. Kimmel, through his employment agreement, is eligible
for an annual bonus equal to 2.4% of the Company's income before income taxes
for the year provided that income before income taxes is at least $5.0
million. Such salary and bonus are subject to increase, but not decrease, by
the Company. Increases in Mr. Kimmel's compensation will be reviewed annually
by the Company's Compensation Committee in a manner so as to qualify under the
performance based compensation provisions of the Internal Revenue Code. Under
the agreement, Mr. Kimmel has agreed to perform services on behalf of the
Company and its subsidiaries in Fort Worth, Texas as he reasonably determines
are necessary to carry out his duties under the agreement. Mr. Kimmel, his
spouse and dependents are, until the death of the survivor of Mr. Kimmel and
his spouse, entitled to participate at Kevco's expense in health programs
offered to Company employees generally or, if insurance coverage is not
available, to have their health care costs reimbursed by the Company. Upon the
death of Mr. Kimmel, the Company must continue to pay his base salary for the
remainder of the then existing agreement term. The agreement can be terminated
by the Company only for cause (as defined in such agreement). The employment
agreement, which will be guaranteed by the subsidiaries of the Company, is
automatically extended for an additional year at the end of each year's
service.
Effective June 30, 1995, Mr. Denham entered into a two-year employment
agreement with Kevco providing for an annual base salary of $78,000. In
addition to base salary, Mr. Denham is eligible to participate in a bonus
pool, which pool during the term of the agreement will not exceed, in the
aggregate, $1.0 million. Mr. Denham's portion of such pool is determined by
the Company's Board of Directors. Mr. Denham's agreement is automatically
extended each year for an additional year if not terminated sixty days prior
to its then current term.
Effective May 24, 1977, Mr. Reed entered into a retirement agreement with
the Company that generally provides that the Company will pay Mr. Reed or his
beneficiaries $55,000 per year for 10 years if Mr. Reed is employed with the
Company at age 65 or upon death or disability. Such agreement also provides
for a smaller lump sum payment that the Company will make upon Mr. Reed's
termination of employment prior to age 65, death or disability. Such lesser
amount equals approximately $14,000 for each year following the effective date
of the agreement, up to such termination.
STOCK OPTION PLANS
In 1995, the Board of Directors adopted, and the stockholders of the Company
approved, the 1995 Stock Option Plan (the "1995 Plan"), which was amended and
restated on August 30, 1996. The purpose of the 1995 Plan is to provide
employees and directors of the Company and its subsidiaries with additional
incentives by increasing their proprietary interest in the Company. The
aggregate number of shares of Common Stock with respect to which options may
be granted under the 1995 Plan may not exceed 258,500 shares; however,
cancelled options become available for later regrant.
The 1995 Plan provides for the grant of incentive stock options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended and
nonqualified stock options (collectively, "Awards"). Following the
consummation of this offering, the 1995 Plan will be administered by the
Compensation Committee of the Board of Directors, which will be comprised of
not less than two members of the Board of Directors (the "Committee"). Prior
to the consummation of this offering, the 1995 Plan had been administered by
the Company's full Board of Directors. The Committee has, subject to the terms
of the 1995 Plan, the sole authority to grant Awards under the 1995 Plan, to
construe and interpret the 1995 Plan and to make all other determinations and
take any and all actions necessary or advisable for the administration of the
1995 Plan.
All of the Company's full-time, salaried employees and members of the Board
of Directors are eligible to receive Awards under the 1995 Plan. Options will
be exercisable during the period specified in each option agreement and will
generally be exercisable in installments pursuant to a vesting schedule to be
designated by the Committee. Options granted under the 1995 Plan may be
exercised by the payment of cash (including cash
36
<PAGE>
loaned to the optionee by the Company for the purpose of such exercise) and
shares of Common Stock (including shares to be issued upon the exercise of
such options). The provisions of option agreements may provide for the
acceleration of the exercisability in the event of certain events including
certain reorganizations and changes in control of the Company. No option will
remain exercisable later than ten years after the date of grant. The exercise
prices for ISOs granted under the 1995 Plan may be no less than the fair
market value of the Common Stock on the date of grant. The exercise prices of
nonqualified stock options are set by the Committee.
In December 1995, the Board of Directors adopted the 1996 Stock Option Plan
(the "1996 Plan"). The 1996 Plan has generally the same terms (including
eligibility and administration terms) as the 1995 Plan, except that only
nonqualified stock options may be granted under the 1996 Plan and no option
granted under the 1996 Plan will remain exercisable later than seven years
after the date of grant. The options currently outstanding under the 1995 Plan
and the 1996 Plan become immediately exercisable upon consummation of this
offering. On August 30, 1996, the Board of Directors of the Company terminated
the 1996 Plan as it relates to future option grants.
There are no federal income tax consequences upon the grant of an option
under the 1995 Plan or the 1996 Plan. Upon exercise of a nonqualified option,
the optionee generally will recognize ordinary income in the amount equal to
the difference between the fair market value of the option shares at the time
of exercise and the exercise price, and the Company is generally entitled to a
corresponding tax deduction. When an optionee sells shares issued upon the
exercise of a nonqualified stock option, the optionee realizes short-term or
long-term capital gain or loss, depending on the length of the holding period,
but the Company is not entitled to any tax deduction in connection with such
sale.
An optionee will not be subject to federal income taxation upon the exercise
of ISOs granted under the 1995 Plan, and the Company will not be entitled to a
federal income tax deduction by reason of such exercise. A sale of shares of
Common Stock acquired upon exercise of an ISO that does not occur within one
year after the exercise or within two years after the grant of the option
generally will result in the recognition of long-term capital gain or loss by
the optionee in the amount of the difference between the amount realized on
the sale and the exercise price, and the Company is not entitled to any tax
deduction in connection therewith. If a sale of shares of Common Stock
acquired upon exercise of an ISO occurs within one year from the date of
exercise of the option or within two years from the date of the option grant
(a "disqualifying disposition"), the optionee generally will recognize
ordinary income equal to the lesser of (i) the excess of the fair market value
of the shares on the date of exercise of the options over the exercise price
or (ii) the excess of the amount realized on the sale of the shares over the
exercise price. Any amount realized on a disqualifying disposition in excess
of the amount treated as ordinary income will be long-term or short-term
capital gain, depending upon the length of time the shares were held. The
Company generally will be entitled to a tax deduction on a disqualifying
disposition corresponding to the ordinary income recognized by the optionee.
The Company anticipates that upon the consummation of this offering it will
have (i) outstanding options to purchase a total of approximately 44,306
shares of Common Stock under the 1995 Plan and 374,120 shares of Common Stock
under the 1996 Plan, all of which will be immediately exercisable, (ii)
options to purchase 214,194 additional shares available for grant under the
1995 Plan and (iii) no additional options issuable under the 1996 Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, the Company has not had a Compensation Committee and
executive compensation has been set by the Company's Board of Directors. Jerry
E. Kimmel is Chairman of the Board of Directors.
PRIOR S CORPORATION STATUS AND DISTRIBUTIONS TO SHAREHOLDERS
In 1986, the Company elected to be treated as an S corporation under
Subchapter S of the Internal Revenue Code and comparable provisions of various
state income tax laws for the years beginning after December 31, 1986. As a
result, earnings prior to the termination of the Company's S corporation
status are taxed for federal
37
<PAGE>
and certain state income tax purposes directly to the shareholders of the
Company. Since its election to be treated as an S corporation, the Company has
made cash distributions to its shareholders in amounts at least equal to their
federal and state income tax liabilities attributable to the Company's
earnings. Such distributions have generally been made on a quarterly basis as
needed to satisfy such tax liabilities. The Company made aggregate cash
distributions to its shareholders of approximately $2.0 million, $4.0 million
and $4.7 million in 1993, 1994 and 1995, respectively, the amounts of which
that were distributed to Jerry E. Kimmel, the Chairman of the Board, President
and Chief Executive Officer of the Company, were approximately $1.4 million,
$3.6 million and $4.2 million, respectively. The Company has made or declared
aggregate cash distributions to its shareholders of approximately $5.8 million
with respect to the six months ended June 30, 1996, of which approximately
$4.7 million was, and approximately $257,000 will be, distributed to Mr.
Kimmel. On June 30, 1996, the Company also distributed to its shareholders a
note payable to the Company. See "--Certain Business Relationships."
Immediately prior to the consummation of this offering, the Company will
declare and make the S Corporation Distribution, consisting of the Prior S
Corporation Earnings Note in the principal amount of approximately $3.7
million and the Future S Corporation Earnings Note. Mr. Kimmel will receive
approximately 85.5% of such distribution.
The Company will enter into an agreement with each of its shareholders of
record immediately prior to the consummation of this offering (including Mr.
Kimmel) pursuant to which the Company agrees to distribute to such
shareholders an amount equal to earnings of the Company as provided in the
agreement and as finally determined for tax purposes for the period January 1,
1995 through the date immediately preceding the consummation of this offering,
to the extent such earnings exceed the earnings for such period as theretofore
reported by the Company. In addition, the Company will agree to indemnify such
shareholders for any penalties and interest attributable to any additional
income taxes they incur as a result of being taxed on such additional
earnings, as well as for related costs and expenses incurred.
The Company is a plaintiff in a pending lawsuit involving a disability
insurance policy on a former shareholder of the Company. The Company has
heretofore distributed to its shareholders of record immediately prior to the
consummation of the offering (including Mr. Kimmel) all claims and any future
awards in this lawsuit other than the contractual claims and awards relating
to this policy.
Gregory G. Kimmel, a Vice President of the Company and the son of Mr. Jerry
E. Kimmel, and Mr. James Kimmel, an employee of the Company and the brother of
Mr. Jerry E. Kimmel, in the aggregate held, prior to the consummation of this
offering, 4.82% of the Common Stock of the Company and, as such, have received
and do receive their pro rata portion of distributions made to the Company's
shareholders.
CERTAIN BUSINESS RELATIONSHIPS
The Company leases three of its warehouse locations from two affiliated
partnerships (K&E Land & Leasing, a Texas general partnership of which Mr.
Kimmel is a managing partner, and 1741 Conant Partnership, a Texas general
partnership of which K&E Land & Leasing is the managing general partner). Mr.
Kollat, the Company's former President of its IDC Limited division, owns a
one-third interest in 1741 Conant Partnership. The Company also leases
computer equipment from K&E Land & Leasing. These leases (i) expire in
November 2003, April 2005, October 2007 and October 2003, respectively, (ii)
provide for total future base rent payments of approximately $907,000,
$778,000, $2.5 million and $1.5 million, respectively, and (iii) require
payments to be made in equal monthly amounts. Mr. Kimmel's indirect interest
in such leases is 38.0%, 38.0%, 25.3% and 38.0%, respectively. Mr. Kimmel's
immediate family members (including a trust for the benefit of one such family
member) own indirect interests in such leases of 12.0%, 12.0%, 8.0% and 12.0%,
respectively. Mr. Kollat owns a one-third indirect interest in the third of
such leases through his ownership of a partnership interest in 1741 Conant
Partnership. Aggregate expenditures by the Company under such leases in 1993,
1994 and 1995 were approximately $656,000, $672,000 and $672,000,
respectively, of which approximately $220,000, $226,000 and $226,000 were
indirectly attributable to Mr. Kimmel's interests in such partnerships
(excluding immediate
38
<PAGE>
family members' interests) and of which approximately $77,000, $77,000 and
$77,000 were indirectly attributable to Mr. Kollat's interest in 1741 Conant
Partnership. It is anticipated that aggregate expenditures by the Company
under such leases for the remainder of their terms will be approximately $5.7
million, of which approximately $1.9 million will be indirectly payable (less
partnership expenses) to Mr. Kimmel (excluding immediate family members'
interests) and of which approximately $841,000 will be indirectly payable
(less partnership expenses) to Mr. Kollat. With respect to the premises leased
from 1741 Conant Partnership, the Company has agreed to perform the
obligations of the partnership contained in the mortgage. The Company believes
that the amounts it has paid under such leases have not been less favorable to
the Company than had the leases been negotiated on an arms-length basis. The
Company has amended the terms of such leases so that their terms are no less
favorable to the Company than had the leases been negotiated on an arms-length
basis. Two of the leased warehouses were financed through economic development
and industrial revenue bonds; one series of which was issued by Newton, Kansas
in the original principal amount of $575,000, and with respect to which the
Company is the sub-lessee of the premises and a co-guarantor, and one series
of which was issued by Elkhart, Indiana in the original principal amount of
$400,000, and with respect to which the Company is the lessee of the premises
and has agreed to perform the obligations of the lessor contained in the
mortgage.
Prior to October 26, 1993, Billy T. Everett owned 50% of the then
outstanding common stock of the Company and served as Chairman of the Board of
the Company. Effective October 26, 1993, the Company repurchased 13% of Mr.
Everett's Common Stock holdings in exchange for the issuance of a promissory
note in the original principal amount of $747,500 and bearing interest at a
floating rate, which was 6% per annum on the date of the note; such note was
retired in 1994. Also effective October 26, 1993, Mr. Kimmel purchased
Mr. Everett's remaining Common Stock holdings in exchange for approximately
$5.0 million cash and, in order to facilitate such purchase, the Company
loaned Mr. Kimmel $5.0 million. The loan is payable in monthly principal
installments of $62,500 plus interest at 9% per annum as of December 31, 1995
with the final installment due in November 1997. As of June 30, 1996, $3.1
million remained outstanding under such loan, and effective as of such date
the note evidencing this loan was distributed to Kevco's shareholders.
Mr. Gregory G. Kimmel and Mr. James Kimmel earned, in the aggregate,
$111,000 in compensation in 1995. Mr. Tucker, a director of the Company, is a
partner in Jackson & Walker, L.L.P., which is the Company's principal outside
legal counsel.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to beneficial
ownership of Common Stock as of August 30, 1996 by (i) all persons known to
Kevco to be the beneficial owner of 5% or more of the Common Stock, (ii) each
director and director nominee of Kevco, (iii) each of the Named Executive
Officers and (iv) all Kevco directors and executive officers as a group. All
persons listed have sole voting and investment power with respect to their
shares.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
NAME OF BENEFICIAL AMOUNT AND NATURE -----------------
OWNER OR NUMBER OF OF BENEFICIAL BEFORE AFTER
PERSONS IN GROUP OWNERSHIP OFFERING OFFERING
------------------ ----------------- -------- --------
<S> <C> <C> <C>
Jerry E. Kimmel(1)......................... 3,759,196(2) 85.5% 57.9%
Clyde A. Reed, Jr. ........................ 28,515(3) * *
Ellis L. McKinley, Jr ..................... 16,450(4) * *
Richard S. Tucker.......................... 0 * *
Martin C. Bowen............................ 0 * *
Richard Nevins............................. 0 * *
C. Lee Denham.............................. 9,400(5) * *
Roger J. Kollat(6)......................... 0 * *
All directors and executive officers as a
group (5 persons)......................... 3,813,561(7) 85.9% 58.3%
</TABLE>
- --------
* Less than 1%
(1) The address of Mr. Kimmel is University Centre I, 1300 S. University
Drive, Suite 200, Fort Worth, Texas 76107.
(2) Excludes 625,636 shares of outstanding Common Stock and 15,299 shares of
Common Stock issuable upon exercise of options beneficially owned by Mr.
Kimmel's adult children and his brother. Mr. Kimmel disclaims beneficial
ownership of such shares.
(3) Includes options to acquire 18,847 shares of Common Stock that will be
exercisable upon consummation of this offering.
(4) Consists of options to acquire 16,450 shares of Common Stock that will be
exercisable upon consummation of this offering.
(5) Consists of options to acquire 9,400 shares of Common Stock that will be
exercisable upon consummation of this offering.
(6) Mr. Kollat is no longer an employee of the Company.
(7) Includes options to acquire 44,697 shares of Common Stock that will be
exercisable upon consummation of this offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of August 30, 1996, the authorized capital stock of the Company consisted
of 100,000,000 shares of Common Stock, par value $0.01 per share, and there
were 4,394,500 shares of Common Stock outstanding held by six shareholders of
record.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share in the
election of directors and for all other purposes. There are no cumulative
voting or preemptive rights applicable to any shares of Common Stock. Under
the terms of the Company's Articles of Incorporation, directors are elected by
a plurality of the votes cast at a meeting of shareholders at which a quorum
is present. Matters for which the affirmative vote of a specified portion of
shares entitled to vote is specified by the Texas Business Corporation Act
(the "TBCA"), are determined by the affirmative vote of the holders of at
least a majority of the shares entitled to vote on the matter. Certain matters
relating to business combinations with Affiliated Shareholders (as defined
below) are determined by the affirmative vote of two-thirds of the shares of
Common Stock issued and outstanding (excluding such Affiliated Shareholder's
shares). See "--Certain Anti-Takeover Provisions." All other matters are
determined by the affirmative vote of at least a majority of the shares
entitled to vote on, and voted for or against, such matter. All shares of
Common Stock are entitled to participate pro rata in such distributions and
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Notwithstanding the foregoing, purchasers of shares of
Common Stock in this offering will not be entitled to receive any portion of
the S Corporation Distribution. Subject to the prior rights of creditors, all
shares of Common Stock are entitled in the event of liquidation to participate
ratably in the distribution of all the remaining assets of the Company. The
outstanding shares of Common Stock are, and the shares offered hereby will be
upon issuance and sale as described herein, fully paid and nonassessable.
LIMITATIONS ON DIRECTOR LIABILITY; INDEMNIFICATION
The Company's Articles of Incorporation provide that, to the fullest extent
permitted by Texas law, no director shall be liable to the Company or its
shareholders for monetary damages for an act or omission in the director's
capacity as a director. By virtue of these provisions, a director of the
Company is not personally liable for monetary damages for a breach of such
director's fiduciary duty except for liability for (i) breach of the duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith that constitute a breach of duty of the director or that involve
intentional misconduct or a knowing violation of law, (iii) any transaction
from which such director receives an improper benefit and (vi) an act or
omission for which the liability of a director is expressly provided by an
applicable statute. In addition, the Company's Articles of Incorporation
provide that if the TBCA is amended to authorize the further elimination or
limitation of the liability of a director, then the liability of the directors
will be eliminated or limited to the fullest extent permitted by the TBCA, as
amended. In addition, such Articles and the Bylaws of the Company provide that
the Company will indemnify and advance expenses to, to the fullest extent
permissible, persons named or threatened to be named in a proceeding resulting
from their status as a director or officer of the Company.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation prohibit the Company from entering
into a broad range of business combinations with a person, or an affiliate or
associate of such person, who is an "Affiliated Shareholder," for the three
year period immediately following the date that such person became an
Affiliated Shareholder, unless (i) approved by the Board of Directors of the
Company prior to such person becoming an Affiliated Shareholder or (ii)
approved by two-thirds of the Company's Common Stock issued and outstanding
(excluding the shares of Common Stock Beneficially Owned (as defined generally
to include shares that the Affiliated Shareholder, with its affiliates and
associates, owns or has the right to acquire or vote) by the Affiliated
Shareholder) at a meeting of shareholders of the Company called for such
purpose not less than six months after such person became an Affiliated
Shareholder. Such provisions generally do not apply to persons that
continuously Beneficially Owned
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<PAGE>
20% or more of the outstanding shares of Common Stock of the Company (i)
immediately prior to the consummation of this offering or (ii) upon receipt of
shares of Common Stock by will or intestate succession, and through the
announcement date of such business combination. The Company's Bylaws provide
for a classified Board of Directors and require that notice of shareholder
director nominees be given to the Company not less than 120 days prior to the
anniversary date of the immediately preceding annual meeting of shareholders
of the Company (or not later than 10 days following the mailing of notices of
a special meeting in which directors are to be elected), or with respect to
the first annual meeting of shareholders following this offering, on or before
January 1, 1997. The Company's Bylaws further provide that notice of
shareholder proposals must be given to the Company not less than 120 days
prior to the anniversary date of the immediately preceding annual meeting of
shareholders of the Company, or, with respect to the first annual meeting of
shareholders following this offering, on or before January 1, 1997. These
provisions may inhibit a change of control of the Company.
The Company's Articles of Incorporation and Bylaws provide that a special
meeting of the shareholders of the Company may be called by the holders of at
least 40% of all shares entitled to vote at the proposed special meeting. The
Articles of Incorporation also provide that the power to amend the Bylaws is
reserved exclusively to the Board of Directors. These provisions may also
inhibit a change of control of the Company.
Upon consummation of this offering, Jerry E. Kimmel, the President, Chairman
of the Board and Chief Executive Officer of the Company, will own
approximately 57.9% of the outstanding Common Stock of the Company. As a
result, Mr. Kimmel will be able to control the management and policies of the
Company through the ability to determine the outcome of elections for the
Company's Board of Directors and other matters requiring the vote or consent
of shareholders of the Company. In addition, Mr. Kimmel has entered into a
rolling five year employment agreement with the Company and its subsidiaries
that can be terminated by the Company only for cause (as defined in such
agreement). These matters may also inhibit a change of control of the Company.
See "Principal Shareholders" and "Management--Employment Agreements."
TRANSFER AGENT AND REGISTRAR
Upon consummation of the offering, the transfer agent and registrar for the
Common Stock will be ChaseMellon Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have outstanding
6,494,500 shares of Common Stock (6,809,500 if the Underwriters' over-
allotment option is exercised in full), of which the 2,100,000 shares sold in
this offering (2,415,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities Act, except for those held by "affiliates"
(as defined in the Securities Act) of the Company, which shares will be
subject to the resale limitations of Rule 144 under the Securities Act. The
remaining 4,394,500 shares of outstanding Common Stock are deemed "restricted
securities" under Rule 144 in that they were originally issued and sold by the
Company in private transactions in reliance upon exemptions under the
Securities Act, and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as those provided by Rule 144 promulgated under the
Securities Act as described below.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of restricted securities from the
issuer or from an "affiliate" of the issuer, as that term is defined under the
Securities Act, the acquirer or subsequent holder would be entitled to sell
within any three-month period a number of those shares that does not exceed
the greater of one percent of the number of shares of such class of stock then
outstanding or the average weekly trading volume of the shares of such class
of stock during the four calendar weeks preceding the filing of a Form 144
with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public
42
<PAGE>
information about the issuer. In addition, if three years have elapsed since
the later of the date of acquisition of restricted securities from the issuer
or from an affiliate of the issuer, and the acquirer or subsequent holder
thereof is deemed not to have been an affiliate of the issuer of such
restricted securities at any time during the 90 days preceding such sale, such
person would be entitled to sell such restricted securities under Rule 144(k)
without regard to the restrictions described above.
As of August 1, 1996, options to purchase an aggregate of 418,426 shares of
Common Stock were outstanding under the Company's 1995 Plan and 1996 Plan (all
of which will become immediately exercisable upon consummation of this
offering), and options to purchase an additional 214,194 shares were available
for grant under the 1995 Plan. See "Management--Stock Option Plans." In
general, pursuant to Rule 701 under the Securities Act, any employee, officer
or director of, or consultant to, the Company who purchased his or her shares
pursuant to a written compensatory benefit plan or contract is entitled to
rely on the resale provisions of Rule 701, which permit non-affiliates to sell
such shares without compliance with the public information, holding period,
volume limitation or notice provisions of Rule 144, and permit affiliates to
sell such shares without compliance with the holding period provisions of Rule
144, in each case commencing 90 days after the date of this Prospectus. A
total of 418,426 shares of Common Stock will be eligible for resale pursuant
to Rule 701 (upon exercise of options) 90 days following the date of this
Prospectus. In addition, the Company may elect to file a registration
statement covering the 214,194 additional shares issuable upon exercise of
stock options that may be granted in the future under the 1995 Plan, in which
case such shares of Common Stock generally will be freely tradable by non-
affiliates in the public market without restriction under the Securities Act.
The Company, its executive officers and directors and certain other
shareholders have agreed that for a period of 180 days after the date of this
Prospectus, they will not offer, sell or otherwise dispose of any shares of
Common Stock beneficially owned or controlled by them (including subsequently
acquired shares) without the prior written consent of Rauscher Pierce Refsnes,
Inc. on behalf of the Underwriters (subject to certain limited exceptions and
the Company's right to issue shares of Common Stock upon the exercise of stock
options granted under its existing stock option plans).
Prior to this offering, there has been no established public market for the
Common Stock. No prediction can be made of the effect, if any, that sales of
shares under Rule 144, or otherwise, or the availability of shares for sale
will have on the market price of the Common Stock prevailing from time to time
after the offering. The Company is unable to estimate the number of shares
that may be sold in the public market under Rule 144, or otherwise, because
such amount will depend on the trading volume in, and market price for, the
Common Stock and other factors. Nevertheless, sales of substantial amounts of
shares of Common Stock in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock of
the Company. See "Underwriting."
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<PAGE>
UNDERWRITING
The Underwriters named below, represented by Rauscher Pierce Refsnes, Inc.
and Oppenheimer & Co., Inc. (the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement, to purchase
from the Company the number of shares of Common Stock set forth opposite their
names below. The nature of the obligations of the Underwriters is such that,
if any of such shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Rauscher Pierce Refsnes, Inc. .................................... 747,500
Oppenheimer & Co., Inc. .......................................... 747,500
Goldman, Sachs & Co. ............................................. 50,000
Prudential Securities Incorporated................................ 50,000
Robertson, Stephens & Company LLC................................. 50,000
Dain Bosworth Incorporated........................................ 50,000
J. C. Bradford & Co. ............................................. 25,000
Crowell, Weedon & Co. ............................................ 25,000
Equitable Securities Corporation.................................. 25,000
First of Michigan Corporation..................................... 25,000
Gerard Klauer Mattison & Co., LLC................................. 25,000
McDonald & Company Securities, Inc. .............................. 25,000
Morgan Keegan & Company, Inc. .................................... 25,000
Principal Financial Securities, Inc. ............................. 25,000
Raymond James & Associates, Inc. ................................. 25,000
The Robinson-Humphrey Company, Inc. .............................. 25,000
Sutro & Co. Incorporated.......................................... 25,000
Vector Securities International, Inc. ............................ 25,000
George K. Baum & Company.......................................... 15,000
Hanifen, Imhoff Inc. ............................................. 15,000
Hoak Breedlove Wesneski & Co. .................................... 15,000
C. L. King & Associates, Inc. .................................... 15,000
Mesirow Financial, Inc. .......................................... 15,000
Southwest Securities, Inc. ....................................... 15,000
Starr Securities, Inc. ........................................... 15,000
---------
Total........................................................... 2,100,000
=========
</TABLE>
The Underwriters propose initially to offer the shares of Common Stock
offered hereby to the public at the price to public set forth on the cover
page of this Prospectus. The Underwriters may allow a concession to selected
dealers who are members of the National Association of Securities Dealers,
Inc. ("NASD") not in excess of $0.48 per share, and the Underwriters may
allow, and such dealers may reallow, to members of the NASD a concession not
in excess of $0.10 per share. After this offering, the price to public, the
concession and the reallowance may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
315,000 shares of Common Stock at the initial price to public, less
underwriting discount, set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only for the purpose of covering any
over-allotments. To the extent that the Underwriters exercise such option,
each Underwriter will be committed, subject to certain conditions, to purchase
that number of the additional shares of Common Stock which is proportionate to
such Underwriter's initial commitment.
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<PAGE>
Prior to the offering, there has been no market for the Common Stock, and
there can be no assurance that a regular trading market will develop upon the
consummation of the offering. The initial public offering price was determined
by negotiations between the Company and the Representatives. The primary
factors considered by the Representatives in determining such public offering
price included the history of and the prospects for the industry in which the
Company competes, an assessment of the Company's management, its past and
present operations, its past and present earnings and the trend of such
earnings, the general condition of the securities markets at the time of the
offering and the price-earnings multiples and market prices of publicly traded
securities of comparable companies.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company, its executive officers and directors and certain other
shareholders have agreed that for a period of 180 days after the date of this
Prospectus, they will not offer, sell or otherwise dispose of any shares of
Common Stock beneficially owned or controlled by them (including subsequently
acquired shares) without the prior written consent of Rauscher Pierce Refsnes,
Inc. on behalf of the Underwriters.
The Representatives have advised the Company that they do not expect any
sales by the Underwriters to accounts over which they exercise discretionary
authority.
Rauscher Pierce Refsnes, Inc. rendered certain financial advisory services
to the Company in connection with Kevco obtaining its existing credit
facilities in June 1995, and received customary fees therefor. Rauscher Pierce
Refsnes, Inc. may render financial advisory services to Kevco in connection
with potential future acquisitions by the Company, for which it would receive
customary fees.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Jackson & Walker, L.L.P., Dallas, Texas. Richard S.
Tucker, a partner in Jackson & Walker, L.L.P., is a director of the Company.
Certain legal matters in connection with the sale of the Common Stock offered
hereby will be passed upon for the Underwriters by Strasburger & Price,
L.L.P., Dallas, Texas.
EXPERTS
The consolidated balance sheet as of December 31, 1995 of Kevco, Inc. and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year ended December 31, 1995 included in this Prospectus have
been included herein in reliance on the report, which includes an explanatory
paragraph regarding a change in accounting method, of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as
experts in auditing and accounting. The balance sheet as of December 31, 1994
of Kevco, Inc. and the related statements of income, stockholders' equity, and
cash flows for the years ended December 31, 1994 and 1993 included in this
Prospectus have been included herein in reliance on the report, which includes
an explanatory paragraph regarding a change in accounting method, of Rylander,
Clay & Opitz, L.L.P., independent auditors, given on the authority of that
firm as experts in auditing and accounting. On July 14, 1995, the Company,
with the approval of its Board of Directors, dismissed Rylander, Clay & Opitz,
L.L.P. as the Company's independent auditor. The report of Rylander, Clay &
Opitz, L.L.P. for the periods referred to above did not contain an adverse
opinion, disclaimer of opinion, qualification, or modification as to
certainty, audit scope or accounting principles. There were no disagreements
between the Company and Rylander, Clay & Optiz, L.L.P. in the periods referred
to above or in subsequent periods on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope which, if not
resolved to the satisfaction of Rylander, Clay & Opitz, L.L.P., would have
caused it to make a reference to the subject matter of the disagreements in
connection with its report. On July 15, 1995, the Company engaged Coopers &
Lybrand L.L.P. to act as the
45
<PAGE>
Company's principal independent accountants. The consolidated statements of
income and cash flows for the years ended December 31, 1994, 1993, and 1992 of
Service Supply Systems, Inc. and Subsidiary included in this Prospectus have
been included herein in reliance on the report of Rumsey & Huckaby, P.C.,
independent auditors, given on the authority of that firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
exhibits, schedules and amendments relating thereto, the "Registration
Statement") with respect to the Common Stock offered hereby. This Prospectus,
filed as part of the Registration Statement, does not contain all the
information included in the Registration Statement, certain portions of which
have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract or
document are not necessarily complete, and in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. All of these documents may be inspected without charge at the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission at CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies can also be obtained from the Commission at prescribed rates. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
The Company intends to furnish to its shareholders annual reports containing
audited financial statements, and quarterly reports containing unaudited
summary financial information for the first three quarters of each fiscal year
of the Company.
46
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KEVCO, INC.
Report of Independent Accountants.......................................... F-2
Independent Auditor's Report............................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets.............................................. F-4
Consolidated Statements of Income........................................ F-5
Consolidated Statements of Stockholders' Equity.......................... F-6
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-9
SERVICE SUPPLY SYSTEMS, INC. AND SUBSIDIARY
Independent Auditor's Report............................................... F-18
Consolidated Financial Statements:
Consolidated Statements of Income........................................ F-19
Consolidated Statements of Cash Flows.................................... F-20
Notes to Consolidated Financial Statements............................... F-21
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS
Unaudited Pro Forma Consolidated Statements of Income.................... F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheet of Kevco, Inc.
as of December 31, 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Kevco, Inc. as of December 31, 1995, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The Company has applied push down accounting as more fully described in Note
2 of the consolidated financial statements.
/s/ Coopers & Lybrand L.L.P.
Fort Worth, Texas
April 15, 1996 except for Note 11 as to which the date is August 29, 1996
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas
We have audited the accompanying balance sheet of Kevco, Inc. (an S-
Corporation) as of December 31, 1994, and the related statements of income,
stockholders' equity, and cash flows for the years ended December 31, 1994 and
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kevco, Inc. as of December
31, 1994, and the results of its operations and its cash flows for the years
ended December 31, 1994 and 1993, in conformity with generally accepted
accounting principles.
The Company has applied push down accounting as more fully described in Note
2 of the financial statements.
/s/ Rylander, Clay & Opitz, L.L.P
Fort Worth, Texas
March 24, 1995
F-3
<PAGE>
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, AS ADJUSTED
---------------- JUNE 30, JUNE 30, 1996
1994 1995 1996 (NOTE 13)
------- ------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 627 $ 977 $ 86 $ 86
Trade receivables (less allowance
for doubtful accounts of $160
and $75 in 1995 and 1994,
respectively, and $229 at June
30, 1996)....................... 4,732 14,769 16,443 16,443
Inventories...................... 7,275 18,383 23,668 23,668
Prepaid expenses and other....... 384 343 399 399
------- ------- ------- -------
Total current assets........... 13,018 34,472 40,596 40,596
Property and equipment, net........ 2,142 9,758 10,084 10,084
Intangible assets, net............. 1,968 10,162 9,817 9,817
Other assets....................... 357 459 405 405
------- ------- ------- -------
Total assets................... $17,485 $54,851 $60,902 $60,902
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQ-
UITY
Current liabilities:
Trade accounts payable........... $ 3,903 $11,258 $18,159 $18,159
Accrued liabilities.............. 1,352 3,231 4,101 4,101
Current portion of long-term
debt............................ 3,267 1,057 2,288 6,021
------- ------- ------- -------
Total current liabilities...... 8,522 15,546 24,548 28,281
Long-term debt, less current
portion........................... 3,118 30,206 25,539 25,539
Deferred compensation obligation... 333 361 372 372
------- ------- ------- -------
Total liabilities.............. 11,973 46,113 50,459 54,192
------- ------- ------- -------
Commitments and contingencies (Note
7)
Stockholders' equity:
Common stock, $.01 par value;
100,000 shares authorized; 4,700
shares issued (including 306
shares held in treasury)........ 47 47 47 44
Additional paid-in capital....... 2,837 3,034 3,120 6,666
Loan to stockholder.............. (4,187) (3,437) -- --
Retained earnings................ 7,563 9,842 8,024 --
Treasury stock, 306 shares at
cost............................ (748) (748) (748) --
------- ------- ------- -------
Total stockholders' equity..... 5,512 8,738 10,443 6,710
------- ------- ------- -------
Total liabilities and
stockholders' equity.......... $17,485 $54,851 $60,902 $60,902
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
KEVCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------- -----------------------------
1993 1994 1995 1995 1996
------- ------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $80,257 $99,279 $182,519 $ 56,301 $ 135,598
Cost of sales........... 67,087 83,625 155,877 47,649 115,247
------- ------- -------- ------------ -------------
Gross profit........ 13,170 15,654 26,642 8,652 20,351
Commission income....... 1,274 1,066 2,610 512 2,700
------- ------- -------- ------------ -------------
14,444 16,720 29,252 9,164 23,051
Selling, general and
administrative
expenses............... 10,550 11,941 20,889 6,908 14,968
------- ------- -------- ------------ -------------
Operating income.... 3,894 4,779 8,363 2,256 8,083
Other income............ -- 800 -- -- --
Interest income......... 83 346 355 186 141
Interest expense........ (425) (627) (1,692) (346) (1,199)
------- ------- -------- ------------ -------------
Income before income
taxes.............. 3,552 5,298 7,026 2,096 7,025
State income taxes...... -- 51 45 20 25
------- ------- -------- ------------ -------------
Net income.......... $ 3,552 $ 5,247 $ 6,981 $ 2,076 $ 7,000
======= ======= ======== ============ =============
Supplemental information
(unaudited) (Note 13):
Historical income
before income taxes.. $ 7,026 $ 7,025
Income tax expense
adjustments.......... 2,740 2,740
-------- -------------
Supplemental net
income............... $ 4,286 $ 4,285
======== =============
Supplemental earnings
per share............ $ 0.87 $ 0.90
======== =============
Weighted average
shares outstanding... 4,946 4,778
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
KEVCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
------------- ----------------- PAID-IN LOAN TO RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER EARNINGS TOTAL
------ ------ ------- -------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1993................... 4,700 $47 -- -- $ 197 -- $ 4,816 $ 5,060
Net income.............. -- -- -- -- -- -- 3,552 3,552
Distribution to
stockholders........... -- -- -- -- -- -- (2,030) (2,030)
Loan to stockholder..... -- -- -- -- -- $(5,000) -- (5,000)
Collections from
stockholder............ -- -- -- -- -- 63 -- 63
Acquisition by majority
stockholder............ -- -- -- -- 2,640 -- -- 2,640
Purchase of treasury
stock.................. -- -- 306 $ (748) -- -- -- (748)
----- --- ------ -------- ------ ------- ------- -------
Balance at December 31,
1993................... 4,700 47 306 (748) 2,837 (4,937) 6,338 3,537
Net income.............. -- -- -- -- -- -- 5,247 5,247
Distribution to
stockholders........... -- -- -- -- -- -- (4,022) (4,022)
Collections from
stockholder............ -- -- -- -- -- 750 -- 750
----- --- ------ -------- ------ ------- ------- -------
Balance at December 31,
1994................... 4,700 47 306 (748) 2,837 (4,187) 7,563 5,512
Net income.............. -- -- -- -- -- -- 6,981 6,981
Distribution to
stockholders........... -- -- -- -- -- -- (4,702) (4,702)
Collections from
stockholder............ -- -- -- -- -- 750 -- 750
Contributed capital..... -- -- -- -- 197 -- -- 197
----- --- ------ -------- ------ ------- ------- -------
Balance at December 31,
1995................... 4,700 47 306 (748) 3,034 (3,437) 9,842 8,738
Net income (unaudited).. -- -- -- -- -- -- 7,000 7,000
Distribution to
stockholders
(unaudited)............ -- -- -- -- -- -- (5,756) (5,756)
Collections from
stockholder
(unaudited)............ -- -- -- -- -- 375 -- 375
Distribution of loan to
stockholder
(unaudited)............ -- -- -- -- -- 3,062 (3,062) --
Contributed capital
(unaudited)............ -- -- -- -- 86 -- -- 86
----- --- ------ -------- ------ ------- ------- -------
Balance at June 30,
1996................... 4,700 $47 306 $ (748) $3,120 $ -- $ 8,024 $10,443
===== === ====== ======== ====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- ----------------------------
1993 1994 1995 1995 1996
------- ------- ------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 3,552 $ 5,247 $ 6,981 $ 2,076 $ 7,000
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 317 399 1,041 233 903
Gain on sale of
assets.............. (9) (11) (16) (6) (3)
Deferred compensation
obligation.......... 2 (7) 28 10 11
Changes in assets and
liabilities, net of
effects from
purchase of Service
Supply Systems,
Inc.:
Trade receivables,
net............... (586) (835) (2,014) (1,663) (1,674)
Inventories........ (1,262) (1,335) (1,127) (1,488) (5,285)
Prepaid expenses
and other......... (31) (9) 71 73 (56)
Trade accounts
payable........... 1,650 (591) 3,650 3,399 6,901
Accrued
liabilities....... 293 218 (166) 64 570
------- ------- ------- ------------ ------------
Net cash provided by
operating
activities.......... 3,926 3,076 8,448 2,698 8,367
------- ------- ------- ------------ ------------
Cash flows from
investing activities:
Purchase of equipment.. (258) (432) (2,844) (262) (884)
Proceeds from sale of
assets................ 9 11 594 7 3
Decrease (increase) in
other assets.......... 377 (47) 180 (51) 54
Purchase of Service
Supply Systems, Inc.,
net of cash acquired.. -- -- (17,449) -- --
Loan origination fees.. -- -- (913) -- --
------- ------- ------- ------------ ------------
Net cash provided
(used) by investing
activities.......... 128 (468) (20,432) (306) (827)
------- ------- ------- ------------ ------------
Cash flows from
financing activities:
Proceeds (payment) of
line of credit, net... -- 2,400 (4,587) 1,000 --
Distributions paid..... (2,030) (4,022) (4,702) (3,880) (5,456)
Payments of long-term
debt.................. (177) (1,578) (1,900) (434) (29,336)
Capital contributions.. -- -- 197 107 86
Proceeds from long-term
debt.................. 3,000 -- 30,700 -- 25,900
Payment of acquired
debt.................. -- -- (8,124) -- --
Long-term loan to
stockholder........... (5,000) -- -- -- --
Collections on loan to
stockholder........... 63 750 750 375 375
------- ------- ------- ------------ ------------
Net cash (used)
provided by
financing
activities.......... (4,144) (2,450) 12,334 (2,832) (8,431)
------- ------- ------- ------------ ------------
Net (decrease) increase
in cash and cash
equivalents............ (90) 158 350 (440) (891)
Beginning cash and cash
equivalents............ 559 469 627 627 977
------- ------- ------- ------------ ------------
Ending cash and cash
equivalents............ $ 469 $ 627 $ 977 $ 187 $ 86
======= ======= ======= ============ ============
Supplemental cash flow
information:
Cash paid during the
period for:
Interest............. $ 404 $ 604 $ 1,471 $ 329 $ 1,192
======= ======= ======= ============ ============
</TABLE>
(Continued)
F-7
<PAGE>
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
Supplemental schedule of noncash investing and financing activities:
During 1993, the Company repurchased 305,500 shares of common stock from one
of its 50% stockholders in exchange for a promissory note in the original
principal amount of $748. The Company's other 50% stockholder purchased
2,044,500 remaining shares of common stock in exchange for approximately
$5,000. This stock purchase transaction resulted in goodwill being recognized
in the amount of $2,026 and a non-cash inventory write-up of $614.
Capital lease obligations of $16 and $162 were incurred when the Company
entered into capital leases for property and equipment in 1994 and 1993,
respectively.
During 1995, the Company purchased all of the capital stock of Service
Supply Systems, Inc. for approximately $17,700. In conjunction with the
acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired.......................................... $32,400
Cash paid for the capital stock........................................ 17,700
-------
Liabilities assumed.................................................. $14,700
=======
</TABLE>
Of the $14,700 in liabilities assumed, approximately $8,100 was immediately
paid off with the proceeds from long-term debt.
Non-compete obligations of $544 were incurred when the Company purchased
Service Supply Systems, Inc. and entered into two non-compete agreements which
are being amortized over the life of the agreements.
As of June 30, 1996, the Company had declared distributions to stockholders
of $300 which had not yet been paid.
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Company Restructuring
Prior to the effective date of the common stock offering (the "Offering"),
Kevco, Inc. (the "Company") will restructure and create an operating company
subsidiary with a subsidiary. Accordingly, these financial statements are
referred to as consolidated financial statements.
Description of Operations
The Company manufactures and distributes products and materials for use by
the manufactured housing and recreational vehicle industries.
Interim Financial Statements
In the opinion of management, the unaudited interim consolidated financial
statements at June 30, 1996 and for the six-month periods ended June 30, 1996
and 1995 include all adjustments, consisting of normal recurring accruals,
necessary to present fairly the Company's consolidated financial position at
June 30, 1996 and the consolidated results of operations and cash flows for
the six-month periods ended June 30, 1996 and 1995. Results for the period
ended June 30, 1996 are not necessarily indicative of the results to be
expected for the entire fiscal year.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, deposits with banks and all highly liquid investments with original
maturities at date of purchase of three months or less. The carrying value of
cash and cash equivalents approximates fair value as of December 31, 1995.
Inventories
Inventories are stated at the lower of cost or market. Inventories purchased
for resale are valued using the last-in, first-out (LIFO) method. Manufactured
inventories are valued using the first-in, first-out (FIFO) method. Had the
first-in, first-out method been used to determine purchased inventory cost,
inventories would have increased by approximately $1,258,000 and $762,000 at
December 31, 1995 and 1994, respectively and $1,258,000 at June 30, 1996. For
the years ended December 31, 1995 and 1994 and the six months ended June 30,
1996, the percentage of inventory valued at LIFO was 81%, 100% and 83%,
respectively.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Additions to and major improvements of property and equipment are capitalized.
Maintenance and repair costs are expensed as incurred. When assets are retired
or otherwise disposed of, their costs and related accumulated depreciation are
removed from the accounts and any resulting gains or losses are included in
the operations for the period.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Buildings.................................................... 40 years
Furniture and equipment...................................... 5 to 10 years
Transportation equipment..................................... 4 to 10 years
Leasehold improvements....................................... 10 years
</TABLE>
F-9
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
Intangible Assets
Non-compete agreements are amortized on a straight-line basis over the terms
of the related agreements (24 to 30 months). Loan origination fees associated
with the acquisition of the Company's term debt and revolving credit facility
have been capitalized and are being amortized on a straight line basis over
five years. The excess of acquisition cost of acquired businesses over the
fair value of net assets acquired ("goodwill") is amortized, using the
straight-line method, over 40 years. The Company reviews goodwill to assess
recoverability periodically. Impairment would be recognized in operating
results if expected future operating undiscounted cash flows of the acquired
business are less than the carrying value of goodwill.
Deferred Compensation Obligation
The Company has entered into deferred compensation agreements with certain
employees, whereby payments will be made upon death or retirement for a ten
year period. The agreements are partially funded by life insurance contracts
and a liability has been recorded at the present value of the anticipated
future payments.
Revenue Recognition
Revenue from product sales is recognized at the time of shipment or the time
of receipt in the case of direct shipments from vendors to customers.
Commissions are recognized as earned.
Income Taxes
The Company's stockholders have elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. As a result, there is no provision
for federal income taxes in the accompanying financial statements, as such
taxes are the responsibility of the individual stockholders.
Interest Rate Hedge
The Company entered into an interest rate hedge agreement in conjunction
with its primary credit facility to alter interest rate exposure on both the
revolver and the term debt. Amounts expected to be paid or received on the
interest rate hedge are recognized as adjustments to interest expense. Any
gain or loss from the termination of this hedge agreement will be recognized
at that time.
Concentration of Credit Risk
The Company's sales are primarily to the manufactured housing and
recreational vehicle industries across a wide geographical area and the
Company generally requires no collateral from customers. The Company had sales
to two customers representing approximately 12% and 8% of net sales in 1995,
12% and 10% in 1994, and 10% and 8% in 1993.
The Company estimates future credit losses based on continual evaluation of
customers' financial condition, historical loss experience and current
economic conditions. The estimated future credit losses are expensed through
an allowance for doubtful receivables and actual credit losses are charged to
the allowance when incurred.
The Company regularly maintains cash balances at financial institutions in
excess of federally insured limits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses in the reporting
periods. Actual results could differ from those estimates.
F-10
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. This Statement,
which became effective in 1996, requires that long-lived assets and certain
identifiable intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. As of June 30, 1996, no such events or
changes in circumstances have occurred which management believes would
indicate that the carrying amount of an asset may not be recoverable.
Management continues to believe that this statement will not have a material
effect on the Company's future financial position, operating results, cash
flow or liquidity.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. This statement requires a determination of the fair value of
stock options at the date of grant for stock options issued after December 15,
1995. This statement permits an entity to continue to apply the accounting
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
but the Company must comply with the disclosure requirements of SFAS No. 123.
The Company has adopted the disclosure method of presentation as allowed under
SFAS No. 123 and such disclosures will be made in the December 31, 1996
consolidated financial statements.
Stock-split
As described in Note 11, on August 29, 1996, the Company effected a .47-for-
1 reverse stock split of its common stock. All share and per share amounts
included in the accompanying financial statements and notes have been restated
to reflect the stock split.
Unaudited Supplemental Net Income
Supplemental net income represents the results of operations adjusted to
reflect a provision for income tax on historical income before income taxes,
which gives effect to the change in the Company's income tax status to a C
corporation prior to the public sale of its common stock. The difference
between the supplemental income tax rates utilized and the federal statutory
rate of 34% relates primarily to state income taxes (5%, net of federal tax
benefit).
Unaudited Supplemental Earnings Per Share
Supplemental earnings per share has been computed by dividing supplemental
net income by the weighted average number of shares of common stock
outstanding during the period.
In accordance with a regulation of the Securities and Exchange Commission,
supplemental earnings per share data have been presented to reflect the effect
of the assumed issuance of that number of shares of common stock that would
generate sufficient cash to pay an S corporation distribution in an amount
equal to previously taxed but undistributed earnings at December 31, 1995 and
June 30, 1996.
Historical net income per common share is not presented because it is not
indicative of the ongoing entity.
Unaudited As Adjusted Balance Sheet
As adjusted balance sheet information as of June 30, 1996 has been presented
to reflect (a) the S corporation distribution of undistributed earnings
previously taxed at the stockholder level, (b) the retirement of the treasury
stock, and (c) the presentation of undistributed retained earnings as
additional paid-in capital. (See Note 13).
F-11
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
2. ACQUISITIONS:
The Company purchased all of the capital stock of Service Supply Systems,
Inc. ("Service Supply") on June 30, 1995 for approximately $17,700,000 and at
that date merged Service Supply with and into the Company. The acquisition was
accounted for as a purchase and, accordingly, the operating results of Service
Supply have been included in the operating results of the Company since June
30, 1995. The acquisition cost in excess of the fair value of net assets of
Service Supply of $7,087,000 has been accounted for as goodwill and will be
amortized over its useful life of 40 years.
The following summary, prepared on a pro forma basis, combines the results
of operations as if Service Supply had been acquired as of the beginning of
each of the two fiscal years presented, after including the impact of
adjustments for amortization of intangibles, income taxes and interest expense
on the acquisition debt (in thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net sales......................................... $ 200,189 $ 241,846
Net income........................................ $ 5,992 $ 8,843
Earnings per share................................ $ 1.27 $ 1.79
Weighted average shares outstanding............... 4,733 4,946
</TABLE>
The pro forma information is presented for informational purposes only and
is not necessarily indicative of operating results that would have occurred
had the acquisition been consummated as of the above dates, nor are they
necessarily indicative of future operating results.
Effective October 26, 1993, the Company repurchased 305,500 shares of common
stock from one of its 50% stockholders ("Selling Stockholder") in exchange for
the issuance of a promissory note in the original principal amount of $747,500
and bearing interest at a floating rate, which was 6% per annum on the date of
the note; such note was retired in 1994. Also effective October 26, 1993, the
Company's other 50% stockholder ("Buying Stockholder") purchased Selling
Stockholder's 2,044,500 remaining common shares in exchange for approximately
$5.0 million cash and, in order to facilitate such purchase, the Company
loaned Buying Stockholder $5.0 million. The loan is payable in monthly
principal installments of $62,500 plus interest at 9% per annum as of December
31, 1995 with the final installment due in November 1997. These transactions
resulted in the Company becoming wholly owned by the Buying Stockholder
resulting in a partial change in basis. Accordingly, the previously issued
financial statements have been restated to apply push down accounting as
required by Staff Accounting Bulletin Topic 5-J. As a result, inventories were
written up by $614 to adjust them to their fair value. The acquisition cost in
excess of the fair value of the net assets acquired in the amount of $2,026
has been accounted for as goodwill and is being amortized over an estimated
useful life of 40 years. The results of operations of the Company would not
have been significantly different had this transaction occurred as of January
1, 1993. As of June 30, 1996, $3.1 million remained outstanding under the loan
to the Buying Stockholder, and effective as of such date, the note evidencing
this loan was distributed to the Company's stockholders.
F-12
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
3. INVENTORIES:
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
------ ------- --------
<S> <C> <C> <C>
Raw materials........................................ $ -- $ 2,314 $ 2,591
Work-in-process...................................... -- 303 364
Finished goods....................................... -- 828 1,059
Goods held for resale................................ 7,275 14,938 19,654
------ ------- -------
$7,275 $18,383 $23,668
====== ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Land............................................. $ -- $ 242 $ 242
Buildings........................................ 2,231 4,774 5,123
Furniture and equipment.......................... 2,246 5,213 5,616
Transportation equipment......................... 832 3,232 3,326
Leasehold improvements........................... 412 503 537
------- ------- -------
5,721 13,964 14,844
Less accumulated depreciation.................... (3,579) (4,206) (4,760)
------- ------- -------
Property and equipment, net.................... $ 2,142 $ 9,758 $10,084
======= ======= =======
</TABLE>
Property and equipment under capital leases consists of buildings of
$2,231,000 and furniture and equipment of $640,000 at December 31, 1995 and
1994 and June 30, 1996, and accumulated depreciation of $1,846,000 and
$1,710,000 at December 31, 1995 and 1994, respectively, and $1,914,000 at June
30, 1996. Included in transportation equipment is an aircraft purchased during
1995 with a net book value of $2,050,000 as of December 31, 1995.
5. INTANGIBLE ASSETS:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ --------
<S> <C> <C> <C>
Goodwill.................................. $2,026 $ 9,113 $9,113
Loan origination fees..................... -- 913 913
Non-compete agreements.................... -- 544 544
------ ------- ------
2,026 10,570 10,570
Less accumulated amortization............. (58) (408) (753)
------ ------- ------
Intangible assets, net.................. $1,968 $10,162 $9,817
====== ======= ======
</TABLE>
F-13
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
6. LONG-TERM DEBT:
Long-term debt consists or the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Term debt payable to a bank with interest pay-
able monthly and quarterly principal payments
of $625 commencing on October 1, 1996 until
maturity at June 30, 2001. Interest is paid at
LIBOR rates based on pricing options selected
by the Company plus a margin determined by op-
erating statistics of the Company (7.54% at
December 31, 1995 and 7.31% at June 30,
1996)......................................... $ -- $14,500 $14,500
Revolving credit facility payable to a bank,
due June 30, 1998, with interest payable
monthly. Interest is paid at the bank's prime
rate or LIBOR rates based on pricing options
selected by the Company plus a margin deter-
mined by operating statistics of the Company
(7.93% at December 31, 1995 and 7.49% at June
30, 1996). $5,261, net of an outstanding let-
ter of credit in the amount of $239, was
available under the credit facility at Decem-
ber 31, 1995.................................. -- 14,500 11,300
Capital lease obligations to related party,
collateralized by equipment, maturing through
2007, with interest rates from 13.9% to
26.8%......................................... 1,798 1,681 1,615
Obligations payable under non-compete and
consulting agreements, due in 24 to 48 months
with payments ranging from $3,000 to $10,833
per month, maturing through 1999, interest
imputed at 8.50%.............................. -- 582 412
Note payable to bank, due in monthly payments
of $62,500 plus interest at the bank's prime
rate of 9%, maturing on November 1, 1997, col-
lateralized by inventory, accounts receivable,
property and equipment, common stock of the
Company and guaranty of majority stockhold-
er............................................ 2,187 -- --
Line of credit payable to a bank with interest
at 8.50% due October 1995, collateralized by
inventory, accounts receivable, property and
equipment, common stock of the Company and
guaranty of majority stockholder.............. $ 2,400 $ -- $ --
------- ------- -------
6,385 31,263 27,827
Less current portion........................... (3,267) (1,057) (2,288)
------- ------- -------
$ 3,118 $30,206 $25,539
======= ======= =======
</TABLE>
The term debt and revolving credit facility are collateralized by inventory,
accounts receivable and property and equipment and upon consummation of the
Offering will be collateralized by substantially all of the assets of the
Company and its subsidiaries including a pledge of all outstanding capital
stock of such subsidiaries. The
F-14
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
related credit agreement contains certain restrictions and conditions which
include cash flow requirements, limitations on acquisitions of property and
equipment and restrictions on distributions to stockholders.
The following are scheduled maturities of debt at December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................................. $ 1,057
1997............................................................. 2,867
1998............................................................. 17,131
1999............................................................. 2,627
2000............................................................. 2,614
Thereafter....................................................... 4,967
-------
$31,263
=======
</TABLE>
In addition, in order to reduce interest rate risk on the credit facility,
the Company has entered into an interest rate hedge agreement in the notional
amount of $15.0 million, whereby the Company will receive interest payments
should LIBOR increase above 9.00% and, conversely, will make interest payments
should LIBOR decrease below 5.25%, the effect of which limits the Company's
interest expense within the range of 9.00% to 5.25% LIBOR on $15.0 million of
debt. Management intends to hold the interest rate hedge until maturity on
August 28, 1998. The Company has incurred no gain or loss related to this
interest rate hedge for the year ended December 31, 1995. The fair value of
the interest rate hedge agreement is not considered to be material.
The fair value of long-term debt was approximately $32.0 million as of
December 31, 1995. The fair value of the Company's long-term debt was
calculated by discounting future cash flows using an estimated fair market
value interest rate.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The Company leases various equipment and buildings under capital and
noncancelable operating leases with an initial term in excess of one year. As
of December 31, 1995, future minimum rental payments required under these
capital and operating leases are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
<S> <C> <C>
1996.................................................. $ 432 $1,969
1997.................................................. 432 1,743
1998.................................................. 363 1,445
1999.................................................. 340 1,012
2000.................................................. 340 602
Thereafter............................................ 1,877 516
------- ------
Total................................................. 3,784 $7,287
======
Less amount representing interest....................... (2,103)
-------
Present value of minimum lease payments................. $ 1,681
=======
</TABLE>
Rental expense for operating leases was $2,640,000, $1,574,000 and
$1,469,000 for the years ended December 31, 1995, 1994 and 1993, respectively
and $1,941,000 for the six months ended June 30, 1996.
F-15
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
Employment Agreements
The Company has entered into an employment agreement with its majority
stockholder for a five-year term renewable annually and has entered into a
consulting agreement with a former stockholder through October 1998.
Litigation
There are claims and pending actions incident to the business operations of
the Company. Management does not expect resolution of these matters to have a
material adverse effect on the Company's financial position or future results
of operations or cash flows.
8. RETIREMENT PLAN:
The Company has a defined contribution retirement plan that covers
substantially all full-time employees and is qualified under Section 401(k) of
the Internal Revenue Code. Under the plan, employees may voluntarily
contribute a percentage of their compensation to the plan and the Company may
make discretionary contributions. Retirement plan expense for the years ended
December 31, 1995, 1994 and 1993 was $225,000, $150,000 and $125,000,
respectively and $180,000 for the six months ended June 30, 1996.
9. RELATED PARTY TRANSACTIONS:
The Company leases certain buildings and data processing equipment under
capital leases from partnerships partially owned by the majority stockholder
of the Company. Two of the leased warehouses were financed through economic
development and industrial revenue bonds; one series of which was issued by
Newton, Kansas in the original principal amount of $575,000, and with respect
to which, the Company is the sub-lessee of the premises and a co-guarantor,
and one series of which was issued by Elkhart, Indiana in the original
principal amount of $400,000, and with respect to which, the Company is the
lessee of the premises and has agreed to perform the obligations of the lessor
contained in the mortgage. Lease payments for the facilities and equipment
were approximately $672,000, $672,000 and $656,000 in 1995, 1994 and 1993,
respectively, and approximately $336,000 for the six months ended June 30,
1996. (See Note 6).
The Company loaned its majority stockholder $5.0 million in 1993, payable in
monthly principal installments of $62,500 plus interest at 9% at December 31,
1995, due November 1997. The Company distributed the Loan to stockholder to
the Company's stockholders effective June 30, 1996.
10. STOCK OPTIONS:
During 1995, the Company issued options to purchase 47,854 shares of the
Company's common stock. As of June 30, 1996, 47,854 of these options were
still outstanding. The option price is $5.64 per share, exercisable over a
nine-year vesting period, expiring June 19, 2004 although immediately
exercisable as of the effective date of the common stock offering. No shares
have been exercised.
Effective January 1, 1996, the Company issued options to purchase 392,450
shares with an option price of $11.17 exercisable over a three-year vesting
period, expiring in seven years although immediately exercisable as of the
effective date of the common stock offering. As of June 30, 1996, 383,520 of
these options were still outstanding. No shares have been exercised.
11. STOCK SPLIT:
During 1994, the Company's board of directors authorized a 10,000-to-1 stock
split with $0.01 par value common stock exchanged for cancellation of all
$1.00 par value common stock previously issued. As a result,
F-16
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTH PERIODS ENDED
JUNE 30, 1996 AND 1995 IS UNAUDITED)
the stockholders received 10,000 shares of common stock for each share
previously held. The par value of the additional shares of common stock issued
in connection with the stock split ($99,000) was credited to common stock and
a like amount charged to paid-in capital in 1994. On August 29, 1996, the
Company effected a .47-for-1 reverse stock split of its common stock. All
share and per share amounts included in the accompanying financial statements
and footnotes have been restated to reflect both of these stock splits.
12. OTHER INCOME:
The Company received $800,000 in 1994 from a disability insurance policy on
a former stockholder who was determined disabled and used the proceeds to
retire a note payable to the former stockholder.
13. UNAUDITED AS ADJUSTED AND SUPPLEMENTAL INFORMATION:
The following unaudited as adjusted and supplemental information reflects
certain assumptions regarding transactions and their effects that would occur
as a result of the Offering.
Unaudited As Adjusted Consolidated Balance Sheet
The unaudited as adjusted consolidated balance sheet at June 30, 1996
reflects adjustments to effect the conversion of the Company to a C
corporation. Prior to this conversion, the Company will distribute an amount
equal to undistributed earnings that were previously taxed at the stockholder
level at June 30, 1996, which was $3.7 million. No adjustment has been made to
give effect to the distribution to the Company's stockholders in the amount of
any S corporation earnings for the period from July 1, 1996 through the
consummation of this Offering, which will be taxed at the stockholder level.
Additionally, the unaudited as adjusted consolidated balance sheet reflects
the retirement of treasury stock and the presentation of undistributed
earnings as additional paid-in capital.
Unaudited Supplemental Consolidated Income Information
The unaudited supplemental consolidated information as shown on the income
statement is presented to show the effects of income tax expense related to
the Company's anticipated termination of its Subchapter S corporation status.
The unaudited supplemental income tax expense adjustment is presented as if
the Company had been a C corporation subject to federal and state income taxes
throughout the periods presented at an effective tax rate of 39%.
The supplemental information is presented for informational purposes only
and is not necessarily indicative of operating results that would have
occurred had the Company elected to terminate its Subchapter S corporation
status as of the beginning of each of the periods presented, nor are they
necessarily indicative of future operating results.
Unaudited Supplemental Earnings Per Share
Supplemental earnings per share has been computed by dividing supplemental
net income by the weighted average number of shares of common stock
outstanding during the period.
In accordance with a regulation of the Securities and Exchange Commission,
supplemental earnings per share data have been presented to reflect the effect
of the assumed issuance of that number of shares of common stock that would
generate sufficient cash to pay an S corporation distribution in an amount
equal to previously taxed but undistributed earnings at December 31, 1995 and
June 30, 1996.
Historical net income per common share is not presented because it is not
indicative of the ongoing entity.
F-17
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Service Supply Systems, Inc.
We have audited the accompanying consolidated statements of income and cash
flows of Service Supply Systems, Inc. and Subsidiary for the years ended
December 31, 1994, 1993, and 1992. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
operations and cash flows of Service Supply Systems, Inc. and Subsidiary for
the years ended December 31, 1994, 1993, and 1992 in conformity with generally
accepted accounting principles.
/s/ Rumsey & Huckaby, P.C.
Cordele, Georgia
February 28, 1995
F-18
<PAGE>
SERVICE SUPPLY SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
-------------------------- ENDED
1992 1993 1994 JUNE 30, 1995
------- ------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales........................... $59,804 $73,625 $100,910 $59,327
Cost of sales....................... 51,493 63,234 88,029 51,972
------- ------- -------- -------
Gross profit...................... 8,311 10,391 12,881 7,355
Commission income................... 913 1,219 1,953 1,383
------- ------- -------- -------
9,224 11,610 14,834 8,738
Selling, general and administrative
expenses........................... 7,978 9,345 11,899 5,904
------- ------- -------- -------
Operating income.................. 1,246 2,265 2,935 2,834
Other income........................ 4 4 33 1
Interest income..................... 15 23 -- --
Interest expense.................... (372) (314) (582) (407)
------- ------- -------- -------
Income before income taxes........ 893 1,978 2,386 2,428
Provision for income taxes.......... 330 732 871 843
------- ------- -------- -------
Net income........................ $ 563 $ 1,246 $ 1,515 $ 1,585
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-19
<PAGE>
SERVICE SUPPLY SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS
---------------------------- ENDED
1992 1993 1994 JUNE 30, 1995
-------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activi-
ties:
Net income........................ $ 563 $ 1,246 $ 1,515 $ 1,585
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Depreciation and amortization... 290 332 515 364
(Gain) loss on disposal of
assets......................... (5) 6 (33) (1)
Increase in deferred tax asset.. (3) (13) (266) --
Changes in assets and
liabilities:
Accounts receivable, net....... (1,117) 314 (2,279) (2,235)
Inventories.................... (1,075) (1,372) (2,346) 135
Other receivables.............. 131 (145) (206) 191
Prepaid expenses............... 3 131 (250) 110
Accounts payable............... 899 304 590 928
Accrued expenses............... 292 643 1,239 (573)
-------- -------- -------- -------
Net cash provided (used) by
operating activities......... (22) 1,446 (1,521) 504
-------- -------- -------- -------
Cash flows from investing
activities:
Purchase of property and
equipment........................ (63) (460) (3,850) (234)
Proceeds from sale of assets...... 34 24 77 2
Payments received from other note
receivable....................... 13 23 -- --
Other assets...................... -- -- (25) 26
Cash surrender value of insurance
policies......................... (35) 103 (34) (15)
-------- -------- -------- -------
Net cash used by investing
activities................... (51) (310) (3,832) (221)
-------- -------- -------- -------
Cash flows from financing
activities:
Proceeds from new borrowings...... 2,644 3,113 8,290 7,922
Payments of long-term debt........ (2,881) (4,700) (3,113) (8,291)
Common stock repurchases.......... (9) (14) -- --
Proceeds from the issuance of
common stock..................... 317 536 -- 257
Dividends paid.................... -- (66) (123) (193)
Loan to stockholders.............. -- (25) -- --
Collections on loan to
stockholders..................... -- -- 153 --
Stock subscriptions receivable.... -- 25 149 23
-------- -------- -------- -------
Net cash provided (used) by
financing activities......... 71 (1,131) 5,356 (282)
-------- -------- -------- -------
Net (decrease) increase in cash and
cash equivalents.................. (2) 5 3 1
Beginning cash and cash
equivalents....................... 22 20 25 28
-------- -------- -------- -------
Ending cash and cash equivalents... $ 20 $ 25 $ 28 $ 29
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-20
<PAGE>
SERVICE SUPPLY SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Service Supply Systems, Inc. (the "Company") is in the business of
procuring, producing, transporting, storing and wholesaling plumbing and
building parts to the housing industry. It also acts as warehousing and sales
agent for certain manufacturers of housing components. The Company has
operations in Georgia, Florida, Alabama, North Carolina and Texas. The Company
extends credit to its customers in these states during the normal course of
business.
Interim Financial Statements
In the opinion of management, the unaudited interim consolidated financial
statements at June 30, 1995 and for the six-month period ended June 30, 1995
include all adjustments, consisting of normal recurring accruals, necessary to
present fairly the Company's consolidated results of operations and cash flows
for the six-month period ended June 30, 1995. Results for the period ended
June 30, 1995 are not necessarily indicative of the results to be expected for
the entire fiscal year.
Property and Equipment
Property and equipment are recorded at cost. The Company uses the straight-
line and declining-balance methods to recognize depreciation over the
estimated useful lives of the related assets. Estimated useful lives range
from three to thirty-nine years.
Principles of Consolidation
The financial statements are a presentation of Service Supply Systems, Inc.
consolidated with its wholly-owned subsidiary, Sunbelt Wood Components, Inc.
All intercompany accounts and transactions are eliminated in consolidation.
Inventories
Inventories are valued at the lower of cost or market. Market is replacement
cost or net realizable value. Inventories purchased for resale are valued
using the last-in, first-out (LIFO) method. Manufactured inventories are
valued using the first-in, first-out (FIFO) method. For the years ended
December 31, 1994, 1993 and 1992, the percentage of inventory valued at LIFO
was 79%, 75% and 80%, respectively. The LIFO reserve at December 31, 1994,
1993 and 1992 was $565,150, $242,916 and $256,626, respectively.
Income Taxes
Incomes taxes are provided on pre-tax earnings reported in the financial
statements. Deferred income taxes have been provided on the future tax effects
of differences between the financial statement and tax values of assets and
liabilities.
Employee Stock Ownership Plan (ESOP)
Dividends on shares held by the ESOP are charged to retained earnings.
F-21
<PAGE>
SERVICE SUPPLY SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
Federal income taxes......................... $296,000 $662,000 $993,793
State income taxes........................... 36,000 83,000 142,222
Deferred income taxes on temporary
differences................................. (2,000) (13,000) (265,015)
-------- -------- --------
Provision for income taxes $330,000 $732,000 $871,000
======== ======== ========
A reconciliation between the taxes due on pre-tax income using the effective
Federal and State tax rates and the provision for income taxes is as follows:
<CAPTION>
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
Tax at effective rates....................... $338,000 $727,000 $905,000
Permanent differences and other adjusting
items....................................... (8,000) 5,000 (34,000)
-------- -------- --------
$330,000 $732,000 $871,000
======== ======== ========
</TABLE>
At December 31, 1994, a deferred tax asset of $300,000 is included in
prepaid expenses. This represents the estimated future tax effects
attributable to temporary differences in tax and financial accounting for
accounts receivable, inventory and accrued liabilities.
3. LEASES AND RELATED PARTIES
The Company leases land, buildings, autos, trucks, trailers and equipment
under operating leases. Rental expense for the years ended December 31, 1994,
1993 and 1992 amounted to $1,136,784, $1,299,744 and $1,194,359, respectively.
Some of these leases were paid to partnerships which are comprised of
stockholders and officers of the Company. Rental expenses paid to these
partnerships for the years ended December 31, 1994, 1993 and 1992 amounted to
$136,000, $496,555 and $466,570, respectively.
As of December 31, 1994, future minimum lease payments under noncancelable
terms were as follows for the five succeeding years:
<TABLE>
<S> <C>
1995.............................. $ 866,567
1996.............................. 808,925
1997.............................. 795,325
1998.............................. 739,571
1999.............................. 319,944
----------
Total........................... $3,530,332
==========
</TABLE>
4. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan covering all of its
employees. It provides for discretionary contributions by the Company as
determined annually by the Board of Directors, up to the maximum amount
permitted under the Internal Revenue Code. The plan is a qualified profit
sharing plan required to invest primarily in Company stock. Contributions are
allocated to participants on a nondiscriminatory formula basis.
F-22
<PAGE>
SERVICE SUPPLY SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company contributed $732,286, $574,709 and $477,390 to the plan in 1994,
1993 and 1992 respectively. The plan purchased 6,200 shares of stock in 1994
for $148,800, 14,000 shares of stock in 1993 for $336,000 and 20,000 shares of
stock in 1992 for $250,000.
The plan owned 234,140 shares at December 31, 1994, 227,940 shares at
December 31, 1993 and 213,940 shares at December 31, 1992. These shares were
subject to a repurchase obligation by the Company at $40.00 per share at
December 31, 1994, $24.00 per share at December 31, 1993 and $11 per share at
December 31, 1992.
5. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
Cash paid for interest and income taxes for periods was as follows:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- ----------
<S> <C> <C> <C>
Interest........................................ $392,000 $318,000 $ 582,000
======== ======== ==========
Income Taxes.................................... $232,000 $432,000 $1,615,000
======== ======== ==========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company is party to a shareholders' agreement giving the Company an
option to purchase all or part of the stock proposed for sale by any
shareholder and requiring the Company to purchase all of the shares upon death
of a shareholder. Terminating employees must offer all of their stock for
purchase by the Company. The purchase price is the fair market value as of the
most recent Annual Valuation Date as determined by independent appraisal
required by the Employee Stock Ownership Plan.
F-23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The unaudited pro forma consolidated statement of income of the Company for
the year ended December 31, 1995 is based on the Consolidated Financial
Statements of the Company and the unaudited Consolidated Financial Statements
of Service Supply, included elsewhere in this Prospectus, adjusted to give
effect to (i) the acquisition of Service Supply, (ii) the Company's conversion
from an S corporation to a C corporation and (iii) the sale of the Common
Stock offered hereby and the application of the net proceeds therefrom, as if
these transactions had occurred on January 1, 1995.
The unaudited pro forma consolidated statement of income of the Company for
the six months ended June 30, 1996 is based on the unaudited Consolidated
Financial Statements of the Company, included elsewhere in this Prospectus,
adjusted to give effect to (i) the Company's conversion from an S corporation
to a C corporation and (ii) the sale of the Common Stock offered hereby and
the application of the net proceeds therefrom, as if these transactions had
occurred on January 1, 1996.
The acquisition adjustments, supplemental adjustments and offering
adjustments are based upon historical financial information of the Company and
Service Supply and certain assumptions that management of the Company believes
are reasonable. The unaudited pro forma consolidated statements of income are
not necessarily indicative of the results of operations as if the transactions
and the offering had occurred on the dates specified or to project the
Company's results of operations for any future period. The unaudited pro forma
consolidated statements of income should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto, and other
information pertaining to the Company, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of Service Supply and the Notes thereto
included elsewhere in this Prospectus.
F-24
<PAGE>
KEVCO, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
---------------------------
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1995 JUNE 30, 1995 ACQUISITION ACQUISITION SUPPLEMENTAL OFFERING AS
KEVCO SERVICE SUPPLY ADJUSTMENTS PRO FORMA ADJUSTMENTS SUPPLEMENTAL ADJUSTMENTS ADJUSTED
------------ -------------- ----------- ----------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $182,519 $59,327 $-- $241,846 $ -- $241,846 $ -- $241,846
Cost of sales........ 155,877 51,972 -- 207,849 -- 207,849 -- 207,849
-------- ------- ---- -------- ------- -------- ----- --------
Gross profit........ 26,642 7,355 -- 33,997 -- 33,997 -- 33,997
Commission income.... 2,610 1,383 -- 3,993 -- 3,993 -- 3,993
-------- ------- ---- -------- ------- -------- ----- --------
29,252 8,738 -- 37,990 -- 37,990 -- 37,990
Selling, general and
administrative
expenses............ 20,889 5,904 208 (1) 27,001 -- 27,001 -- 27,001
-------- ------- ---- -------- ------- -------- ----- --------
Operating income.... 8,363 2,834 (208) 10,989 -- 10,989 -- 10,989
Interest income...... 355 1 356 -- 356 -- 356
Interest expense..... (1,692) (407) (358)(2) (2,457) -- (2,457) 1,418(7) (1,039)
-------- ------- ---- -------- ------- -------- ----- --------
Income before income
taxes.............. 7,026 2,428 (566) 8,888 -- 8,888 1,418 10,306
State income taxes... 45 -- -- 45 (45)(4) -- -- --
Provision for income
taxes............... -- 843 (843)(3) -- 3,466 (5) 3,466 553(5) 4,019
-------- ------- ---- -------- ------- -------- ----- --------
Net income.......... $ 6,981 $ 1,585 $277 $ 8,843 $(3,421) $ 5,422 $ 865 $ 6,287
======== ======= ==== ======== ======= ======== ===== ========
Earnings per share... $ 1.10 $ 0.96
======== ========
Weighted average
shares outstanding.. 4,946 (6) 6,544
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of income.
F-25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(1) To reflect an additional $208,000 of amortization of goodwill and non-
compete agreements generated as a result of the June 30, 1995 purchase of
Service Supply.
(2) To reflect an additional $267,000 of interest expense as if the Company's
acquisition debt had been outstanding for an additional six months and an
additional $91,000 of amortization of loan costs generated as a result of
the June 30, 1995 purchase of Service Supply.
(3) To eliminate the provision for income taxes for Service Supply, which was
a C corporation prior to its acquisition by the Company.
(4) To eliminate state income taxes paid by the Company while it was an S
corporation as such taxes would be incorporated into the effective income
tax rate as a C corporation. See Note (5).
(5) To reflect a provision for income taxes at an effective rate of 39%
associated with the Company's conversion to a C corporation.
(6) Amount reflects the assumed issuance of 502,379 shares of Common Stock at
the initial public offering price per share, less underwriting discount,
to generate sufficient cash to fund the distribution of undistributed
earnings previously taxed at the stockholder level existing at December
31, 1995.
(7) To reflect a decrease in interest expense as if debt of $17.3 million, at
an average interest rate of 8.2%, had been repaid on January 1, 1995 from
the net proceeds of the Common Stock offered hereby. Indebtedness repaid
reflects the portion of net proceeds that would have been available to
repay debt after making an S corporation distribution in an amount equal
to undistributed earnings previously taxed at the stockholder level
existing at December 31, 1995.
F-26
<PAGE>
KEVCO, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPPLEMENTAL OFFERING
ACTUAL ADJUSTMENTS SUPPLEMENTAL ADJUSTMENTS AS ADJUSTED
-------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales............... $135,598 $ -- $135,598 $ -- $135,598
Cost of sales........... 115,247 -- 115,247 $ -- 115,247
-------- ------- -------- ----- --------
Gross profit.......... 20,351 -- 20,351 -- 20,351
Commission income....... 2,700 -- 2,700 -- 2,700
-------- ------- -------- ----- --------
23,051 -- 23,051 -- 23,051
Selling, general and
administrative
expenses............... 14,968 -- 14,968 -- 14,968
-------- ------- -------- ----- --------
Operating income...... 8,083 -- 8,083 -- 8,083
Interest income......... 141 -- 141 -- 141
Interest expense........ (1,199) -- (1,199) 735(4) (464)
-------- ------- -------- ----- --------
Income before income
taxes................ 7,025 -- 7,025 735 7,760
State income taxes...... 25 (25)(1) -- -- --
Provision for income
taxes.................. -- 2,740 (2) 2,740 287(2) 3,027
-------- ------- -------- ----- --------
Net income............ $ 7,000 $(2,715) $ 4,285 $ 448 $ 4,733
======== ======= ======== ===== ========
Earnings per share...... $ 0.90 $ 0.72
======== ========
Weighted average shares
outstanding............ 4,778 (3) 6,544
</TABLE>
See accompanying notes to unaudited pro forma consolidated statement of income.
F-27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(1) To eliminate state income taxes paid by the Company while it was an S
corporation as such taxes would be incorporated into the effective income
tax rate as a C corporation. See Note (2).
(2) To reflect a provision for income taxes at an effective rate of 39%
associated with the Company's conversion to a C corporation.
(3) Amount reflects the assumed issuance of 334,488 shares of Common Stock at
the initial public offering price per share, less underwriting discount,
to generate sufficient cash to fund the distribution of undistributed
earnings previously taxed at the stockholder level existing at June 30,
1996.
(4) To reflect a decrease in interest expense as if debt of $19.2 million, at
an average interest rate of 7.7%, had been repaid on January 1, 1996 from
the net proceeds of the Common Stock offered hereby. Indebtedness repaid
reflects the portion of net proceeds that would have been available to
repay debt after making an S corporation distribution in an amount equal
to undistributed earnings previously taxed at the stockholder level
existing at June 30, 1996.
F-28
<PAGE>
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- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Prior S Corporation Status............................................... 10
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Dilution................................................................. 12
Capitalization........................................................... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 22
Management............................................................... 31
Principal Shareholders................................................... 40
Description of Capital Stock............................................. 41
Shares Eligible for Future Sale.......................................... 42
Underwriting............................................................. 44
Legal Matters............................................................ 45
Experts.................................................................. 45
Additional Information................................................... 46
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL NOVEMBER 26, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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2,100,000 SHARES
[LOGO OF KEVCO INC. APPEARS HERE]
KEVCO, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
RAUSCHER PIERCE REFSNES, INC.
OPPENHEIMER & CO., INC.
November 1, 1996
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