Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From _____To _____
Commission File Number: 000-21621
KEVCO, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-2666013
- ------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
University Centre I
1300 S. University Drive
Suite 200
Fort Worth, Texas 76107
------------------------- ---------
(Address of principal (Zip Code)
executive offices)
(817-332-2758)
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding for each of the issuer's classes or
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 6,809,500 shares
- -------------------------------------- ---------------------------------
(Class) (Outstanding as of July 31, 1997)
<PAGE>
KEVCO, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 1997 (unaudited)
and December 31, 1996............................................. 3
Consolidated Statements of Income for the three-month and six-month
periods ended June 30, 1997 and 1996 (unaudited).................. 4
Consolidated Statements of Cash Flows for the six-month
periods ended June 30, 1997 and 1996 (unaudited).................. 5
Notes to Consolidated Financial Statements........................... 6
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 10
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K............................ 15
Signatures........................................................... 19
Exhibit index........................................................ 20
Exhibits............................................................. 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Kevco, Inc.
Consolidated Balance Sheets
(in thousands)
(unaudited)
June 30, December 31,
1997 1996
---- ----
ASSETS
Current assets
Cash and cash equivalents $ 80 $ 2,078
Trade accounts receivable, less allowance for
doubtful accounts of $119 and $100 in
1997 and 1996, respectively 24,413 9,458
Inventories 34,434 23,722
Prepaid expenses and other current assets 813 533
-------- -------
Total current assets 59,740 35,791
Property and equipment, net 17,802 10,208
Intangible assets, net 33,836 9,495
Other assets 644 322
-------- -------
Total assets $112,022 $55,816
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 19,661 $ 6,666
Accrued liabilities 3,739 3,107
Income taxes payable 57 762
Current portion of long-term debt 1,389 367
-------- -------
Total current liabilities 24,846 10,902
Long-term debt, less current portion 46,880 9,464
Deferred income taxes 629 629
Deferred compensation obligation 652 383
-------- -------
Total liabilities 73,007 21,378
------- -------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares
authorized; 6,809 shares issued and outstanding 68 68
Additional paid-in capital 32,854 32,854
Retained earnings 6,093 1,516
-------- -------
Total stockholders' equity 39,015 34,438
-------- -------
Total liabilities and stockholders' equity $112,022 $55,816
======== =======
See accompanying notes to consolidated financial statements.
3
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Kevco, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $101,305 $71,364 $173,404 $135,598
Cost of sales 87,434 60,506 149,410 115,247
-------- ------- -------- --------
Gross profit 13,871 10,858 23,994 20,351
Commission income 1,628 1,526 2,907 2,700
-------- ------- -------- --------
15,499 12,384 26,901 23,051
Selling, general and administrative expenses 10,097 7,858 17,778 14,968
-------- ------- -------- --------
Operating income 5,402 4,526 9,123 8,083
Interest expense 968 511 1,496 1,058
-------- ------- -------- --------
Income before income taxes 4,434 4,015 7,627 7,025
Income taxes 1,773 15 3,050 25
-------- ------- -------- --------
Net income $ 2,661 $ 4,000 $ 4,577 $ 7,000
======== ======= ======== ========
Earnings per share $ 0.39 $ 0.66
======== ========
Weighted average shares outstanding 6,910 6,927
======== ========
Pro forma information (Note 5)
Historical income before income taxes $ 4,015 $ 7,025
Income tax expense adjustments 1,566 2,740
------- --------
Pro forma net income $ 2,449 $ 4,285
======= ========
Pro forma earnings per share $ 0.51 $ 0.90
======= ========
Weighted average shares outstanding 4,778 4,778
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
Kevco, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
June 30,
---------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 4,577 $ 7,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,386 903
Gain on sale of assets -- (3)
Deferred compensation obligation 76 11
Changes in assets and liabilities (3,221) 456
-------- --------
Net cash provided by operating activities 2,818 8,367
Cash flows from investing activities:
Purchase of Consolidated (13,421) --
Purchase of Bowen (19,077) --
Purchase of equipment (747) (884)
Proceeds from sale of assets 813 3
(Increase) decrease in other assets (394) 54
-------- --------
Net cash used by investing activities (32,826) (827)
Cash flows from financing activities:
Payments on line of credit, net (1,771) --
Proceeds from long-term debt 30,000 25,900
Distributions paid -- (5,456)
Payments of long-term debt (219) (29,336)
Capital contributions -- 86
Collections on loan to stockholder -- 375
Net cash provided (used) by
-------- --------
financing activities 28,010 (8,431)
-------- --------
Net decrease in cash and cash equivalents (1,998) (891)
Beginning cash and cash equivalents 2,078 977
-------- --------
Ending cash and cash equivalents $ 80 $ 86
======== ========
See accompanying notes to consolidated financial statements.
5
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The Annual Report on Form 10-K for the year ended December 31, 1996, for Kevco,
Inc. includes a summary of significant accounting policies and should be read in
conjunction with this Form 10-Q. Prior to the effective date of the initial
public offering (see Note 3), Kevco, Inc. restructured and created an operating
company subsidiary with a subsidiary. As a result, the financial statements are
referred to as consolidated financial statements. The accompanying consolidated
financial statements of Kevco, Inc. and its wholly-owned subsidiaries (the
"Company") have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. All significant
intercompany transactions and accounts have been eliminated.
In the opinion of management, the consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the balance sheets as of June 30, 1997 and
December 31, 1996, the statements of income for the three-month and six-month
periods ended June 30, 1997 and 1996 and the statements of cash flows for the
six-month periods ended June 30, 1997 and 1996. The results of operations for
the three-month and six-month periods ended June 30, 1997 are not necessarily
indicative of the results of operations for the entire fiscal year ending
December 31, 1997.
On August 29, 1996, the Company effected a 0.47-for-1 reverse stock split of its
common stock and retired its treasury shares. All share and per share amounts
included in the accompanying financial statements and footnotes have been
restated to reflect the reverse stock split.
2. ACQUISITIONS
On February 27, 1997, the Company acquired substantially all of the assets, and
assumed certain liabilities, of Consolidated Forest Products, L.L.C.
("Consolidated") (the "Consolidated Acquisition") for approximately $14.0
million. The acquisition was accounted for as a purchase and, accordingly, the
operating results of Consolidated have been included in the operating results of
the Company since February 27, 1997. The acquisition cost in excess of the fair
value of net assets of Consolidated of approximately $9.6 million has been
accounted for as goodwill and will be amortized over its estimated useful life
of 40 years.
On February 28, 1997, the Company purchased all of the capital stock of Bowen
Supply, Inc. ("Bowen") (the "Bowen Acquisition") for approximately $19.5
million. The acquisition was accounted for as a purchase and, accordingly, the
operating results of Bowen have been included in the operating results of the
Company since February 28, 1997. The acquisition cost in excess of the fair
value of net assets of Bowen of approximately $14.9 million has been accounted
for as goodwill and will be amortized over its estimated useful life of 40
years.
6
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following pro forma financial information combines the historical results of
the Company as if the Consolidated Acquisition, the Bowen Acquisition and the
initial public offering had occurred as of the beginning of each period
presented:
Six months ended June 30,
-------------------------
1997 1996
---- ----
(dollars in thousands)
Net sales $195,700 $202,486
Net income $ 4,960 $ 6,475
Earnings per share $ 0.72 $ 0.94
3. INITIAL PUBLIC OFFERING
In November 1996, the Company completed an initial public offering of 2,415,000
shares of the Company's common stock (including an over-allotment option of
315,000 shares exercised in December 1996) for $12.00 per share, netting
proceeds to the Company after underwriting discounts and expenses of
approximately $26.0 million. Proceeds to the Company were used to repay all of
the outstanding balance of the Company's $20.0 million revolving credit facility
of $9.0 million and a permanent reduction of all of the outstanding balance of
the Company's term loan of $13.9 million. Proceeds were also used to make an S
corporation distribution of approximately $3.7 million representing previously
taxed but undistributed earnings through June 30, 1996 (see Note 7 and 8).
4. INVENTORIES
Inventories are comprised of the following (in thousands):
June 30, December 31,
1997 1996
-------- ------------
Raw materials $ 8,573 $ 4,385
Work-in process 832 332
Finished goods 2,145 1,324
Goods held for resale 22,884 17,681
------- -------
$34,434 $23,722
======= =======
7
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. INVENTORIES (continued)
During the second quarter of 1997, the Company adopted the FIFO method to value
inventories for which the LIFO method had previously been utilized for
determining cost. The FIFO method will better measure the current value of such
inventories, provide a more appropriate matching of revenues and expenses, and
conform all inventories of the Company to the same accounting method.
Additionally, the change will enhance the comparability of the Company's
financial statements by changing to the predominant method utilized in its
industry.
The Company applied this change retroactively, which resulted in an increase in
retained earnings of $789,000 and $787,000 at January 1, 1997 and 1996,
respectively. There was no material impact on net income or earnings per share
for the three and six months ended June 30, 1997 and 1996.
5. PRO FORMA INFORMATION
Pro forma net income for 1996 represents the results of operations adjusted to
reflect a provision for income taxes on historical income before income taxes,
which gives effect to the change in the Company's income tax status to a C
corporation concurrently with the consummation of the Company's initial public
offering. The difference between the pro forma income tax rates utilized and the
federal statutory rate of 34% relates primarily to state income taxes.
Pro forma earnings per share for 1996 has been computed by dividing pro forma
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, pro
forma earnings per share data for 1996 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.
Historical earnings per share for 1996 is not presented because it is not
indicative of the ongoing entity.
6. INCOME TAXES
Prior to November 6, 1996, the Company's stockholders had elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code. As a result,
there was no provision for federal income taxes in the historical financial
statements for the three-month and six-month periods ended June 30, 1996, as
such taxes were the responsibility of the individual stockholders. Effective
November 6, 1996, the Company converted to a C corporation and became subject to
federal income taxes on an ongoing basis.
8
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. STOCKHOLDERS' EQUITY
In conjunction with its initial public offering, the Company terminated its S
corporation status and distributed to its stockholders approximately $3.7
million, representing previously taxed but undistributed earnings at June 30,
1996. On December 31, 1996, the Company repaid notes in the approximate
aggregate amount of $5.2 million that were issued immediately prior to the
consummation of the offering, which notes were the final S corporation
distribution and represented earnings from July 1, 1996 to the consummation of
the offering.
8. CREDIT AGREEMENT
In February 1997, the Company and its lender amended the credit agreement in
order to fund the Consolidated Acquisition and the Bowen Acquisition (see Note
2). The term debt was increased to $30.0 million and the revolving credit
facility was increased to $35.0 million, each maturing in 2001. The Company's
term debt and revolver are collateralized by inventory, accounts receivable and
property and equipment and the common stock of the Company's subsidiaries (see
Note 1). 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).
9. RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 simplifies the standards for computing earnings per share ("EPS") previously
found in APB Opinion No. 15, Earnings Per Share ("Opinion 15"), and makes them
comparable to international EPS standards. SFAS 128 replaces the presentation of
primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Opinion 15. SFAS 128 also requires dual presentation of basic and diluted EPS on
the face of the income statement for entities with complex capital structures
and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. SFAS 128 requires restatement of all prior-period EPS data presented.
The Company is currently evaluating SFAS 128. However, management does not
believe that it will have a material impact on the consolidated financial
statements of the Company.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion includes the operations of Kevco, Inc. for
each of the periods discussed. This discussion and analysis should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
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
increases or decreases in shipment volume.
ACQUISITIONS
On February 27, 1997, the Company acquired Consolidated for
approximately $13.0 million in cash and 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. The acquisition cost in excess of the fair value of net assets of
Consolidated resulted in goodwill of approximately $9.6 million.
On February 28, 1997, the Company acquired Bowen for approximately
$18.0 million in cash and promissory notes in the aggregate original principal
amount of approximately $1.5 million, with such aggregate original principal
amount subject to potential post-closing downward adjustments. The acquisition
cost in excess of the fair value of net assets of Bowen resulted in goodwill of
approximately $14.9 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Consolidated Statements of Income data as a percentage of the Company's net
sales.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.3 84.8 86.2 85.0
----- ----- ----- -----
Gross profit 13.7 15.2 13.8 15.0
Commission income 1.6 2.1 1.7 2.0
----- ----- ----- -----
15.3 17.3 15.5 17.0
Selling, general and
administrative expenses 10.0 11.0 10.3 11.0
----- ----- ----- -----
Operating income 5.3 6.3 5.2 6.0
Interest expense (0.9) (0.7) (0.8) (0.8)
----- ----- ----- -----
Income before income taxes 4.4% 5.6% 4.4% 5.2%
===== ===== ===== =====
10
<PAGE>
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Net sales increased by $29.9 million, or 41.9%, to $101.3 million for
the three month period ended June 30, 1997 from $71.4 million for the comparable
1996 period. The net sales increase primarily resulted from the effect of the
Consolidated Acquisition and Bowen Acquisition (collectively, the
"Acquisitions") consummated in February 1997. However, net sales, without the
effect of the Acquisitions, decreased from $71.4 million to $68.0 million, a
decrease of 4.8%, which is comparable to the reported manufacturing housing
shipment decline of 3.2% from January through May 1997, as compared to the prior
period. Sales to the manufactured housing industry represented approximately 90%
for the three months ended June 30, 1997.
Gross profit increased by $3.0 million, or 27.5%, to $13.9 million for
the three month period ended June 30, 1997 from $10.9 million for the comparable
1996 period due primarily to the Acquisitions. Gross profit, as a percent of net
sales, decreased to 13.7% for the three month period ended June 30, 1997 from
15.2% for the comparable 1996 period. Management believes that the decrease in
gross profit, as a percent of net sales, is related primarily to consistently
high lumber prices compared to relatively stable gross profit dollars associated
with the Company's wood products divisions, which divisions represent 40% of net
sales.
Commission income increased by $0.1 million, or 6.7%, to $1.6 million
for the three month period ended June 30, 1997 from $1.5 million for the
comparable 1996 period. The increase was primarily attributable to the Company's
expansion in commission-based distribution arrangements.
Selling, general and administrative expenses increased by $2.2 million,
or 27.8%, to $10.1 million for the three month period ended June 30, 1997 from
$7.9 million for the comparable 1996 period. The increase was primarily due to
increased sales volume. Selling, general and administrative expenses, as a
percent of net sales, decreased to 10.0% for 1997 from 11.0% for the comparable
1996 period. The decrease reflects the Company's continued efforts in increasing
efficiency.
Net income increased by $0.3 million, or 12.5%, to $2.7 million for the
three months ended June 30, 1997 from $2.4 million for the comparable 1996
period on a pro forma basis giving effect to the Company's conversion from an S
corporation to a C corporation. The increase in net income is primarily
attributable to the increase in net sales due to the Acquisitions.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net sales increased by $37.8 million, or 27.9%, to $173.4 million for
the six month period ended June 30, 1997 from $135.6 million for the comparable
1996 period. The net sales increase primarily resulted from the effect of the
Consolidated Acquisition and Bowen Acquisition (collectively, the
"Acquisitions") in February 1997. However, net sales, without the effect of the
Acquisitions, decreased from $135.6 million to $128.9 million, a decrease of
4.9%, which is comparable to the reported manufacturing housing shipment decline
of 3.2% from January through May 1997, as compared to the prior period. Sales to
the manufactured housing industry represented approximately 90% for the six
months ended June 30, 1997.
11
<PAGE>
Gross profit increased by $3.7 million, or 18.2%, to $24.0 million for
the six month period ended June 30, 1997 from $20.3 million for the comparable
1996 period due primarily to the Acquisitions. Gross profit, as a percent of net
sales, decreased to 13.8% for the six month period ended June 30, 1997 from
15.0% for the comparable 1996 period. Management believes that the decrease in
gross profit, as a percent of net sales, is related primarily to consistently
high lumber prices compared to relatively stable gross profit dollars associated
with the Company's wood products divisions, which divisions represent 37% of net
sales.
Commission income increased by $0.2 million, or 7.4%, to $2.9 million
for the six month period ended June 30, 1997 from $2.7 million for the
comparable 1996 period. The increase was primarily attributable to the Company's
expansion in commission-based distribution arrangements.
Selling, general and administrative expenses increased by $2.8 million,
or 19.3%, to $17.8 million for the six month period ended June 30, 1997 from
$15.0 million for the comparable 1996 period. The increase was primarily due to
increased sales volume. Selling, general and administrative expenses, as a
percent of net sales, decreased to 10.3% for 1997 from 11.0% for the comparable
1996 period. The decrease reflects the Company's continued efforts in increasing
efficiency.
Net income increased by $0.3 million, or 7.0%, to $4.6 million for the
six months ended June 30, 1997 from $4.3 million for the comparable 1996 period
on a pro forma basis giving effect to the Company's conversion from an S
corporation to a C corporation. The increase in net income is primarily
attributable to the increase in net sales due to the Acquisitions.
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 $2.8 million for
the six months ended June 30, 1997. The Company's capital expenditures were $0.7
million for the six months ended June 30, 1997.
In connection with the acquisition of Service Supply 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. In November 1996, the Company completed an initial public offering of
2,415,000 shares of the Company's stock (including an over-allotment option of
315,000 shares exercised in December 1996) for $12.00 per share, netting
proceeds to the Company after underwriting discounts and expenses of
approximately $26.0 million. A portion of the net proceeds of the public
offering was used to repay all of the outstanding balance of the revolving
credit facility and to permanently repay all of the outstanding balance under
the term loan. In February 1997, the Company and its lender amended the credit
agreement in order to fund the Acquisitions. The term debt was increased to
$30.0 million and the revolving credit facility was increased to $35.0 million,
each maturing in 2001. The term debt will be payable $0 in 1997; $2.0 million in
1998; $8.0 million in 1999; $10.0 million in 2000; and $10.0 million in 2001.
Interest is 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 (7.05% at June 30, 1997). Borrowings under
the revolving credit facility are due 2001, and require 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 (7.45% at June 30, 1997). The borrower under the
12
<PAGE>
credit facility is one of the Company's operating subsidiaries, and the
obligations thereunder are guaranteed by the Company. The term debt and revolver
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).
As an S corporation, the Company 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 were
generally made on a quarterly basis as needed to satisfy such tax liabilities.
Concurrent with the consummation of the offering, the Company converted to a C
corporation and is now subject to federal and certain state taxes. The Company
does not anticipate paying cash dividends on its common stock in the foreseeable
future and intends to retain its earnings to support operations and finance
expansion.
In conjunction with its initial public offering, the Company terminated
its S corporation status and distributed to its stockholders approximately $3.7
million, representing previously taxed but undistributed earnings at June 30,
1996. On December 31, 1996, the Company repaid notes in the approximate
aggregate amount of $5.2 million that were issued immediately prior to the
consummation of the offering, which notes were the final S corporation
distribution and represented earnings from July 1, 1996 to the consummation of
the offering.
ASSET MANAGEMENT
The Company actively manages its assets and liabilities through
compensating its corporate and facility managers for receivable collection,
inventory control and profits in relation to these and other net assets
employed.
For the six months ended June 30, 1997, days sales in average
receivables was approximately 22 days, days sales in average inventory was
approximately 39 days and days sales in average payables was approximately 23
days.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report that are not
historical facts are forward-looking statements that involve risks and
uncertainties, including, but not limited to, the impact of competitors'
pricing, product quality and related features; the cyclical nature and
seasonality of the manufactured housing and recreational vehicle markets; the
dependence of the Company on its principal customers and key suppliers; and
other risks detailed in the Company's Securities and Exchange Commission
filings, including those set forth in the Company's Annual Report on Form 10-K.
13
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number Description
- ------ -----------
2.1 Merger Agreement, dated June 6, 1995 by and among Kevco, Inc. and Service
Supply Systems, Inc., joined by a wholly-owned subsidiary of Kevco, Inc.(1)
2.2 Form of Plan and Agreement of Merger (between Kevco, Texas, Inc. and Kevco
Delaware, Inc.)(1)
2.3 Form of Bill of Sale and General Assignment from Kevco Delaware, Inc., as
Assignor, to Sunbelt Wood Components, Inc. as Assignee.(1)
2.4 Form of Assumption Agreement between Kevco Delaware, Inc. and Sunbelt Wood
Components, Inc.(1)
2.5 Asset Purchase Agreement by and among Consolidated Forest Products, Inc.,
Consolidated Forest Products, L.L.C. and the members of Consolidated Forest
Products, L.L.C.(2)
2.6 Stock Purchase Agreement by and among Kevco Delaware, Inc. and the
shareholders of Bowen Supply, Inc. (2)
3.1 Articles of Incorporation of Kevco, Inc., as amended.(1)
3.2 Bylaws of Kevco, Inc.(1)
4.1 Form of certificate evidencing ownership of the Common Stock of Kevco,
Inc.(1)
10.1 Amendment No. 2 to 1995 Stock Option Plan (Amended and Restated 1995 Stock
Option Plan of Kevco, Inc.) and Supplementary Letter.(1)
10.2 1996 Stock Option Plan of Kevco, Inc., as amended, and Supplementary
Letter.(1)
10.3 Form of Amended and Restated Employment Agreement (between Gerald E. Kimmel
and Kevco, Inc.), joined therein by Kevco Delaware, Inc. and Sunbelt Wood
Components, Inc.(1)
10.4 Employment Agreement between C. Lee Denham and Kevco, Inc. dated June 30,
1995.(1)
10.5 Lease between K & E Land & Leasing and Kevco, Inc. dated December 1,
1977.(1)
14
<PAGE>
Exhibit
Number Description
- ------ -----------
10.6 Amendment No. 1 to Lease, by and between K & E Land & Leasing and Kevco,
Inc. dated March , 1982.(1)
10.7 Amendment No. 2 to Lease, by and between K & E Land & Leasing and Kevco,
Inc. dated May 30, 1983.(1)
10.8 Amendment No. 3 to Lease, by and between K & E Land & Leasing and Kevco,
Inc. dated February 1, 1993.(1)
10.9 Lease dated April 1, 1980 between City of Newton, Kansas and K & E Land &
Leasing.(1)
10.10 Sublease and Lease Guarantee Agreement dated April 1, 1980 between K & E
Land & Leasing and Kevco, Inc.(1)
10.11 Amendment No. 1 to Sublease and Lease Guaranty Agreement by and between
K & E Land & Leasing and Kevco, Inc. dated May 30, 1983.(1)
10.12 Lease Agreement dated October 12, 1987 between 1741 Conant Partnership &
Kevco, Inc.(1)
10.13 Equipment Lease Agreement dated January 1, 1991 between K & E Land &
Leasing and Kevco, Inc.(1)
10.14 Amendment No. 1 to Equipment Lease Agreement between K & E Land & Leasing
and Kevco, Inc. dated February 12, 1993.(1)
10.15 Amendment No. 2 to Equipment Lease Agreement between K & E Land & Leasing
and Kevco, Inc. dated October 26, 1993.(1)
10.16 Amendment No. 3 to Equipment Lease Agreement between K & E Land & Leasing
and Kevco, Inc. dated May 23, 1994.(1)
10.17 Deferred Compensation Agreement between Kevco, Inc. and Clyde A. Reed, Jr.
dated May 24, 1977.(1)
10.18 Amendment No. 1 to Deferred Compensation Agreement dated May , 1980.(1)
10.19 Amendment No. 2 to Deferred Compensation Agreement dated March 10,
1992.(1)
10.20 Amended and Restated Health and Accident Pan of Kevco, Inc.(1)
10.21 Investment and Tax Advice Plan of Kevco, Inc.(1)
10.22 Credit Agreement among Kevco Inc., certain Lenders and NationsBank of
Texas, N.A., as Administrative Lender dated June 30, 1995.(1)
15
<PAGE>
Exhibit
Number Description
- ------ -----------
10.23 First Amendment to Credit Agreement, dated as of September 1, 1995, among
Kevco, Inc., the banks listed on the signature pages thereof, and
NationsBank of Texas, N.A.(1)
10.24 Second Amendment to Credit Agreement dated as of November 29, 1995, among
Kevco, Inc., the banks listed on the signature pages thereof, and
NationsBank of Texas, N.A.(1)
10.25 Revolving Credit Note of Kevco, Inc. to NationsBank of Texas, N.A. dated
September 1, 1995, in the amount of $14,285,714.28.(1)
10.26 Term Loan Note of Kevco, Inc. to NationsBank of Texas, N.A. dated
September 1, 1995 in amount of $10,714,285.72.(1)
10.27 Revolving Credit Note of Kevco, Inc. to The Sumitomo Bank, Ltd. dated
February 2, 1996 in the amount of $5,714,285.72.(1)
10.28 Term Loan Note of Kevco, Inc. to The Sumitomo Bank, Ltd. dated February 2,
1996 in the amount of $4,285,714.28.(1)
10.29 Paine Webber Standardized 401(K) Profit-Sharing Adoption Agreement (No.
005) (To be used with Basic Plan Document No. 03 Only) for Kevco Inc.
dated May 24, 1996 and Paine Webber Defined Contribution Plan.(1)
10.30 Promissory Note of Gerald E. Kimmel to Kevco, Inc. dated October 26, 1993
in the amount of $5,000,000.(1)
10.31 Amendment No. 4 to Lease dated December 1, 1977 by and between K & E
Leasing and Kevco, Inc. dated October 26, 1993.(1)
10.32 Assignment and Acceptance dated February 2, 1996 between The Daiwa Bank,
Limited and The Sumitomo Bank, Ltd., Chicago, Branch.(1)
10.33 Form of Tax Indemnification and Distribution Agreement.(1)
10.34 Form of Promissory Note made by Kevco Texas, Inc in the amount of
$3,733,000 (the Prior S Corporation Earnings Note).(1)
10.35 Form of Promissory Note made by Kevco Texas, Inc. (the Future S
Corporation Earnings Note).(1)
10.36 Form of Assignment of $5,000,000 Note made by Kevco, Inc. (n/k/a Kevco
Texas, Inc.).(1)
10.37 Form of Adoption Agreement by Kevco, Inc. and Kevco Texas, Inc. (re; 1995
Stock Option Plan and 1996 Stock Option Plan).(1)
16
<PAGE>
Exhibit
Number Description
- ------ -----------
10.38 Amendment No. 1 dated September 21, 1988, to Lease Agreement by 1741
Conant Partnership as lessor an Kevco, Inc.(n/k/a Kevco Texas, Inc.).(1)
10.39 Letter Agreement dated June 22, 1982, between Kevco, Inc.(n/k/a Kevco
Texas, Inc.) and K & E Land & Leasing. (re: lease rentals).(1)
10.40 Letter Agreement dated October 1,1996 by Kevco, Inc., K & E Land &
Leasing, and 1741 Conant Partnership (re: lease rental).(1)
10.41 Form of Parent Pledge Agreement.(1)
10.42 Consent and Waiver, dated as October 21, 1996, by and among NationsBank of
Texas, N.A., The Sumitomo Bank, Ltd. and Kevco Texas, Inc.(1)
10.43 Amended and Restated Credit Agreement, dated as of February 27, 1997, by
and among Kevco Delaware, Inc., certain lenders and NationsBank of Texas,
N.A.(4)
11.1 Computation of Earnings Per Common Share.(5)
18.1 Letter on change in accounting principle.(5)
27.1 Financial Data Schedule.(5)
- ----------
(1) Previously filed as an exhibit to the Company's Registration Statement of
Form S-1 (No. 333-11173) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 27, 1997, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997.
(5) Filed herewith.
(b) REPORTS ON FORM 8-K
On March 13, 1997, the Company filed a Current Report on Form 8-K dated
February 17, 1997, reporting the acquisitions of Consolidated Forest
Products, L.L.C. and Bowen Supply, Inc. A Form 8-K/A dated February 17,
1997, was filed on May 8, 1997 to include the financial statements of the
acquired businesses and the pro forma financial data for the year ended
December 31, 1996 related to those acquisitions.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Commission Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KEVCO, INC.
Date: July 31, 1997 By: /s/ Jerry E. Kimmel
--------------------------------
Jerry E. Kimmel
Chairman of the Board, President
and Chief Executive Officer
Date: July 31, 1997 By: /s/ Ellis L. McKinley, Jr.
--------------------------------
Ellis L. McKinley, Jr.
Vice President, Chief Financial
Officer, Treasurer and Director
(Principal Financial Officer)
18
<PAGE>
KEVCO, INC.
Exhibit Index
Exhibit No. Description
----------- -----------
11.1 Computation of earnings per common share.
18.1 Letter on change in accounting principle.
27.1 Financial Data Schedule.
19
EXHIBIT 11.1
KEVCO, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Primary earnings
Net income $2,661 $2,449(1) $4,577 $4,285(1)
Shares
Weighted average number of 6,809 4,395 6,809 4,395
common shares outstanding
Conversion of options issued 101 119 118 119
and outstanding
Other shares -- 264(2) -- 264(2)
------ ------ ------ ------
Weighted average number of common
shares outstanding as adjusted 6,910 4,778 6,927 4,778
====== ====== ====== ======
Primary earnings per common share $ 0.39 $ 0.51 $ 0.66 $ 0.90
====== ====== ====== ======
Earnings per share is computed by dividing net income by the weighted
average number of common shares and common share equivalents outstanding. Common
share equivalents are computed using the treasury stock method. Under the
treasury stock method, market price is used to determine the number of common
share equivalents.
(1) Net income for the three and six months ended June 30, 1996 has been
adjusted to reflect a provision for income taxes, which gives effect to the
change in the Company's income tax status to a C corporation concurrently
with the consummation of the Company's initial public offering. (See Note 5
to the Financial Statements included in the Form 10-Q for which this forms
an exhibit.)
(2) Amount reflects the assumed issuance 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. (See Note 5 to the
Financial Statements included in the Form 10-Q for which this forms an
exhibit.)
EXHIBIT 18.1
LETTER OF INDEPENDENT ACCOUNTANTS
Mr. Jerry Kimmel
Kevco, Inc.
P.O. Box 947015
Fort Worth, Texas 76146-9015
Dear Mr. Kimmel:
We are providing this letter to you for inclusion as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.
We have read management's justification for the change in accounting from the
last-in-first-out inventory valuation method to the first-in-first-out inventory
valuation method contained in the Company's Form 10-Q for the quarter ended June
30, 1997. Based on our reading of the data and discussions with Company
officials of the business judgment and business planning factors relating to the
change, we believe management's justification to be reasonable. Accordingly, in
reliance on management's determination as regards elements of business judgment
and business planning, we concur that the newly adopted accounting principle
described above is preferable in the Company's circumstances to the method
previously applied.
We have not audited any financial statements of Kevco, Inc. as of any date or
for any period subsequent to December 31, 1996, nor have we audited the
application of the change in accounting principle disclosed in Form 10-Q of
Kevco, Inc. for the six months ended June 30, 1997; accordingly, our comments
are subject to revision on completion of an audit of the financial statements
that include the accounting change.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
Fort Worth, Texas
July 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF KEVCO, INC. FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 80
<SECURITIES> 0<F1>
<RECEIVABLES> 24,532<F2>
<ALLOWANCES> 119
<INVENTORY> 34,434
<CURRENT-ASSETS> 59,740
<PP&E> 24,945
<DEPRECIATION> 7,143
<TOTAL-ASSETS> 112,022
<CURRENT-LIABILITIES> 24,846
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 38,947
<TOTAL-LIABILITY-AND-EQUITY> 112,022
<SALES> 173,404
<TOTAL-REVENUES> 176,311
<CGS> 149,410
<TOTAL-COSTS> 17,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,496
<INCOME-PRETAX> 7,627
<INCOME-TAX> 3,050
<INCOME-CONTINUING> 4,577
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,577
<EPS-PRIMARY> 0.66
<EPS-DILUTED> 0
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line in the Statement of
Financial Position or Results of Operations are reported as 0 herein.
<F2> Notes and accounts receivable - trade are reported net of allowances for
doubtful accounts in the Statement of Financial Position.
</FN>
</TABLE>
