<PAGE>
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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 September 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 76107
1300 S. University Drive (Zip Code)
Suite 200
Fort Worth, Texas
(Address of principal
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 6,825,049 SHARES
(Class) (Outstanding as of October 31, 1997)
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<PAGE>
KEVCO, INC.
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
ITEM 1--Financial Statements
<TABLE>
<S> <C>
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and Decem-
ber 31, 1996.............................................................. 3
Consolidated Statements of Income for the three-month and nine-month peri-
ods ended September 30, 1997 and 1996 (unaudited) ........................ 4
Consolidated Statements of Cash Flows for the nine-month periods ended Sep-
tember 30, 1997 and 1996 (unaudited)...................................... 5
Notes to Consolidated Financial Statements................................. 6
ITEM 2--Management's Discussion and Analysis of Financial Condition and Re-
sults of Operations....................................................... 11
PART II--OTHER INFORMATION
ITEM 6--Exhibits and Reports on Form 8-K................................... 15
Signatures................................................................. 18
Exhibit index
Exhibits
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................... $ 77 $ 2,078
Trade accounts receivable, less allowance for
doubtful accounts of $132
and $100 in 1997 and 1996, respectively........... 25,190 9,458
Inventories........................................ 34,988 23,722
Prepaid expenses and other current assets.......... 1,447 338
-------- -------
Total current assets.............................. 61,702 35,596
Property and equipment, net......................... 18,563 10,208
Intangible assets, net.............................. 33,600 9,495
Other assets........................................ 713 440
-------- -------
Total assets...................................... $114,578 $55,739
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable............................. $ 22,245 $ 6,666
Accrued liabilities................................ 4,050 3,107
Income taxes payable............................... 118 762
Current portion of long-term debt.................. 112 367
Current deferred income taxes...................... 50 168
-------- -------
Total current liabilities......................... 26,575 11,070
Long-term debt, less current portion................ 45,737 9,464
Deferred income taxes............................... 629 629
Deferred compensation obligation.................... 1,240 383
-------- -------
Total liabilities................................. 74,181 21,546
-------- -------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares autho-
rized; 6,825 shares issued and outstanding........ 68 68
Additional paid-in capital......................... 32,974 32,854
Retained earnings.................................. 7,355 1,271
-------- -------
Total stockholders' equity........................ 40,397 34,193
-------- -------
Total liabilities and stockholders' equity........ $114,578 $55,739
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
KEVCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1997 1996 1997 1996
--------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................................ $ 98,553 $ 69,449 $271,957 $205,048
Cost of sales............................ 85,728 58,866 235,138 174,114
--------- --------- -------- --------
Gross profit............................ 12,825 10,583 36,819 30,934
Commission income........................ 1,506 1,400 4,413 4,100
--------- --------- -------- --------
14,331 11,983 41,232 35,034
Selling, general and administrative ex-
penses.................................. 10,960 7,618 28,738 22,590
--------- --------- -------- --------
Operating income........................ 3,371 4,365 12,494 12,444
Interest expense......................... 858 567 2,354 1,626
--------- --------- -------- --------
Income before income taxes.............. 2,513 3,798 10,140 10,818
Income taxes............................. 1,006 10 4,056 30
--------- --------- -------- --------
Net income.............................. $ 1,507 $ 3,788 $ 6,084 $ 10,788
========= ========= ======== ========
Earnings per share....................... $ 0.22 $ 0.88
========= ========
Weighted average shares outstanding...... 6,892 6,916
========= ========
Pro forma information (Note 5)
Historical income before income taxes... $ 3,798 $ 10,818
Income tax expense adjustments.......... 1,443 4,111
--------- --------
Pro forma net income.................... $ 2,355 $ 6,707
========= ========
Pro forma earnings per share............ $ 0.46 $ 1.32
========= ========
Weighted average shares outstanding..... 5,098 5,098
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30
----------------
1997 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Cash flows form operating activities:
Net income.................................................. $ 6,084 $10,788
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 2,172 1,318
Gain on sale of assets..................................... (3) (4)
Deferred compensation obligation........................... 375 24
Changes in assets and liabilities.......................... (2,390) (415)
------- -------
Net cash provided by operating activities.................. 6,238 11,711
Cash flows from investing activities:
Purchase of Consolidated.................................... (13,420) --
Purchase of Bowen........................................... (19,115) --
Purchase of equipment....................................... (2,000) (1,086)
Proceeds from sale of assets................................ 806 4
Increase in other assets.................................... (509) (314)
------- -------
Net cash used by investing activities...................... (34,238) (1,396)
Cash flows from financing activities:
Proceeds (payments) on line of credit, net.................. 4,600 (5,500)
Proceeds from long-term debt................................ 30,000 --
Distributions paid.......................................... -- (5,915)
Payments of long-term debt.................................. (8,721) (99)
Capital contributions....................................... -- 86
Collections on loan to stockholder.......................... -- 375
Stock options exercised..................................... 120 --
------- -------
Net cash provided (used) by financing activities........... 25,999 (11,053)
------- -------
Net decrease in cash and cash equivalents.................... (2,001) (738)
Beginning cash and cash equivalents.......................... 2,078 977
------- -------
Ending cash and cash equivalents............................. $ 77 $ 239
======= =======
</TABLE>
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.
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:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1997 1996
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Net sales............................................... $294,253 $305,379
Net income.............................................. $ 6,467 $ 10,001
Earnings per share...................................... $ 0.93 $ 1.45
</TABLE>
6
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials........................................ $ 7,922 $ 4,385
Work-in process...................................... 636 332
Finished goods....................................... 1,938 1,324
Goods held for resale................................ 24,492 17,681
------- -------
$34,988 $23,722
======= =======
</TABLE>
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 approximately $542,000 and $818,000 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.
7
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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.
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 PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") 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.
8
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In February 1997, The FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 129 establishes standards for disclosing information about
an entity's capital structure and applies to all entities. This statement
continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, Omnibus Opinion -
1966, and No. 15, Earnings per Share, and FASB Statement No. 47, Disclosure of
Long-Term Obligations, for entities that were subject to the requirements of
those standards. This statement supersedes specific disclosure requirements of
Opinions 10 and 15 and Statement 47 and consolidates them in this statement
for ease of retrieval and for greater visibility to non-public entities. This
statement is effective for financial statements for periods ending after
December 15, 1997. It is not expected that the Company will experience any
material revision in its disclosures when SFAS No. 129 is adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. This
statement has no impact on the financial condition or results of operations of
the Company, but may require changes to the Company's disclosure requirements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes FASB Statement No. 14, Financial Reporting for Segments
of a Business Enterprise, but retains the requirement to report information
about major customers. It amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but may require
changes in the Company's disclosure requirements.
10.SUBSEQUENT EVENT
On October 21, 1997, Kevco signed a definitive merger agreement with Shelter
Components Corporation ("Shelter") for Kevco to acquire all the outstanding
shares of Shelter. Pursuant to the agreement, Kevco will pay $17.50 per share
for each share of common stock of Shelter which currently has approximately
7.8 million shares of common stock outstanding. The transaction will be a cash
tender offer followed by a cash merger to acquire any shares not previously
tendered. As a result of the transaction, Shelter will become a wholly-owned
subsidiary of Kevco.
9
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In connection with the acquisition of Shelter, Kevco has entered into an
arrangement to amend its credit agreement with a bank at closing of the
acquisition to allow for aggregate senior borrowings of up to $130 million.
The aggregate amount will be comprised of a revolving credit facility of $35
million and a term loan facility of up to $95 million. The revolving credit
facility will mature six years from date of closing and assuming a term loan
facility of $95 million, the term loan scheduled repayments will be $0.55
million in 1998, $5.55 million in 1999, $8.05 million in 2000, $8.05 million
in 2001, $10.55 million in 2002, $10.55 million in 2003 and $51.7 million in
2004. Borrowings under the revolving credit facility require monthly, bi-
monthly or quarterly interest payments (depending on whether interest accrues
based on the prime rate or LIBOR) calculated as 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. Borrowings under the term
loan facility require monthly, bi-monthly or quarterly interest payments
(depending on whether interest accrues based on the prime rate or LIBOR) 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. The term loan and revolving credit facility is 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 of debt or liens,
acquisitions of property and equipment, distributions to stockholders and
certain events constituting a Change of Control (as defined in the agreement).
In addition to the funds available under the amended credit facility, the
Company will seek to issue senior subordinated notes in the aggregate
principal amount of at least $100 million to complete the acquisition of the
outstanding shares of Shelter. The term loan facility will be decreased to the
extent the aggregate principal amount of the senior subordinated notes exceed
$100 million. Such decreases will reduce the principal amount of the term loan
facility due in 2004.
10
<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.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 86.9 84.8 86.4 84.9
------ ------ ------ ------
Gross profit................................... 13.1 15.2 13.6 15.1
Commission income............................... 1.5 2.0 1.6 2.0
------ ------ ------ ------
14.6 17.2 15.2 17.1
Selling, general and administrative expenses.... 11.1 10.9 10.6 11.0
------ ------ ------ ------
Operating income............................... 3.5 6.3 4.6 6.1
Interest expense................................ 1.0 0.8 0.9 0.8
------ ------ ------ ------
Income before income taxes..................... 2.5% 5.5% 3.7% 5.3%
====== ====== ====== ======
</TABLE>
Comparison of Three Months Ended September 30, 1997 and 1996
Net sales increased by $29.1 million, or 41.9%, to $98.5 million for the
three month period ended September 30, 1997 from $69.4 million for the
comparable 1996 period. The net sales increase primarily resulted from the
11
<PAGE>
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 $69.4 million in 1996 to $67.7
million in 1997, a decrease of 2.5%, which is less than the reported
manufactured housing shipment decline of 3.4% from January through August
1997, as compared to the prior period. Sales to the manufactured housing
industry represented approximately 90% for the three months ended September
30, 1997.
Gross profit increased by $2.2 million, or 20.7%, to $12.8 million for the
three month period ended September 30, 1997 from $10.6 million for the
comparable 1996 period due primarily to the Acquisitions. Gross profit, as a
percent of net sales, decreased to 13.1% for the three month period ended
September 30, 1997 from 15.2% for the comparable 1996 period. The decrease in
gross profit, as a percent of net sales, is a result of lower gross margins
associated with the Consolidated Acquisition and lower margin dollars earned
from wood products as a whole due to declining lumber prices throughout the
three months ended September 30, 1997 (such wood products represent
approximately 38% of net sales). To a lesser extent, gross margins from non-
lumber related business decreased primarily as a result of temporary price
increases of a major product line.
Commission income increased by $0.1 million, or 7.1%, to $1.5 million for
the three month period ended September 30, 1997 from $1.4 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 $3.3 million, or
43.4%, to $10.9 million for the three month period ended September 30, 1997
from $7.6 million for the comparable 1996 period. The increase was primarily
due to increased sales volume related to the Acquisitions. Selling, general
and administrative expenses, as a percent of net sales, increased to 11.1% for
1997 from 10.9% for the comparable 1996 period. Selling, general and
administrative expenses, as a percent of net sales, is comparable to the prior
period.
Net income decreased by $0.8 million, or 34.8%, to $1.5 million for the
three months ended September 30, 1997 from $2.3 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 decrease is due primarily to
lower gross margins as described above.
Comparison of Nine Months Ended September 30, 1997 and 1996
Net sales increased by $67.0 million, or 32.7%, to $272.0 million for the
nine month period ended September 30, 1997 from $205.0 million for the
comparable 1996 period. The net sales increase primarily resulted from the
effect of the Acquisitions in February 1997. However, net sales, without the
effect of the Acquisitions, decreased from $205.0 million to $196.6 million, a
decrease of 4.1%, which is comparable to the reported manufacturing housing
shipment decline of 3.4% from January through August 1997, as compared to the
prior period. Sales to the manufactured housing industry represented
approximately 90% for the nine months ended September 30, 1997.
Gross profit increased by $5.9 million, or 19.1%, to $36.8 million for the
nine month period ended September 30, 1997 from $30.9 million for the
comparable 1996 period due primarily to the Acquisitions. Gross profit, as a
percent of net sales, decreased to 13.6% for the nine month period ended
September 30, 1997 from 15.1% for the comparable 1996 period. The decrease in
gross profit, as a percent of net sales, is a result of lower gross margins
associated with the Consolidated Acquisition and lower margin dollars earned
from wood products as a whole due to declining lumber prices throughout the
nine months ended September 30, 1997 (such wood products represent
approximately 38% of net sales). To a lesser extent, gross margins from non-
lumber related business decreased primarily as a result of temporary price
increases of a major product line.
Commission income increased by $0.3 million, or 7.3%, to $4.4 million for
the nine month period ended September 30, 1997 from $4.1 million for the
comparable 1996 period. The increase was primarily attributable to the
Company's expansion in commission-based distribution arrangements.
12
<PAGE>
Selling, general and administrative expenses increased by $6.1 million, or
27.0%, to $28.7 million for the nine month period ended September 30, 1997
from $22.6 million for the comparable 1996 period. The increase was primarily
due to increased sales volume due to the Acquisitions. Selling, general and
administrative expenses, as a percent of net sales, decreased to 10.6% for
1997 from 11.0% for the comparable 1996 period. The decrease reflects the
Company's continued efforts in increasing efficiency.
Net income decreased by $0.6 million, or 9.0%, to $6.1 million for the nine
months ended September 30, 1997 from $6.7 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 decrease in net income is primarily
attributable to lower gross margins as discussed above.
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 $6.2 million for
the nine months ended September 30, 1997. The Company's capital expenditures
were $2.0 million for the nine months ended September 30, 1997.
In connection with the acquisition of Service Supply Systems, Inc. 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 (6.98% at September
30, 1997). Borrowings under the revolving credit facility are due 2001, and
require quarterly interest payments currently calculated as 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 (7.11% at
September 30, 1997). The borrower under the credit facility is one of the
Company's operating subsidiaries, and the obligations thereunder are
guaranteed by the Company and each of its subsidiaries. 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 its initial public offering in November
1996, 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.
13
<PAGE>
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 nine months ended September 30, 1997, days sales in average
receivables was approximately 22 days, days sales in average inventory was
approximately 38 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.
14
<PAGE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(A) EXHIBITS
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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)
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)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 Plan 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)
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
Land & 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)
10.38 Amendment No. 1 dated September 21, 1988, to Lease Agreement by 1741
Conant Partnership as lessor and 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)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.41 Form of Parent Pledge Agreement.(1)
10.42 Consent and Waiver, dated as of 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.(6)
18.1 Letter on change in accounting principle.(5)
27.1 Financial Data Schedule.(6)
</TABLE>
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement on
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, and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997, and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated herein by
reference.
(6) Filed herewith.
(B)REPORTS ON FORM 8-K
On March 13, 1997, the Company filed a Current Report on Form 8-K dated
February 27, 1997, reporting the acquisitions of Consolidated Forest Products,
L.L.C. and Bowen Supply, Inc. A Form 8-K/A dated February 27, 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 Exchange 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: OCTOBER 30, 1997
By: /s/ Jerry E. Kimmel
--------------------------------------
Jerry E. Kimmel
Chairman of the Board, President
and Chief Executive Officer
Date: OCTOBER 30, 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
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
11.1 Computation of earnings per common share.
27.1 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 11.1
KEVCO, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1997 1996 1997 1996
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Primary earnings
Net income.................................. $1,507 $2,355(1) $6,084 $6,707(1)
Shares
Weighted average number of common shares
outstanding................................ 6,815 4,395 6,811 4,395
Conversion of options issued and outstand-
ing........................................ 77 439 105 439
Other shares................................ -- 264(2) -- 264(2)
------ ------ ------ ------
Weighted average number of common shares
outstanding as adjusted.................... 6,892 5,098 6,916 5,098
====== ====== ====== ======
Primary earnings per common share............ $ 0.22 $ 0.46 $ 0.88 $ 1.32
====== ====== ====== ======
</TABLE>
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 nine months ended September 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.)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF KEVCO, INC. FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 77
<SECURITIES> 0<F1>
<RECEIVABLES> 25,322<F2>
<ALLOWANCES> 132
<INVENTORY> 34,988
<CURRENT-ASSETS> 61,702
<PP&E> 26,204
<DEPRECIATION> 7,641
<TOTAL-ASSETS> 114,578
<CURRENT-LIABILITIES> 26,575
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 40,329
<TOTAL-LIABILITY-AND-EQUITY> 114,578
<SALES> 271,957
<TOTAL-REVENUES> 276,370
<CGS> 235,138
<TOTAL-COSTS> 28,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,354
<INCOME-PRETAX> 10,140
<INCOME-TAX> 4,056
<INCOME-CONTINUING> 6,084
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,084
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.00
<FN>
<F1>AMOUNTS INAPPLICABLE OR NOT DISCLOSED AS A SEPARATE LINE ON 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>
