<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 27, 1997
Kevco, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 000-21621 75-2666013
- ---------------------------- ------------- -------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1300 S. University Drive, Suite 200, Fort Worth, Texas 76107
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 332-2758
<PAGE>
Reference is made to the Current Report on Form 8-K dated February 27, 1997 (the
"Form 8-K") filed by Kevco, Inc. on March 13, 1997. The Form 8-K is hereby
amended to read in its entirety as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
CONSOLIDATED ACQUISITION
On February 27, 1997, Kevco, Inc., a Texas corporation (the "Company"),
through a wholly-owned subsidiary, acquired (the "Consolidated Acquisition")
substantially all of the assets, and assumed certain liabilities, of
Consolidated Forest Products, L.L.C., an Alabama limited liability company
("Consolidated") pursuant to the terms of that certain Asset Purchase Agreement,
dated as of January 31, 1997 by and among Consolidated Forest Products, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company, Consolidated
and the Members of Consolidated.
As a result of the Consolidated Acquisition, the Company became the
indirect holder (through a subsidiary of the Company) of, with certain
limitations, all of the assets and properties, real and personal, tangible and
intangible, and certain liabilities of Consolidated. Consolidated was a
manufacturer of wood products for the manufactured housing industry and the
Company's subsidiary intends to continue the use of the assets it acquired
substantially in accordance with their prior use.
To the best knowledge of the Company, at the time of the Consolidated
Acquisition there was no material relationship between (i) Consolidated and the
Members on the one hand and (ii) the Company, or any of its affiliates, any
director or officer of the Company, or any associate of such director or officer
on the other.
The aggregate consideration paid by the Company as a result of the
Consolidated Acquisition was approximately $13 million in cash and two
promissory notes in the aggregate original principal amount of approximately
$1.0 million, with such aggregate original principal amount subject to potential
post-closing downward adjustments. In connection with the Consolidated
Acquisition, the Company assumed approximately $4.9 million in debt of
Consolidated. The acquisition consideration for the Consolidated Acquisition
was determined by arms-length negotiations between the parties to the Asset
Purchase Agreement.
The primary source of funds used in the Consolidated Acquisition was
funds extended under the Company's Credit Agreement with NationsBank of Texas,
N.A. ("NationsBank").
BOWEN ACQUISITION
On February 28, 1997, the Company through a wholly-owned subsidiary
acquired (the "Bowen Acquisition") all of the capital stock of Bowen Supply,
Inc., a Georgia corporation ("Bowen") pursuant to the terms of that certain
Stock Purchase Agreement, dated as of
2
<PAGE>
February 20, 1997 by and among Kevco Delaware, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company, Bowen and the shareholders of Bowen,
being Raja Corporation, Robert P. Murray Revocable Trust, Jere W. Goldsmith,
Harrold P. Bowen, and Fred P. Bowen, II (the "Shareholders").
As a result of the Bowen Acquisition, the Company became the indirect
holder (through a subsidiary of the Company) of all of the assets and
properties, real and personal, tangible and intangible, and liabilities of
Bowen. Bowen was a wholesale distributor of building products to the
manufactured housing and recreational vehicle industries and the Company's
subsidiary intends to continue the use of its assets substantially in accordance
with prior practice.
To the best knowledge of the Company, at the time of the Bowen
Acquisition there was no material relationship between (i) Bowen and the
Shareholders on the one hand and (ii) the Company, or any of its affiliates, any
director or officer of the Company, or any associate of such director or officer
on the other.
The aggregate consideration paid by the Company as a result of the Bowen
Acquisition was approximately $18 million in cash and three promissory notes in
the aggregate original principal amount of $2.5 million, with such aggregate
original principal amount subject to potential post-closing downward
adjustments. The acquisition consideration for the Bowen Acquisition was
determined by arms-length negotiations between the parties to the Stock Purchase
Agreement.
The primary source of funds used in the Bowen Acquisition was funds
extended under the Company's Credit Agreement with NationsBank.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The audited consolidated balance sheets of Bowen Supply, Inc. and
Subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the two years then
ended, are attached hereto as Annex A.
(b) The audited balance sheets of Consolidated Forest Products, L.L.C.
("Consolidated") as of September 29, 1996 and October 1, 1995, and the related
statements of income and retained earnings and cash flows for the year ended
September 29, 1996 and the period December 2, 1994 to October 1, 1995, are
attached hereto as Annex B.
(c) The unaudited pro forma condensed combined balance sheet of Kevco, Inc.
as of December 31, 1996 attached hereto as Annex C assumes the consummation of
the Consolidation Acquisition and the Bowen Acquisition as of that date. The
unaudited pro forma condensed combined statement of income for the year ended
December 31, 1996 also attached hereto as Annex C presents the historical
results of Kevco, Inc. as if Kevco, Inc. had consummated the Consolidated
Acquisition and Bowen Acquisition on January 1, 1996. Such pro forma information
is not necessarily indicative of operating results that would have been achieved
had
3
<PAGE>
such transactions been consummated on the date presented and should not be
construed as representative of future operations.
(d) Exhibits.
2.1 Asset Purchase Agreement by and among Consolidated Forest Products, Inc.,
Consolidated Forest Products, L.L.C. and the members of the Company.(1)
2.2 Stock Purchase Agreement by and among Kevco Delaware, Inc. and the
shareholders of Bowen Supply, Inc.(1)
4.1 Articles of Incorporation of Kevco, Inc., as amended.(2)
4.2 Bylaws of Kevco, Inc.(2)
4.3 Form of certificate evidencing ownership of the Common Stock of Kevco,
Inc.(2)
23.1 Consent of Coopers & Lybrand L.L.P.(3)
23.2 Consent of Dougherty McKinnon & Luby(3)
____________________
(1) Previously filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-11173) and incorporated herein by reference.
(3) Filed herewith.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Kevco, Inc.
Date: May 7, 1997 By: /s/ Jerry E. Kimmel
-------------------------------
Jerry E. Kimmel
Chairman of The Board,
President and
Chief Executive Officer
5
<PAGE>
ANNEX A
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
BOWEN SUPPLY, INC., AND SUBSIDIARY
DECEMBER 31, 1996
Independent Auditors' Report................................................ 1
Consolidated Balance Sheets................................................. 2
Consolidated Statements ofStockholders' Equity.............................. 4
Consolidated Statements of Income........................................... 5
Consolidated Statements of Cash Flows....................................... 6
Notes to Consolidated Financial Statements.................................. 8
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bowen Supply, Inc.
Americus, Georgia
We have audited the consolidated balance sheets of Bowen Supply, Inc., and
Subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the years 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 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 financial position of Bowen
Supply, Inc., and Subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Dougherty McKinnon & Luby
Columbus, Georgia
February 14, 1997, except
for Note K which is
February 28, 1997
<PAGE>
CONSOLIDATED BALANCE SHEETS
BOWEN SUPPLY, INC., AND SUBSIDIARY
December 31
1996 1995
----------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 39,195 $ 112,131
Trade accounts receivable--Note D 2,283,195 1,783,262
Other receivables 151,840 97,835
Inventories--Notes C and D 4,040,910 3,699,942
Deferred taxes--Note I 142,537 65,649
Other current assets 616,479 274,891
----------- ----------
TOTAL CURRENT ASSETS 7,274,156 6,033,710
OTHER ASSETS
Goodwill, net of accumulated amortization
of $540,504 and $518,081 for 1996 and
1995, respectively 356,442 378,865
Cash surrender value of life insurance--
Notes G and H 352,210 356,793
Rental property, net of allowances for depre-
ciation of $291,294 and $265,144 for
1996 and 1995, respectively 435,704 460,430
Deferred taxes, net--Note I 0 20,231
Other 5,450 13,029
----------- ----------
1,149,806 1,229,348
PROPERTY AND EQUIPMENT--Notes D, E and F
Land and land improvements 333,863 92,120
Buildings and improvements 1,732,608 580,154
Leasehold improvements 51,431 42,295
Machinery and equipment 1,249,703 598,753
Furniture and fixtures 580,627 431,779
Construction in progress 0 155,345
----------- ----------
3,948,232 1,900,446
Less allowances for depreciation 1,010,218 777,767
----------- ----------
2,938,014 1,122,679
----------- ----------
$11,361,976 $8,385,737
=========== ==========
2
<PAGE>
December 31
1996 1995
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank--Note D $ 855,866 $1,857,090
Note payable to stockholder 700,000 0
Trade accounts payable 1,565,624 974,882
Other accrued expenses--Note H 278,732 82,994
Income taxes payable 125,840 153,494
Current portion of long-term debt and
capitalized lease obligations 289,163 90,672
----------- ----------
TOTAL CURRENT LIABILITIES 3,815,225 3,159,132
LONG-TERM DEBT AND CAPITALIZED
LEASE OBLIGATIONS, less portion classified
as a current liability--Notes D and E 1,802,421 516,733
NOTE PAYABLE TO STOCKHOLDER--Note F 0 700,000
DEFERRED COMPENSATION--Note G 196,039 212,272
MINORITY INTEREST 6,640 12,122
STOCKHOLDERS' EQUITY--Note J
Common Stock, par value $.10 per share;
authorized 3,000,000 shares 75,000 75,000
Additional paid-in capital 1,420,000 1,420,000
Retained earnings 4,806,881 3,050,708
----------- ----------
6,301,881 4,545,708
Less Treasury Stock, at cost 760,230 760,230
----------- ----------
5,541,651 3,785,478
----------- ----------
COMMITMENTS--Note E
$11,361,976 $8,385,737
=========== ==========
See notes to consolidated financial statements
3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BOWEN SUPPLY, INC., AND SUBSIDIARY
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained Treasury Stock
Shares Amount Capital Earnings Shares Amount Total
------- ------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Balances at January 1, 1995 750,000 $75,000 $1,420,000 $1,861,924 125,000 $(760,230) $2,596,694
Net income for the year 0 0 0 1,188,784 0 0 1,188,784
------- ------- ---------- ---------- ------- --------- ----------
Balances at
December 31, 1995 750,000 75,000 1,420,000 3,050,708 125,000 (760,230) 3,785,478
Year ended December 31, 1996
Net income for the year 0 0 0 1,756,173 0 0 1,756,173
------- ------- ---------- ---------- ------- --------- ----------
Balances at
December 31, 1996 750,000 $75,000 $1,420,000 $4,806,881 125,000 $(760,230) $5,541,651
======= ======= ========== ========== ======= ========= ==========
</TABLE>
( ) denotes deduction
See notes to consolidated financial statements
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
BOWEN SUPPLY, INC., AND SUBSIDIARY
Year Ended December 31
1996 1995
------------ ------------
OPERATING REVENUES AND COSTS
Net sales $41,301,322 $30,296,011
Less cost of goods sold--Note C 33,269,930 24,026,234
----------- -----------
GROSS PROFIT 8,031,392 6,269,777
OTHER OPERATING REVENUES 1,403,328 918,595
----------- -----------
9,434,720 7,188,372
OPERATING EXPENSES--Note H
Selling, warehouse and delivery 4,424,647 3,616,386
General and administrative 1,755,821 1,406,924
----------- -----------
6,180,468 5,023,310
----------- -----------
INCOME FROM OPERATIONS 3,254,252 2,165,062
NONOPERATING REVENUES AND EXPENSES
Rental income, net--Note E 1,475 14,801
Gain on sale of assets 14,100 94,419
Interest income 5,069 6,218
Minority interest (deduction) (518) 4,891
Interest expense (deduction)--Note H (369,143) (333,386)
----------- -----------
(349,017) (213,057)
----------- -----------
INCOME BEFORE INCOME TAXES 2,905,235 1,952,005
INCOME TAX EXPENSE--Note I 1,149,062 763,221
----------- -----------
NET INCOME $ 1,756,173 $ 1,188,784
=========== ===========
See notes to consolidated financial statements
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
BOWEN SUPPLY, INC., AND SUBSIDIARY
Year Ended December 31
1996 1995
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 42,165,191 $ 30,933,192
Cash paid to suppliers and employees (39,066,689) (29,940,882)
Income taxes paid (1,233,371) (953,110)
Interest received 5,069 6,218
Interest paid (362,618) (347,754)
----------- ------------
NET CASH PROVIDED FROM
(USED IN) OPERATING ACTIVITIES 1,507,582 (302,336)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and
equipment and rental property 27,801 144,110
Purchases of property and equipment (1,429,218) (130,644)
Proceeds from cash surrender value of
life insurance 67,532 0
Purchase of minority interest in subsidiary (6,000) 0
Increase in cash surrender value of
life insurance (62,949) (50,567)
----------- ------------
NET CASH USED IN
INVESTING ACTIVITIES (1,402,834) (37,101)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving
credit agreement (1,001,224) 387,678
Additional borrowings under long-term debt
and capitalized lease obligations 1,024,216 0
Principal payments on long-term debt and
capitalized lease obligations (200,676) (92,598)
----------- ------------
NET CASH PROVIDED FROM
(USED IN) FINANCING ACTIVITIES (177,684) 295,080
----------- ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS 72,936 44,357
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 112,131 156,488
----------- ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 39,195 $ 112,131
=========== ============
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31
1996 1995
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED FROM (USED IN) OPERATING ACTIVITIES
Net income $1,756,173 $1,188,784
Adjustments to reconcile net income to net
cash provided from (used in) operating
activities:
Amortization 22,448 22,536
Depreciation 285,547 216,668
Deferred compensation 29,807 32,133
Deferred income taxes (56,657) (3,200)
Gain on sale of assets (14,100) (94,419)
Minority interest in net income (loss)
of consolidated subsidiary 518 (4,891)
Changes in account balances:
Receivables (540,934) (296,215)
Inventories (340,968) (789,616)
Other current assets (341,588) (170,243)
Other assets (5,450) 0
Trade accounts payable 590,742 (174,638)
Other accrued expenses 189,213 (28,178)
Income taxes payable (27,654) (186,689)
Accrued interest payable 6,525 (14,368)
Deferred compensation paid (46,040) 0
---------- ----------
NET CASH PROVIDED FROM
(USED IN) OPERATING ACTIVITIES $1,507,582 ($302,336)
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During 1996 and 1995 the Company acquired certain assets in exchange for
directly related debt totaling $660,639 and $150,000, respectively.
( ) denotes deduction
See notes to consolidated financial statements
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BOWEN SUPPLY, INC., AND SUBSIDIARY
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts and transactions of the Company and its 90% owned (80% owned in 1995)
subsidiary, Encore Industries, Inc. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Description of Business: The Company is primarily engaged in the wholesale
distribution of building products to the manufactured housing industry. The
Company operates out of eleven warehouse locations located throughout the
continental United States.
Concentration of Credit Risks: The Company extends unsecured credit to customers
located throughout the continental United States.
The Company maintains its cash in bank deposit accounts at high credit quality
financial institutions. The balances, at times, may exceed federally insured
limits.
The Company had net sales to two customers representing 20% and 12% of net sales
in 1996.
Inventories: Inventories are valued at the lower of cost or market value. The
last-in, first-out (LIFO) method is used to determine the cost of the Company's
inventory.
Property and Equipment and Rental Property: Property and equipment and rental
property are recorded at cost. Major renewals and betterments are charged to the
property accounts while replacements, maintenance and repairs which do not
extend the life of the respective assets are expensed currently.
The Company provides for depreciation of property and equipment and rental
property by charging against operations amounts sufficient to amortize the cost
of properties over their estimated useful lives: buildings 15 - 40 years;
machinery and equipment 3 - 10 years; furniture and fixtures 3 - 8 years.
Depreciation is computed using the straight-line method for financial reporting
purposes and on accelerated methods for income tax purposes.
When properties are disposed of, the related costs and accumulated depreciation
are removed from the respective accounts and any profit or loss on disposition
is credited or charged to operations.
Goodwill: Goodwill represents the excess of purchase price over net tangible
assets acquired. This amount is being amortized on the straight-line method over
a period of 40 years. The Company reviews goodwill to assess recoverability
periodically. At each balance sheet date, management assesses whether there has
been a permanent impairment in the value of goodwill by considering factors such
as expected future operating income, current operating results and other
economic factors. Management believes no impairment has occurred.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES - Continued
Income Taxes: Income taxes are provided based on earnings reported for tax
return purposes in addition to a provision for deferred income taxes in
accordance with Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. The Company provides for deferred income taxes (see Note I)
arising from the use of different methods of reporting depreciation expense for
financial reporting purposes and income tax purposes and from differences in the
timing of recording deferred compensation expense, bad debt expense, salary
expense and certain inventory costs for financial reporting purposes and income
tax purposes.
Retirement Plan: The Company adopted a Defined Contribution 401(k) Plan
effective January 1, 1996, in which substantially all full-time employees are
eligible to participate. Participating employees can defer up to 15% of eligible
compensation and the Company matches the employee contributions at the rate of
25% of the first 4% of employee deferral. The Company's matching contribution
amounted to $20,452 for 1996.
Cash and Cash Equivalents: For purposes of the Consolidated Statements of Cash
Flows, the Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
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.
Financial Instruments: The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents, accounts receivable, and accounts payable
approximates fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for the revolving line of
credit and long-term debt approximate fair value because the underlying
instruments are either at variable interest rates which reprice frequently or at
stated rates of interest which approximate market.
NOTE B -- ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE C -- INVENTORIES
Inventory cost is determined using the last-in, first-out (LIFO) method of
inventory accounting. The Company utilizes this method because it believes this
method results in a better matching of revenues and expenses. If the Company
had used the first-in, first-out (FIFO) method of inventory accounting,
inventories would have been $196,188 and $216,123 higher than reported at
December 31, 1996 and 1995, respectively.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D -- NOTE PAYABLE AND LONG-TERM DEBT
The Company has a line of credit agreement under which the Company can borrow up
to $3,500,000. Interest is payable at the LIBOR rate plus two percent and the
line of credit is collateralized by inventories, accounts receivable, machinery
and equipment and furniture and fixtures. This agreement contains certain
covenants restricting the payment of dividends and the maintenance of minimum
debt/worth ratios, debt service coverage ratios and tangible net worth. The
amount borrowed under this agreement was $855,866 at December 31, 1996 (see Note
K). The Company had a similar agreement with another lender in 1995. The amount
borrowed under that agreement was $1,857,090 at December 31, 1995. The weighted
average interest rate for borrowings under the line of credit was 8.3% and 9.9%
during 1996 and 1995, respectively.
Long-term debt is summarized as follows:
December 31
1996 1995
---------- --------
Capitalized lease obligations (see
Note E) $1,164,115 $ 44,259
9.9% note payable to Small Business
Administration, due in monthly install-
ments of $2,279, including interest,
in 1996 and decreasing to $2,229, in-
cluding interest, in 2008; collater-
alized by a second mortgage on real
estate with a cost of $507,591 (see
Note K) $ 179,812 $187,715
7.0% notes payable to bank, due in
monthly installments totaling $1,117,
including interest, through November,
1996; collateralized by trucks with a
cost of $42,500 0 10,885
8.0% note payable to bank, due in
monthly installments of $1,594, includ-
ing interest, through June, 1998, with
balance then due; collateralized by
real estate with a cost of $501,662
(see Note K) 98,099 107,904
7.0% note payable to bank, due in
monthly installments of $3,860,
including interest, through June,
1998; collateralized by real estate
with a cost of $507,591 (see Note K) 67,040 106,642
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D -- NOTE PAYABLE AND LONG-TERM DEBT - Continued
Construction loan payable to bank; due
on February 23, 1996; refinanced with
9.0% note below 0 150,000
9.0% note payable to bank, due in
monthly installments of $1,679,
including interest, through March, 2001;
with balance then due; collateralized by
a second mortgage on real estate with a
cost of $501,662 (see Note K) 161,868 0
8.80% note payable to bank, due in
monthly installments of $5,338,
including interest, through September,
2006; collateralized by real estate with
a cost of $531,345 (see Note K) 420,650 0
---------- ----------
2,091,584 607,405
Less current portion 289,163 90,672
---------- ----------
$1,802,421 $ 516,733
========== ==========
Annual maturities on long-term debt and capitalized lease obligations outlined
above at December 31, 1996, are summarized as follows:
1997 $ 289,163
1998 367,217
1999 255,092
2000 211,078
2001 223,848
Thereafter 745,186
----------
$2,091,584
==========
NOTE E -- LEASES
The Company has acquired certain assets under capital leases at rates ranging
from 4.90% to 12.46%. The cost and accumulated amortization of assets under
capital leases was $1,456,985 and $102,703, respectively, at December 31, 1996,
and $147,095 and $56,528, respectively, at December 31, 1995. Amortization of
these assets is included in depreciation expense in the accompanying
consolidated financial statements.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E -- LEASES - Continued
The capitalized lease obligations are summarized as follows:
December 31
1996 1995
--------- --------
Construction loan to be refinanced by an
Industrial Revenue bond on April 1, 1997;
payable in 120 monthly installments beginning
May 1, 1997, with interest fixed at the prime
rate plus 3/8% as of April 1, 1997;
collateralized by real estate and machinery and
equipment costing $727,482 (see below) $ 583,800 $ 0
Capitalized lease obligations with interest rates
ranging from 4.90% to 12.46%; monthly
payments ranging from $16,935 in 1997 to
$6,267 in 2001, year of final payment;
collateralized by automobiles, trucks and
equipment costing $729,503. 580,315 44,259
---------- --------
$1,164,115 $ 44,259
========== ========
The construction loan is to be refinanced from the proceeds of an Industrial
Revenue Bond issued by the Douglas-Coffee County Industrial Authority. The
Company will enter into a lease agreement with the Authority whereby the lease
payments pursuant to the lease will equal the debt service requirements of the
Bonds. The Bond issue will be for an amount not to exceed $616,250. Through
December 31, 1996, the Company had incurred $727,482 in costs relating to this
project.
In addition, certain warehouses and automobiles are leased (see Note H) under
noncancelable operating leases with original terms of three to ten years and
renewal options of similar lengths of time. The warehouse leases generally
provide for the payment of taxes and insurance by the lessor and utilities and
minor repairs by the Company. The total rental expense for all operating leases
amounted to $692,173 and $744,283 for 1996 and 1995, respectively.
Future minimum payments, by year and in the aggregate, under the capital leases
and operating leases with initial terms of one year or more consisted of the
following at December 31, 1996:
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE E -- LEASES - Continued
Capital Operating
Leases Leases
---------- ----------
1997 $ 274,152 $ 415,335
1998 289,204 365,284
1999 260,062 330,130
2000 192,481 312,000
2001 98,058 312,000
Thereafter 465,852 0
---------- ----------
Total minimum lease payments 1,579,809 $1,734,749
==========
Less amounts representing interest 415,694
----------
Included in Note D $1,164,115
==========
In computing the operating lease commitments shown above, it has been assumed
that leases with related parties will be renewed at their expiration dates at
annual rentals in effect at the end of the lease term.
The Company has rental property which it leases to unaffiliated companies under
leases ranging in original terms of one to twelve months. These leases provide
that the Company will pay real estate taxes and insurance on the leased
property.
The Company received rental income totaling $7,987 and $20,635 from these and
other short-term leases in 1996 and 1995, respectively.
NOTE F -- NOTE PAYABLE TO STOCKHOLDER
Note payable to stockholder consists of a note with interest payable monthly at
10% through April 1, 1997, with the principal then due. The note is
collateralized by substantially all machinery and equipment and furniture and
fixtures. The note is subordinated to the line of credit described in Note D.
NOTE G -- DEFERRED COMPENSATION
The Company has employment contracts with various employees which provide for
the payment of retirement benefits upon retirement at age 65. The agreements
provide for payments to be made to the employees or their legal representatives
over a ten year period commencing with the month following the employee's
retirement.
The Company has recorded a liability which represents the net present value of
benefits vested under these agreements using an interest rate of 8%. This
liability amounted to $196,039 and $212,272 at December 31, 1996 and 1995,
respectively.
The agreements also provide for death benefits to be paid to the employee's
legal representatives in the event of their death prior to retirement in lieu of
the retirement benefits described above. These benefits and the payment terms
thereof are equal to those described above and are funded by life insurance
policies.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H -- RELATED PARTY TRANSACTIONS
Transactions with related parties not disclosed elsewhere are summarized as
follows:
Year Ended December 31
1996 1995
-------- --------
Rental expense on automobiles and trucks $ 1,082 $ 12,990
Rental expense on warehouses 276,000 276,000
Interest expense on note payable to
stockholder 70,192 70,000
Equity in split-dollar life insurance
policy on stockholder/officer 86,878 66,979
Advances to majority stockholder
(repaid prior to year end) 907,613 0
Entertainment expenses paid to majority
stockholder for use of certain assets 11,900 5,100
The rental expense is paid under operating leases to the Company's majority
stockholder or President (see Note E).
Other accrued expenses in the accompanying consolidated balance sheets include
interest payable on the note payable to stockholder of $5,945 at
December 31, 1996 and 1995.
NOTE I -- INCOME TAXES
The net deferred taxes recorded in the accompanying consolidated balance sheets
include the following components:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
-------- -------
Non- Non-
Current Current Current Current
-------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Deferred tax liabilities $ 0 ($77,392) $ 0 ($63,570)
Deferred tax assets 142,537 77,392 65,649 83,801
-------- ---------- ------- ---------
NET DEFERRED TAXES $142,537 $ 0 $65,649 $ 20,231
======== ========== ======= =========
</TABLE>
Income tax expense in the accompanying Consolidated Statements of Income is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
--------- ---------
<S> <C> <C>
Federal
Current income tax expense $ 999,017 $ 604,087
Deferred income tax benefit (deduction) (44,746) (2,883)
---------- ---------
954,271 601,204
State
Current income tax expense 206,702 162,334
Deferred income tax benefit (deduction) (11,911) (317)
---------- ---------
194,791 162,017
INCOME TAX EXPENSE $1,149,062 $ 763,221
========== =========
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE I -- INCOME TAXES - Continued
A reconciliation of income tax expense in the accompanying Consolidated
Statements of Income to the statutory rate is summarized as follows:
Year Ended December 31
1996 1995
--------- ---------
Income tax expense at 34% statutory
rate $ 987,780 $ 663,681
Add (deduct):
State income taxes, net of federal
benefit 128,562 106,931
Income tax effect of nondeductible
expenses 33,124 19,275
Other (404) (26,666)
---------- ---------
161,282 99,540
---------- ---------
INCOME TAX EXPENSE $1,149,062 $ 763,221
========== =========
NOTE J -- STOCK OPTIONS
The Company has a Qualified Stock Option Plan which reserves 50,000 shares of
the Company's $.10 par value Common Stock for granting to key personnel. The
options allow these personnel to purchase the Company's stock at no less than
$5 per share or 100% of the fair market value, whichever is higher, on the dates
the options are granted. At December 31, 1996, no options had been granted
under this plan.
NOTE K -- SUBSEQUENT EVENT
The stockholders of the Company executed an agreement on February 28, 1997, with
Kevco, Inc., whereby Kevco, Inc. will acquire all of the outstanding stock of
the Company. All of the Company's long-term debt (including the revolver
described in Note D) is anticipated to be paid in full in conjunction with this
transaction.
15
<PAGE>
ANNEX B
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Consolidated Forest Products, L.L.C.
We have audited the accompanying balance sheets of Consolidated Forest Products,
L.L.C. (the Company) as of September 29, 1996 and October 1, 1995, and the
related statements of income and retained earnings and cash flows for the year
ended September 29, 1996 and the period December 2, 1994 to October 1, 1995.
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 audits 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 Consolidated Forest Products,
L.L.C. as of September 29, 1996 and October 1, 1995, and the results of its
operations and its cash flows for the year ended September 29, 1996 and the
period December 2, 1994 to October 1, 1995, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Fort Worth, Texas
November 8, 1996, except for Note 9 as
to which the date is February 27, 1997
1
<PAGE>
CONSOLIDATED FOREST PRODUCTS, L.L.C.
BALANCE SHEETS
September 29, 1996 and October 1, 1995
SEPTEMBER 29, OCTOBER 1,
1996 1995
------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 6,254 $ 6,053
Trade accounts receivable, net of
allowance of doubtful accounts of
$73,800 and $150,486 in 1996 and 1995,
respectively 3,928,686 3,786,127
Advances to owner and employees 17,546 12,757
Inventory 4,496,745 4,022,491
Prepaid expenses and other 287,313 252,259
------------- ------------
Total current assets 8,736,544 8,079,687
Property, plant, and equipment, net 4,099,814 4,086,385
Organization and financing cost, net of
accumulated amortization of $353,175 and
$152,115 in 1996 and 1995, respectively 282,825 483,885
Goodwill, net of accumulated amortization
of $470,130 and $213,690 in 1996 and 1995,
respectively 3,376,279 3,632,719
Noncompete agreement, net of accumulated
amortization of $27,500 in 1996 122,500 0
------------- ------------
$ 16,617,962 $ 16,282,676
============= ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,798,077 $ 1,586,967
Cash overdraft 2,552,927 1,718,697
Accounts payable 2,059,859 1,465,965
Accrued liabilities 724,408 652,059
------------ ------------
Total current liabilities 7,135,271 5,423,688
------------ ------------
Long-term debt, less current portion above 4,178,829 5,851,307
Borrowings under line of credit 2,956,194 4,253,853
------------ ------------
Total liabilities 14,270,294 15,528,848
------------ ------------
Commitments and contingencies (Note 7)
Members' equity:
Capital contributions 700,000 700,000
Retained earnings 1,647,668 53,828
------------ ------------
Total members' equity 2,347,668 753,828
------------ ------------
$ 16,617,962 $ 16,282,676
============ ============
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CONSOLIDATED FOREST PRODUCTS, L.L.C.
STATEMENTS OF INCOME AND RETAINED EARNINGS
for the year ended September 29, 1996 and the period
December 2, 1994 to October 1, 1995
DECEMBER 2,
1994 TO
SEPTEMBER 29, OCTOBER 1,
1996 1995
----------- -----------
Net sales $92,474,171 $62,872,613
Cost of sales 81,745,729 56,642,646
----------- -----------
Gross profit 10,728,442 6,229,967
Selling, general, and administrative
expenses 7,597,871 4,978,089
----------- -----------
Income from operations 3,130,571 1,251,878
----------- -----------
Other income and expense:
Other income 46,213 2,545
Interest expense (1,229,984) (1,053,477)
----------- -----------
Total other expense, net (1,183,771) (1,050,932)
----------- -----------
Net income 1,946,800 200,946
Retained earnings, beginning of period 53,828 0
Tax dividends paid to members (352,960) (147,118)
----------- -----------
Retained earnings, end of period $ 1,647,668 $ 53,828
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CONSOLIDATED FOREST PRODUCTS, L.L.C.
STATEMENTS OF CASH FLOWS
for the year ended September 29, 1996 and the period
December 2, 1994 to October 1, 1995
DECEMBER 2,
1994 TO
SEPTEMBER 29, OCTOBER 1,
1996 1995
------------- ------------
Cash flows from operating activities:
Net income $ 1,946,800 $ 200,946
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 576,154 392,999
Amortization 485,000 365,805
Loss (gain) on sale of equipment 1,487 (1,548)
Other, net 0 (235,503)
Changes in:
Accounts receivable, net (142,559) (360,511)
Advances to owner and employees (4,789) (21,052)
Inventory (474,254) (178,918)
Prepaid expenses and other (35,054) (111,770)
Accounts payable 593,894 330,574
Accrued liabilities 72,349 278,509
------------ -----------
Net cash provided by operating activities 3,019,028 659,531
------------ -----------
Cash flows from investing activities:
Cash paid in connection with acquisition
of net assets of business 0 (11,940,730)
Cash paid for organization costs 0 (82,624)
Cash paid for noncompete agreement (150,000) 0
Capital expenditures (646,070) (1,395,651)
Proceeds from sale of equipment 55,000 62,814
------------ -----------
Net cash used in investing activities (741,070) (13,356,191)
============ ===========
Cash flows from financing activities:
Cash paid for financing costs 0 (153,376)
Net (payments) proceeds on line of credit (1,297,659) 4,253,853
Proceeds from long-term debt 150,000 6,780,156
Payments on long-term debt (1,611,368) (1,018,379)
Proceeds from capital contributions 0 2,200,000
Change in cash overdraft 834,230 787,577
Tax dividends paid to members (352,960) (147,118)
------------ -----------
Net cash (used in) provided by
financing activities (2,277,757) 12,702,713
------------ -----------
Net increase in cash and cash
equivalents 201 6,053
Cash and cash equivalents, beginning of period 6,053 0
------------ -----------
Cash and cash equivalents, end of period $ 6,254 $ 6,053
============ ===========
Supplemental cash flow information:
Cash paid for interest during the period $ 1,256,911 $ 944,070
============ ===========
As described in Note 1, the note payable to member at October 1, 1995 of
$1,264,497 represented a noncash financing activity.
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CONSOLIDATED FOREST PRODUCTS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
On December 2, 1994, Consolidated Forest Products, L.L.C. (the Company)
purchased the net assets of Consolidated Forest Products, Inc.
(Predecessor) for $7,260,104. The financial information of the Company
reflects purchase accounting in which the purchase price of $7,260,104 is
allocated to the underlying assets and liabilities of the Predecessor based
on their respective estimated fair values. In connection with the
acquisition, payments in the amount of $5,995,607 were made to shareholders
of the Predecessor who are also members of the Company. Amounts paid to
these members in excess of Predecessor basis have been recorded as a
reduction of members' equity of $1,500,000. A note payable to the principal
member of the Predecessor was recorded for the unpaid portion of the
purchase price. Goodwill, the excess of the purchase price over the fair
value of the net assets acquired, amounted to approximately $3,846,000 and
is being amortized on a straight-line basis over 15 years.
The acquisition of the net assets of the Predecessor was financed with
contributed capital of $2,200,000 and the following borrowings from
Barclays Business Credit, Inc. (which was subsequently acquired by Fleet
Capital Corporation): a term note payable of $5,500,000 and advances under
a $6,500,000 revolving line of credit facility. Following the acquisition,
certain existing indebtedness of the Predecessor was repaid using financing
proceeds.
The Company is engaged in the business of fabricating and distributing
lumber and plywood, at wholesale, as well as manufacturing wood rafters for
mobile home manufacturers. The Company operates and sells to customers
primarily in the Southeastern United States. During the year ended
September 29, 1996 and the period December 2, 1994 to October 1, 1995,
sales to seven customers represented approximately 69% and 62% of total
sales, respectively, and outstanding balances related to these customers
represented approximately 59% and 63% of accounts receivable as of
September 29, 1996 and October 1, 1995, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used by the Company is set
forth below.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments with an original maturity of three months or less at the time
of purchase to be cash equivalents. Primarily all of the Company's cash and
cash equivalents are held in one major banking institution.
FINANCIAL INSTRUMENTS - The carrying amount reported in the balance sheet
for cash and cash equivalents, accounts receivable, and accounts payable
approximates fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amounts reported for the
revolving line of credit and long-term debt approximate fair value because
the underlying instruments are either at variable interest rates which
reprice frequently or at stated rates of interest which approximate market.
INVENTORY - Inventory is valued at the lower of cost or market. The first-
in, first-out (FIFO) method is used to determine the cost of the Company's
inventory.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
INTANGIBLE ASSETS - Intangible assets are stated at cost and are being amortized
on a straight-line basis over lives as follows:
Life
-----------
Goodwill 15 years
Organization and financing costs 5 - 7 years
Noncompete agreement 5 years
The Company reviews goodwill to assess recoverability periodically. At each
balance sheet date, management assesses whether there has been a permanent
impairment in the value of goodwill by considering factors such as expected
future operating income, current operating results and other economic factors.
Management believes no impairment has occurred.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated at
cost and depreciated using the straight-line method over the estimated useful
lives of the assets. Expenditures for repairs and maintenance are charged to
expense as incurred; betterments which materially prolong the lives of the
assets are capitalized. The cost of assets retired or otherwise disposed of and
the related accumulated depreciation are removed from the accounts and the gain
or loss on such disposition is included in income.
LONG-LIVED ASSETS - During the year ended September 29, 1996, the Company
implemented Financial Accounting Standards Board (FASB) Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. In accordance with FASB 121, the Company will recognize
impairment losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the asset's carrying amount. If undiscounted
future cash flows are less than the asset's carrying amount, an impairment loss
would be recorded using discounted future cash flows. There were no such losses
recognized at September 29, 1996.
INCOME TAXES - As a limited liability company, the Company is not subject to
income taxes. The liability or benefit is passed on to the members of the
Company. Thus, no provision for income taxes has been provided for in the
accompanying financial statements.
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 date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. INVENTORY
Inventory consists of the following at September 29, 1996 and
October 1, 1995:
September 29, 1996 October 1, 1995
------------------ ---------------
Raw materials $ 3,498,929 $ 3,299,664
Work-in-process 304,978 187,595
Finished goods 692,838 535,232
------------- -------------
$ 4,496,745 $ 4,022,491
============= =============
4. PROPERTY, PLANT, AND EQUIPMENT
Balances of property, plant, and equipment consist of the following at
September 29, 1996 and October 1, 1995:
September 29, 1996 October 1, 1995
------------------ ---------------
Land $ 393,822 $ 380,792
Buildings 1,091,329 961,767
Machinery and equipment 2,159,840 1,784,971
Furniture and office equipment 93,099 80,874
Automotive equipment 1,293,355 1,263,902
------------- -------------
5,031,445 4,472,306
Less accumulated depreciation 931,631 385,921
------------- -------------
$ 4,099,814 $ 4,086,385
============= =============
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. LONG-TERM DEBT
At September 29, 1996 and October 1, 1995, long-term debt consists of the
following:
September 29, October 1,
1996 1995
------------- ----------
Senior note payable to Fleet Capital
Corporation, variable interest (9.75%
and 10.25% at September 29, 1996 and
October 1, 1995, respectively) payable
monthly along with $114,583 in principal
until January 6, 1998, at which time
remaining principal balance becomes due. $ 3,145,520 $ 4,520,520
Senior note payable to Fleet Capital
Corporation, variable interest (9.75%
and 10.25% at Sepember 29, 1996 and
October 1, 1995, respectively) payable
monthly along with $10,833 in principal
until January 6, 1998, at which time
remaining principal balance becomes due. 487,505 617,501
Note payable to member, subordinate to
the debt payable to Fleet Capital
Corporation, with interest payable
annually at 8%. 1,190,681 1,264,497
Subordinated note payable to member,
variable interest (9.25% and 10% at
September 29, 1996 and October 1, 1995,
respectively) payable monthly, principal
due January 6, 1999. 450,000 300,000
Subordinated note payable to member,
variable interest (9.25% and 10% at
September 29, 1996 and October 1, 1995,
respectively) payable monthly, principal
due January 6, 1999. 300,000 300,000
Deferred loan origination
fee payable to Fleet Capital
Corporation, due January 6, 1998. 400,000 400,000
Note payable to AmSouth
Bank, payable monthly
including interest at 7-3/4%. 0 30,156
Note payable to City of Haleyville Water
& Sewer Department, no interest,
principal payable $200 monthly. 3,200 5,600
----------- -----------
5,976,906 7,438,274
Less current maturities 1,798,077 1,586,967
----------- -----------
Long-term portion $ 4,178,829 $ 5,851,307
=========== ===========
Future maturities of long-term debt are as follows:
Years Ending September 29:
1997 $ 1,798,077
1998 2,828,829
1999 1,050,000
2000 300,000
-----------
$ 5,976,906
===========
The Company operates under a revolving line of credit agreement with Fleet
Capital Corporation (the Bank), a commercial bank, which provides
borrowings based upon certain inventory and accounts receivable levels up
to a maximum amount of $7,608,000. Advances bear interest at 1.5% in excess
of the prime rate. The interest rate was 9.75% at September 29, 1996. At
September 29, 1996, the outstanding borrowings under this line of credit
totaled $2,956,194 and the total unused availability under this agreement
was approximately $1,540,000. Total outstanding borrowings under this line
of credit become due January 6, 1998.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
The revolving line of credit agreement, as well as the senior notes payable
to the Bank, places certain restrictive covenants upon the Company, such as
maintaining specified equity levels, meeting certain financial ratios, and
achieving certain net income and cash flow levels. At September 29, 1996
and for the year then ended, the Company was in compliance with or had
received appropriate waivers of these covenants. Substantially all of the
assets of the Company are pledged as collateral for the line-of-credit and
long-term debt.
The note payable to member of $1,190,681 at September 29, 1996 represents
the unpaid portion of the purchase price as described in Note 1. Principal
payments on the note are subordinate to the debt owed to the Bank; however,
the Bank did allow payment of the first installment on the note in January
of 1996 of approximately $65,000. Further, absent any defaults under the
bank agreements, the Company is allowed to make annual interest payments on
this note as well. During the period ended October 1, 1995, the Company
obtained working capital loans of $300,000 each from two of its members to
fund working capital needs of the Company. An additional $150,000 was
borrowed from one of its members during the year ended September 29, 1996.
Each of these loans are subordinated to the Company's bank debt with only
interest payments required until the January 6, 1999 maturity of the notes.
6. RETIREMENT PLAN
The Company has made available to all eligible employees a defined
contribution retirement plan (the Plan). Employees are eligible to
participate after completing six months of service and attaining the age of
eighteen. The Plan provides that employees may elect to defer up to 15% of
compensation, as defined in the plan agreement. The Company will match 50%
of employee deferrals up to 6% of compensation. The Company made
contributions of approximately $40,500 and $26,000 for the year ended
September 29, 1996 and the period December 2, 1994 to October 1, 1995,
respectively.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office and warehouse space under various operating
leases. The leases generally are for terms of three to five years and do
not contain purchase options. Rent expense was approximately $184,000 and
$115,000 for the year ended September 29, 1996 and the period December 2,
1994 to October 1, 1995, respectively.
The future minimum lease payments required under noncancelable operating
leases with initial or remaining terms of one or more years at September
29, 1996 were approximately as follows:
Fiscal Years:
-------------
1997 $ 182,000
1998 178,500
1999 177,000
2000 64,500
2001 2,250
----------
$ 604,250
==========
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS, CONTINUED
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. RELATED PARTIES
On January 3, 1995, the Company entered into a sales agreement with Caney
Creek, Inc. (Caney Creek), a sales company owned by individuals with a
minority membership position in the Company. Under this agreement, Caney
Creek has exclusive rights to sell products manufactured by the Company to
all but one of the Company's customers. The initial term of this agreement
was for the three-year period ending December 31, 1997. After the initial
term, this agreement shall automatically renew for successive one-year
terms unless otherwise canceled by either party. Upon termination of the
sales agreement, the Company is obligated to pay Caney Creek an amount
equal to one-half of the sales commissions paid to them during the previous
twelve-month period in exchange for a one-year covenant not to compete from
Caney Creek and its employees. This amount will be paid in twelve monthly
installments beginning the month after the agreement is effectively
terminated. Sales commissions paid to Caney Creek totaled approximately
$2,886,000 and $2,000,000 for the year ended September 29, 1996 and the
period December 2, 1994 to October 1, 1995, respectively.
9. SUBSEQUENT EVENT
On February 27, 1997, Kevco, Inc., through a wholly-owned subsidiary,
acquired substantially all of the assets and assumed certain liabilities of
the Company pursuant to the terms of a certain asset purchase agreement,
dated as of January 31, 1997.
10
<PAGE>
ANNEX C
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The unaudited pro forma financial data is based on (i) the consolidated
financial statements of Kevco, Inc. ("Company") as of and for the year ended
December 31 ,1996, (ii) the consolidated financial statements of Bowen Supply,
Inc. ("Bowen") as of and for the year ended December 31, 1996, included
elsewhere in this Form 8-K/A and (iii) the consolidated financial statements of
Consolidated Forest Products, L.L.C. ("Consolidated") as of and for the year
ended September 29, 1996, included elsewhere in this Form 8-K/A. The unaudited
pro forma financial data gives effect to (x) the acquisition of Bowen ("Bowen
Acquisition"), (y) the acquisition of Consolidated ("Consolidated Acquisition"
and, collectively with the Bowen Acquisition, the "Acquisitions") and (z) the
sale of 2,415,000 shares of common stock and conversion from an S corporation to
a C corporation in November 1996 (including an over-allotment option of 315,000
shares exercised in December 1996) ("Offering"), as if these transactions had
occurred on January 1, 1996.
The unaudited pro forma condensed combined balance sheet at December 31, 1996
is based on the consolidated financial statements of the Company adjusted to
give effect to the Acquisitions as if such transactions had occurred on
December 31, 1996. The unaudited pro forma condensed combined statement of
income for the year ended December 31, 1996 is based on the consolidated
financial statements of the Company and adjusted to give effect to the
Acquisitions and the Offering as if such transactions had occurred on
January 1, 1996. The acquisition adjustments and offering adjustments are based
upon historical financial information of the Company, Bowen and Consolidated and
certain assumptions that management of the Company believes are reasonable. The
Acquisitions are accounted for under the purchase method of accounting. Under
this method of accounting, the purchase price has been allocated to the assets
and liabilities acquired based on preliminary estimates of fair value. The
actual fair value is determined as of the consummation of each of the
Acquisitions. The unaudited pro forma financial data does not necessarily
reflect the results of operations or the financial position of the Company that
actually would have resulted had the Acquisitions and the Offering occurred at
the dates indicated, or project the results of operations or financial position
of the Company for any future date or period.
The unaudited pro forma financial data should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto, the
consolidated financial statements of Bowen and Consolidated and the notes
thereto included elsewhere in this Form 8-K/A.
<PAGE>
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Bowen Supply, Inc. Consolidated Forest Products, L.L.C.(A)
------------------------------------ ---------------------------------------
Kevco Acquisition Acquisition Pro Forma
Historical Historical Adjustments Pro Forma Historical Adjustments Pro Forma Total
----------- ---------- ----------- --------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,078 $ 39 $ - $ 39 $ 6 $ - $ 6 $ 2,123
Trade accounts receivable,
net 9,458 2,283 - 2,283 3,929 - 3,929 15,670
Inventories 22,792 4,041 196(a) 4,237 4,497 - 4,497 31,526
Other current assets 533 911 - 911 304 - 304 1,748
----------- ---------- ----------- --------- ---------- ----------- --------- ---------
Total current assets 34,861 7,274 196 7,470 8,736 - 8,736 51,067
Property and equipment,
net 10,208 2,938 - 2,938 4,100 1,103 (e) 5,203 18,349
Intangible assets, net 9,495 356 (356)(a) 15,096 3,782 (3,782)(e) 8,642 33,233
14,885 (a) 8,431 (e)
211 (b) 211 (b)
Other assets 440 794 - 794 - 492 (f) 492 1,726
----------- ---------- ----------- --------- ---------- ----------- --------- ---------
Total assets $ 55,004 $ 11,362 $ 14,936 $ 26,298 $ 16,618 $ 6,455 $ 23,073 $ 104,375
=========== ========== =========== ========= ========== =========== ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,666 $ 1,566 $ - $ 1,566 $ 4,613 $ - $ 4,613 $ 12,845
Accrued liabilities 3,107 279 - 279 724 - 724 4,110
Current portion of long-
term debt 367 289 - 289 1,798 (1,798)(e) - 656
Other liabilities 762 1,681 - 1,681 - - - 2,443
----------- ---------- ----------- --------- ---------- ----------- --------- ---------
Total current
liabilities 10,902 3,815 - 3,815 7,135 (1,798) 5,337 20,054
Long-term debt, less
current portion 9,464 1,802 20,478 (c) 22,280 4,179 (4,179)(e) 14,288 46,032
14,288 (c)
Other liabilities 987 203 - 203 2,956 492 (f) 3,448 4,638
----------- ---------- ----------- --------- ---------- ----------- --------- ---------
Total liabilities 21,353 5,820 20,478 26,298 14,270 8,803 23,073 70,724
Stockholders' equity:
Common stock 68 75 (75) (d) - - - - 68
Additional paid-in
capital 32,854 1,420 (1,420) (d) - 700 (700)(g) - 32,854
Retained earnings 729 4,807 (4,807) (d) - 1,648 (1,648)(g) - 729
Treasury stock - (760) 760 (d) - - - - -
----------- ---------- ----------- --------- ---------- ----------- --------- ---------
Total stockholders'
equity 33,651 5,542 (5,542) - 2,348 (2,348) - 33,651
----------- ---------- ----------- --------- ---------- ----------- --------- ---------
Total liabilities and
stockholders' equity $ 55,004 $ 11,362 $ 14,936 $ 26,298 $ 16,618 $ 6,455 $ 23,073 $ 104,375
=========== ========== =========== ========= ========== =========== ========= =========
(A) As of September 29, 1996, which represents Consolidated's fiscal year end.
</TABLE>
<PAGE>
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(a) To eliminate historical goodwill of $356, record a fair value adjustment to
inventory of $196 and record goodwill of $14,885. Goodwill resulted from the
excess of the purchase price of $20,267 over the fair value of the net
assets acquired by the Company and is amortized against net income using the
straight-line method over 40 years.
(b) To reflect the loan origination fees related to the debt incurred to fund
the Acquisitions.
(c) To reflect total borrowings necessary to fund the Acquisitions.
(d) To eliminate the equity of Bowen of $5.5 million.
(e) To eliminate historical intangibles of $3,782, record fair value adjustments
to property and equipment of $1,103, eliminate historical long-term debt not
assumed by the Company of $5,977 and record goodwill of $8,431. Goodwill
resulted from the excess of the purchase price of $14,077 over the fair
value of the net assets acquired by the Company. Fair value adjustments for
property, machinery and equipment and goodwill are amortized against net
income using the straight-line method over a period of 40 years, 15 years
and 40 years, respectively.
(f) To reflect the present value of the future payments related to non-compete
agreements entered into with three employees of Consolidated in connection
with the Consolidated Acquisition.
(g) To eliminate the equity of Consolidated of $2.3 million.
<PAGE>
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Bowen Supply, Inc. Consolidated Forest Products, L.L.C.(A)
----------------------------------- ---------------------------------------
Kevco Acquisition Acquisition Pro Forma
Historical Historical Adjustments Pro Forma Historical Adjustments Pro Forma Offering Total
---------- ---------- ----------- --------- ---------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 267,344 $ 41,301 $ - $ 41,301 $ 92,474 $ - $ 92,474 $ - $ 401,119
Cost of sales 226,765 33,270 196 (b) 33,466 81,746 - 81,746 - 341,977
---------- ---------- ---------- --------- ---------- ----------- --------- -------- ---------
Gross profit 40,579 8,031 (196) 7,835 10,728 - 10,728 - 59,142
Commission income 5,497 1,403 - 1,403 - - - - 6,900
---------- ---------- ---------- --------- ---------- ----------- --------- -------- ---------
46,076 9,434 (196) 9,238 10,728 - 10,728 - 66,042
Selling, general and
administrative
expenses 29,723 6,180 (494)(a) 6,100 7,597 313 (e) 6,441 - 42,264
414 (b) (1,510)(f)
- - - - - 41 (h) - - -
---------- ---------- ---------- --------- ---------- ----------- --------- -------- ---------
Operating income 16,353 3,254 (116) 3,138 3,131 1,156 4,287 - 23,778
Interest income 151 5 - 5 - - - - 156
Interest expense (2,209) (369) (1,556)(c) (1,925) (1,230) (1,085)(c) (1,738) 1,296(i) (4,576)
611 (g)
(34)(h)
Other income (expense) - 15 - 15 46 - 46 - 61
---------- ---------- ---------- --------- ---------- ----------- --------- -------- ---------
Income before
income taxes 14,295 2,905 (1,672) 1,233 1,947 648 2,595 1,296 19,419
Income taxes 1,307 1,149 (656)(d) 493 _ 1,038 (d) 1,038 4,643(j) 7,481
---------- ---------- ---------- --------- ---------- ----------- --------- -------- ---------
Net income $ 12,988 $ 1,756 $ (1,016) $ 740 $ 1,947 $ (390) $ 1,557 $ (3,347) $ 11,938
========== ========== ========== ========= ========== =========== ========= ======== =========
Historical income
before income
taxes $ 14,295
Income tax expense
adjustment (B) 5,432
----------
Pro forma net income $ 8,863
==========
Pro forma earnings
per share $ 1.60 $ 1.73
========== =========
Pro forma weighted
average shares
outstanding 5,531 6,911
========== =========
(A) For the year ended September 29, 1996, which represents Consolidated's fiscal year end.
(B) To reflect a 38% provision for income tax on historical income before income taxes.
</TABLE>
<PAGE>
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(a) To eliminate expense of $471 related to an executive of Bowen who was
retired in connection with the Bowen Acquisition and to eliminate
amortization of historical goodwill of $23.
(b) To reflect the amortization of the fair value adjustment to inventory of
$196 and the amortization of goodwill and loan origination fees of $372 and
$42, respectively, related to the Bowen Acquisition.
(c) To reflect interest expense on borrowings to fund the Acquisitions at an
assumed interest rate of 7.6%.
(d) To reflect the amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense was computed utilizing an
effective rate of 40%.
(e) To reflect the amortization of the fair value adjustments to property and
equipment of $60 and the amortization of loan origination fees and goodwill
of $42 and $211, respectively, related to the Consolidated Acquisition.
(f) To eliminate historical management fees and amortization of historical
intangible assets of Consolidated totalling $166 and $488, respectively, and
to reflect a reduction in commission expense of $856 resulting from the
amendment of a contract with a third party.
(g) To eliminate historical interest expense related to long-term debt not
assumed by the Company in the Consolidated Acquisition.
(h) To reflect the amortization and interest expense related to the non-compete
agreements entered into in connection with the Consolidated Acquisition.
(i) To reflect a decrease in interest expense as if debt of $16.9 million, at an
average interest rate of 7.65%, had been repaid on January 1, 1996 from the
net proceeds of the Offering. Indebtedness repaid reflects the portion of
net proceeds that were available to repay debt after making final S
corporation distributions of $9.1 million in 1996.
(j) To reflect a provision for income taxes at an effective rate of 40%
associated with the Company's conversion to a C corporation offset by the
tax effect of the decrease in interest expense referred to in (h).
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Kevco, Inc. on Form S-8 (File No. 333-19959) of our report dated
November 8, 1996, except for Note 9 as to which the date is February 27, 1997,
on our audits of the financial statements of Consolidated Forest Products,
L.L.C. as of September 29, 1996 and October 1, 1995 and for the year ended
September 29, 1996 and the period December 2, 1994 to October 1, 1995, which
report is included in this Form 8-K/A.
/s/ COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
May 6, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Kevco, Inc. on Form S-8 (File No. 333-19959) of our report dated
February 14, 1997, except for Note K, which is February 28, 1997, on our audits
of the consolidated financial statements of Bowen Supply, Inc. and Subsidiary as
of December 31, 1996 and 1995 and for the two years in the period ended
December 31, 1996, which report is included in this Form 8-K/A.
/s/ Dougherty McKinnon & Luby
Columbus, Georgia
May 6, 1997
