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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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 (I.R.S. Employer
incorporation or organization) Identification No.)
Kevco, Inc.
1300 S. University Drive, Suite 200 76107
Fort Worth, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (817) 332-2758
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- -------------------
Common Stock, The Nasdaq National Market
par value of $.01 per share
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or informational statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock of the Registrant held by non-
affiliates of the registrant was $51,435,812 on March 19, 1997, based on the
closing price of the registrant's common stock on such date of $17.00 per share,
as reported on The Nasdaq National Market.
As of March 19, 1997, 6,809,500 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's annual report to shareholders for the year ended
December 31, 1996 are incorporated by reference into Part II of this report, and
portions of the proxy statement for the annual meeting of shareholders of the
registrant to be held during 1997 are incorporated by reference into Part III of
this report.
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PART I
ITEM 1. BUSINESS.
GENERAL
Kevco, Inc. ("Kevco" or the "Company," and includes, unless the context
otherwise requires, its direct and indirect subsidiaries) is a leading wholesale
distributor of building products to the manufactured housing and recreational
vehicle (RV) industries. Except as otherwise indicated, information contained
herein relating to Kevco is as of December 31, 1996, without giving effect to
the acquisitions described below under the heading Recent Acquisitions. Through
its 17 distribution centers (excluding wood products facilities), the Company
distributes more than 10,000 different inventory items to approximately 278
manufactured home and 148 RV manufacturing facilities throughout the United
States. Kevco is one of only a few companies capable of providing national
distribution of building products to the manufactured housing and RV industries.
In addition, the Company also manufactures wood products for the manufactured
housing industry in the southeastern and southwestern United States. From 1992
to 1996, the Company's net sales increased from $61.2 million to $267.3 million,
a compound annual growth rate of approximately 45%. Since its founding in 1964,
the Company's growth has been fueled by internal growth and acquisitions.
The Company believes that it provides a cost-effective form of distribution
that offers value to both the Company's suppliers and producers of manufactured
homes and RVs. Kevco believes that it provides significant benefits to its
suppliers by placing large orders at regular intervals, thereby enabling its
suppliers to achieve efficient and cost-effective production planning and
economies of scale. In addition, Kevco markets and sells its suppliers' products
directly to the manufactured housing and RV industries. As a result, the Company
believes it reduces its suppliers' inventory carrying, marketing and
distribution costs. The Company also provides significant benefits to its
customers as a result of its ability to respond on a same day shipment basis to
a majority of its customers' orders, thus reducing the amount of inventory they
must maintain. Furthermore, Kevco assists its customers in inventory management,
product support, training and implementing cost saving measures, all of which
are services that the Company believes most building products manufacturers
cannot provide in a cost effective manner. The Company believes that the
specialized product knowledge and high level of service provided by Kevco
personnel result in strong relationships between Kevco and its suppliers and
customers.
The Company primarily distributes a full line of plumbing fixtures and
supplies as well as a variety of other building products, including insulation,
roof shingles, patio doors, aluminum and wood windows, vinyl siding, fireplaces
and electrical products. The Company distributes products of several nationally
recognized manufacturers, including Eljer, Crane Plumbing, Coastal(R) and
Nibco(R) plumbing products, State Industries water heaters, Owens-Corning
Fiberglas(R) insulation and shingles, Delta(R), Moen(R) and Phoenix(R) faucets,
CertainTeed(R) vinyl siding and Capri bath products. The Company's wood products
subsidiaries manufacture roof trusses and lumber cut to customer specifications.
In 1996, approximately 54% of the Company's net sales were derived from plumbing
products, 20% from wood products and 26% from other building products.
On November 6, 1996, the Company consummated its initial public offering of
2,100,000 shares (and an additional 315,000 shares in connection with the
exercise of the underwriter over-allotment option on December 3, 1996) of the
common stock, par value $.01 per share, of the Company.
Jerry E. Kimmel, the Company's Chairman of the Board, President and Chief
Executive Officer, has over 35 years of experience in the industry. The other
members of Kevco's senior management have an average of more than 10 years of
experience in the industry.
RECENT ACQUISITIONS
On February 27, 1997, the Company consummated the acquisition of
substantially all of the assets, and assumed certain liabilities, of
Consolidated Forest Products, L.L.C. ("Consolidated"), an Alabama limited
liability company (a manufacturer of wood products for the manufactured housing
industry) in exchange for approximately
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$13 million in cash and two promissory notes in the aggregate original principal
amount of approximately $1.0 million, with such aggregate original principal
amount subject to potential post-closing downward adjustments. On February 28,
1997, the Company consummated the acquisition of all of the outstanding stock of
Bowen Supply, Inc. ("Bowen"), a Georgia corporation (a wholesale distributor of
building products to the manufactured housing and RV industries) in exchange for
approximately $18 million in cash and three promissory notes in the aggregate
original principal amount of $2.5 million, with such aggregate original
principal amount being subject to potential post-closing adjustments.
INDUSTRY
For the year ended December 31, 1996, approximately 88% of the Company's
net sales were to producers of manufactured homes. A manufactured home is a
complete single-family residence that is built in a factory and transported to a
site. Manufactured homes offer most of the amenities of, and are generally built
with the same materials as, site-built homes.
Manufactured housing has historically served as one of the most affordable
alternatives for the home buyer. According to the U.S. Department of Commerce,
in 1995 the average cost per square foot was $23.95 for a single-section
manufactured home and $28.96 for a multi-section manufactured home, as compared
to an average cost of $60.55 per square foot for a site-built home, each
excluding land costs. In 1995, reported sales of new manufactured homes totaled
approximately $12.3 billion (at retail). Approximately 340,000 manufactured
homes were reported as shipped in 1995 (which would represent approximately
33.7% of all new single family homes sold in 1995). Reported shipments of new
manufactured homes experienced compound annual growth of approximately 18.8% for
the four years ended December 31, 1995.
The Company believes steady employment growth, reduced inventories of
repossessed homes, greater availability of retail financing for the home buyer
and enhanced quality of manufactured homes have contributed to improved industry
conditions. Although the manufactured housing industry has experienced
significant growth over the past four years, the industry is cyclical and is
affected by many of the same factors that influence the housing industry
generally, including inflation, interest rates, availability of financing,
regional economic and demographic conditions and consumer confidence levels, as
well as the affordability and availability of alternative housing, such as
apartments, condominiums and conventional, site-built homes.
The ten highest volume producers of manufactured homes in 1995 reportedly
accounted for approximately 66.4% of total manufactured home shipments in that
year. Management believes that only a few distributors are capable of
distributing a broad line of building products to meet the needs of these
manufacturers on a national basis.
For the year ended December 31, 1996, approximately 10% of the Company's
net sales were to producers of RVs. RVs are motorized and non-motorized vehicles
that provide comfortable, self-contained living facilities for short periods of
time, but are not generally designed for permanent living. RV shipments to
retailers reportedly totaled approximately $12.1 billion (at retail) in 1995.
Although reported RV shipments declined approximately 8.4% in 1995, the RV
industry has experienced compound annual growth in reported shipments of
approximately 12.8% since 1991. Historically, demand for RVs has been influenced
by a number of factors, including the availability and terms of financing to
dealers and retail purchasers, the abundance of motor vehicle fuels and fuel
prices, as well as general economic conditions.
BUSINESS STRATEGY
Kevco's primary objective is to become the leading national distributor of
building products to the manufactured housing and RV industries. The Company
intends to continue to pursue this objective through a combination of internal
growth and selective acquisitions. To achieve its objective, the Company has
adopted a strategy based on the following key elements:
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Provide Superior Customer Service. The Company believes its success is
primarily attributable to its emphasis on customer service and that providing a
high level of customer service leads to long-term relationships with customers.
The Company's operating philosophy is based on a commitment to Total Quality
Management, which emphasizes at every level an awareness of, and accountability
for, customer needs and effective communication both internally and externally.
Consistent with this commitment, the Company strives to achieve maximum
responsiveness to customer orders and to assist its customers in controlling
costs, improving their materials resource planning and facilitating their just-
in-time inventory procurement needs. The Company's sales representatives, who
have an average of approximately nine years of experience with the Company, play
an important role in training customers in the proper installation of products
and assisting in their inventory management.
Leverage National Distribution Network. Kevco will continue to use its
national distribution network as a platform for growth and profitability. The
Company believes that its national distribution network has allowed it to
develop close relationships with leading product manufacturers and to become the
exclusive supplier of certain product lines to the manufactured housing and RV
industries. The following manufacturers have represented to the Company that the
Company is the exclusive supplier of certain products to the manufactured
housing industry on a nationwide basis, including the indicated products: (i)
State Industries water heaters (except in the state of Wisconsin), (ii) Phoenix
Products, Inc. faucets and (iii) Elkay Manufacturing Company stainless steel
sinks. In addition, the Company believes that its national presence provides it
with a significant competitive advantage due to its ability to service
effectively the building products needs of its customers' manufacturing
facilities, several of which are located in remote, rural areas. This capability
has led to several national customer accounts. As one of the leading national
distributors of building products in the United States to the manufactured
housing and RV industries, the Company has substantial purchasing power and is
able to realize economies of scale.
Increase Customer Penetration and Product Offerings. Kevco supplies over
90% of all manufactured housing plants in the United States with one or more
product lines. This established customer base provides the Company with a
significant opportunity to supply a greater portion of its customers' building
products needs as the customers seek to reduce the number of their suppliers.
The Company also intends to add new product lines through internal growth and
acquisitions. With its existing national distribution infrastructure, the
Company believes that additional product lines can be offered to customers
without significant additional cost.
Geographically Expand Wood Products Business. The Company intends to expand
its wood products business primarily by increasing the number of its wood
products manufacturing facilities. The Company manufactures wood products,
primarily roof trusses, and distributes cut lumber in three (five, after giving
effect to the acquisition of Consolidated) locations in the southeastern and
southwestern United States. This segment of the wood products industry is highly
fragmented, and the Company believes there are significant opportunities to grow
this business internally and through acquisitions.
Pursue Vertical Integration Opportunities. The Company intends to
selectively explore the acquisition of manufacturers of building products. By
manufacturing its own products, the Company will seek to achieve greater
profitability from its sales, while obtaining direct control over product
availability and quality.
SUPPLIER/CUSTOMER RELATIONSHIPS
Kevco acts with its suppliers and customers to provide value-added services
in the distribution of manufactured home and RV building products by managing
inventories, providing product support and training, introducing cost saving
measures and providing a marketing and distribution network with warehousing
capabilities. The Company believes that the specialized product knowledge and
high level of service provided by Kevco personnel results in strong ties between
Kevco and its customers and suppliers.
Inventory Management. Kevco's customers generally attempt to minimize
inventories and to maximize the use of their facilities for the assembly of
manufactured homes and RVs. For this reason, Kevco actively manages customers'
inventories of products supplied by Kevco. Kevco sales representatives generally
visit customers' plants weekly to count inventories, review production
schedules, prepare purchase orders and schedule deliveries in order
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to achieve the Company's goal of being a just-in-time supplier. In addition,
because of their detailed awareness of existing building codes for manufactured
homes and RVs, Kevco's sales representatives are able to assist customers in
planning for, and maintaining product inventories in accordance with, building
code changes.
Product Support and Training. At their weekly visits, sales representatives
also take the opportunity to resolve product problems and train customer
employees in the proper installation of products. Kevco has found that its
willingness and availability to solve product problems has resulted in its
customers first turning to Company representatives, rather than Kevco's
suppliers, when they have problems with or questions about products. This
benefits both Kevco's customers and suppliers in that Kevco provides customer
support that the supplier might otherwise have to provide in order to achieve
the same level of customer satisfaction, and Kevco's customers receive support
from individuals with expertise in serving the manufactured housing and RV
industries. Kevco has also found that its customers benefit from the training
given by sales representatives in the proper installation of products, since
Kevco's sales representatives generally have significant expertise in the
installation and service of the products they sell. Sales representatives also
take the opportunity during their weekly visits to promote other Kevco products,
thus educating customers as to additional products the customers can purchase
from Kevco and receive similar product support.
Cost Saving Measures. Kevco's sales force also works with the Company's
customers and suppliers in suggesting and implementing cost saving measures.
Kevco actively works to find ways for producers of manufactured homes or RVs to
reduce the number of stock-keeping units ("SKUs") they use in production in
order to further reduce their inventories. In its wood products operations,
Kevco also builds steel forms to its customers' specifications to ensure the
dimensional tolerances of the roof trusses it manufactures, as strict adherence
to design specifications translates into reduced manufacturing costs for Kevco's
customers.
Marketing/Distribution Network. Kevco believes that its suppliers also
benefit by utilizing Kevco's extensive marketing and distribution network. The
Company also believes that it is generally not cost effective for its suppliers
to provide the same level of service and delivery responsiveness as Kevco to
producers of manufactured homes and RVs.
TOTAL QUALITY MANAGEMENT
Kevco is committed to maintaining Total Quality Management throughout its
operations. The key elements of this operating philosophy are (i) to increase
customer satisfaction by seeking to meet or exceed all customer requirements and
ensuring that all associates are "customer focused," which the Company believes
results in Kevco becoming the supplier of choice, (ii) to create the mindset and
awareness within all of its associates that each is responsible and accountable
for the results of Kevco's operations and (iii) to work with Kevco's suppliers
and customers to create an environment where all are working together to improve
the value of the products supplied to the manufactured home or RV consumer. The
Company's executive office and profit centers hold weekly Total Quality
Management meetings attended by all employees. The meetings focus on training
and on reaffirming Kevco's mission, quality and value statements in order to
achieve the goal of being the distributor, customer and employer of choice. An
integral part of the entire quality process is creating a culture where
communication can flourish among all internal and external parties, including
associates, customers and suppliers.
PRODUCTS
Kevco distributes more than 10,000 SKUs manufactured by more than 490
companies. The following is a brief description of the products the Company
distributes:
Plumbing Products. Kevco distributes a wide variety of plumbing fixtures
and supplies including tubs, toilets, faucets, ABS pipe, connectors and
fittings. Kevco supplies substantially everything necessary to carry water into
and out of a manufactured home or RV. Principal brands of plumbing products
include Eljer, Crane Plumbing, Coastal(R) and Nibco(R) plumbing products,
Delta(R), Moen(R) and Phoenix(R) faucets and Capri bath products.
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Wood Products. At its three (five, after giving effect to the acquisition
of Consolidated) manufacturing facilities, Kevco manufactures roof trusses and
lumber cut to customer specifications for use in manufactured homes. Roof
trusses are rectangular or triangular structures that form the principal roof
support for a manufactured home. Kevco also distributes plywood and mill direct
lumber.
Other Building Products. Kevco distributes other building products,
including insulation, roof shingles, patio doors, aluminum and wood windows,
vinyl siding, fireplaces, kitchen cabinetry, aluminum siding, water heaters
(under an exclusive arrangement with State Industries) and electrical products
(including load-centers, circuit breakers and copper wire). Principal brands of
building products include Owens-Corning Fiberglas(R) insulation and shingles,
CertainTeed(R) vinyl siding, Alcoa vinyl and aluminum siding, and Merillat
kitchen cabinets.
SALES AND MARKETING
Kevco's marketing programs center on fostering strong customer
relationships and providing superior customer service. Kevco believes its
competitive advantage lies in its breadth of product offerings and the knowledge
and expertise of its sales representatives, and its just-in-time delivery
capabilities, regular calling program, dedication to Total Quality Management
and competitive pricing.
As of December 31, 1996, Kevco marketed its products through 70 direct
sales representatives consisting of 59 Kevco sales representatives and 11
Sunbelt Wood Components, Inc. ("Sunbelt") sales representatives. Because of the
specific nature of the wood products business, these sales forces generally work
independently. Each sales representative works within an assigned sales
territory associated with one of the Company's 17 distribution centers (23 after
giving effect to the acquisition of Bowen) or three (five, after giving effect
to the acquisition of Consolidated) manufacturing facilities and is actively
supported by a manager at such distribution center or facility. To certain
producers of manufactured homes and RVs, Kevco is the sole provider of certain
core product lines on a national basis. National accounts are supported by a
profit center manager and by the Company's management. Each potential customer
within a distribution center's geographic reach is regularly contacted by a
sales representative, usually at the purchasing manager level.
Sales representatives, consisting of salespersons and sales managers, are
all Kevco employees and are generally compensated on a salary and incentive
based compensation arrangement. The incentive portion of the salespersons'
compensation is based on a percentage of the profits of the sales region "profit
center" in which that salesperson operates. The incentive portion of the sales
manager's compensation is determined by a variety of factors, which include the
profit center's sales and return on assets and investments as well as a
discretionary element.
Kevco maintains active customer relationships with approximately 278
manufactured home production plants and approximately 148 RV production plants
in the 33 states that have manufactured home or RV production plants. The
Company's two largest customers, Champion Enterprises, Inc. and Fleetwood
Enterprises, Inc., accounted for approximately 16% and 14%, respectively, of
Kevco's net sales in 1996. Although the Company has ongoing supply relationships
with these customers, it does not have a formal supply contract with these
customers or most of its other customers. The Company's business could be
adversely affected if these customers, or other major customers, substantially
reduced or discontinued purchases from the Company. Further, the Company can
give no assurance that its sales to such customers will continue at historical
levels. The Company believes that it has good relationships with each of its
manufactured home and RV customers.
DISTRIBUTION
Kevco distributes products through 17 distribution centers (23 after giving
effect to the acquisition of Bowen and 28 after including wood products
manufacturing/distributing facilities, including those acquired as a result of
the acquisition of Consolidated). Sixteen (22 after giving effect to the
acquisition of Bowen) of the Company's distribution centers distribute primarily
plumbing products and, to varying extents, other building products. One
distribution center, the Company's IDC Limited division in Elkhart, Indiana,
distributes only non-plumbing building products. Kevco intends to use the
supplier relationships and product knowledge developed by its IDC Limited
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division to broaden the product lines carried by its other distribution centers.
The Company's facilities are strategically located near its customers'
manufacturing plants in order to provide prompt delivery and responsive customer
service. In most cases, the Company's desired service area is within a 250-mile
radius of each distribution center. The Company generally uses a decentralized
management structure that emphasizes individual distribution center profit-and-
loss responsibility. A distribution center is typically comprised of warehouse
and receiving space, secure outdoor holding space and office space. Local sales
efforts are coordinated and supported at the distribution centers. The
remaining distribution center activities relate to receiving, storing and
delivering products.
All distribution centers (other than those recently acquired in connection
with the acquisition of Bowen) are equipped with real-time management
information systems that allow the distribution centers to control and monitor
inventory levels, perform invoicing and order entry, and establish delivery
schedules and routes. Corporate management also uses the Company's information
system to monitor sales, inventory and profitability by distribution center. By
utilizing its computerized inventory management system, the Company is able to
accurately predict inventory turns and minimize inventory levels. Each morning,
management is supplied with detailed accounts receivable aging and inventory
status reports from each distribution center. The Company is currently
implementing an improved management information system with a particular focus
on inventory management, which will allow managers to create customized,
Windows-based reports and to obtain faster access to detailed inventory data.
The Company anticipates that the upgrade will be completed within the next
two years.
Inventories are kept on the perpetual method, with daily physical counts of
at least five items in each warehouse. A complete physical inventory count is
performed twice a year. For book and tax purposes, the Company records purchased
inventories under the LIFO method.
In most cases, the Company warehouses products before distributing them to
customers. Kevco delivers the products it sells either by Company truck or
common carrier. Delivery is a key component of Kevco's dedication to customer
service and is a competitive requirement. In some instances, suppliers will
"drop ship" products directly to Kevco's customers, with Kevco retaining
responsibility for selling, billing and collection. Also, under certain
arrangements, the Company receives fees for warehousing, delivering, selling or
other services without taking title to the products. Kevco records such fees as
commission income.
PURCHASING AND SUPPLIERS
Kevco obtains its products from more than 490 different manufacturers. As a
distributor, Kevco plays a valued role in linking product manufacturers with
customers and provides the level of customer service and just-in-time delivery
its customers require. Kevco's position in the marketplace and financial
condition have enabled it to take advantage of volume discounts, product
promotions and other buying opportunities from suppliers, which allow the
Company to market a wide variety of products to its customers at attractive
prices.
The Company generally sells products from manufacturers on a non-exclusive
basis without geographical restrictions. In certain limited instances, a
supplier will grant Kevco the exclusive right to market its products in the
manufactured housing or RV industries. Management believes that its national
distribution capability will allow the Company to increase the number of
products it distributes on a national and/or exclusive basis.
The Company generally negotiates the price and other purchase terms with
its vendors on a company-wide or regional basis. Payment, discount and volume
purchase programs are negotiated directly by the Company with its major
suppliers, with a significant portion of the Company's purchases made from
suppliers offering these programs. Distribution center managers are responsible
for inventory selection and ordering on terms negotiated centrally, so that the
Company remains responsive to local market demand. Distribution center managers
are also responsible for inventory management.
Kevco continuously seeks to expand the variety of products it sells. While
the loss of a major supplier could have a material adverse effect on the
Company's business, the Company believes alternative suppliers for similar
products in each of its product lines are available. The Company believes its
relations with all of its suppliers are good.
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The Company has established a Supplier Certification Program, in which the
Company identifies the performance level of a supplier to Kevco and benchmarks
such performance on a regular basis. Such benchmarking criteria include minimum
order fill rates and other factors.
MANUFACTURING
Kevco, through its Sunbelt and Consolidated Forest Products, Inc.
subsidiaries, also manufactures wood products for distribution principally to
producers of manufactured homes. Kevco's wood products include roof trusses and
lumber cut to customer specifications for structural support within the
manufactured home unit. Each of the Company's roof trusses are built to meet the
customer's specific requirements.
Kevco utilizes automated saws to reduce the cutting time needed to process
raw wood, and fabricates steel forms based on customer specifications in order
to ensure the dimensional tolerances of its roof trusses. The quality and
structural strength of roof trusses are monitored closely by manufactured home
producers. Wind zone construction standards require that roof trusses sold for
use in certain regions meet increased strength benchmarks. Roof trusses that
meet exacting specifications can reduce customer installation costs. The Company
believes that its ability to produce roof trusses of consistent quality that
adhere to customer specifications provides a competitive advantage.
The Company's wood products customers include producers of manufactured
homes as well as contract, "cut-to-order" customers outside of the manufactured
housing industry. Substantially all of Kevco's wood product sales are to
manufactured home producers. Kevco's wood products are sold through 11 sales
representatives who are technically trained in lumber and roof truss
applications. Kevco has roof truss manufacturing facilities in Spruce Pine,
Alabama, Ashburn, Georgia, and Waco, Texas (and after giving effect to the
acquisition of Consolidated, Haleyville, Alabama and Baxter, Tennessee).
WARRANTY AND RETURNS
Kevco's customers generally rely on the warranties issued by the
manufacturer of the products sold by the Company. Kevco generally provides a one
year limited warranty on the products it sells, which warranty covers the
product and service calls. The Company's warranty on the product itself is
generally not utilized because the product manufacturer provides a more
comprehensive warranty. The Company's warranty expense in 1996 was negligible.
Kevco also has an informal, unwritten return policy under which, for one year
following sale, Kevco will generally accept the nonwarranty return of unused
products, after inspection by Kevco personnel, for a 20% restocking charge.
In the event a manufactured home experiences a failure of a roof truss
manufactured by the Company, the Company will inspect the home to determine
whether there is a covered defect in the roof truss. If a covered defect is
discovered, the Company generally pays to replace the roof truss and the roof.
The Company has only had one such claim in the past three years.
COMPETITION
The building products wholesale distribution industry is highly
competitive. Numerous companies, both public and private, are in direct
competition with the Company and many of those competitors have longer operating
histories and greater financial and other resources than the Company. The
Company believes its prices, wide array of products and ability to deliver on
short notice are competitive.
The Company believes that its business strategy has permitted it to compete
effectively in its marketing areas. While price is an important competitive
factor in the Company's business, the Company believes that its sales are
principally dependent upon its service, technical expertise, reputation and
experience. The Company's principal competitive strengths include (i) quality
assurance, service and installation support, (ii) a wide array of products and
product availability due to the Company's ability to attract major product
manufacturers and (iii) the prompt and reliable delivery of products to
customers.
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Certain product manufacturers sell and distribute their products directly
to producers of manufactured homes and RVs. However, the Company believes that,
for most product manufacturers, providing the same level of service and offering
the same delivery responsiveness as Kevco is not cost-effective.
EMPLOYEES
As of December 31, 1996, the Company employed 625 persons. The Company is a
party to one collective bargaining agreement, which covered, as of December 31,
1996, 11 employees at one of the Company's facilities in Elkhart, Indiana. The
Company has not experienced any work stoppages as a result of labor disputes and
the Company considers its employee relations to be good.
REGULATION
The Company's suppliers and customers are subject to a variety of federal,
state and local laws and regulations. The National Manufactured Housing
Construction and Safety Standards Act of 1974 and regulations promulgated
thereunder by HUD impose comprehensive national construction standards for
manufactured homes and preempt conflicting state and local regulations. HUD has
adopted regulations that divide the United States into three "Wind Zones" and
impose more stringent construction standards for homes to be sold in areas
designated as Wind Zones II or Ill. These regulations have resulted in higher
manufacturing and dealer costs. The Company cannot predict if additional
regulations will be adopted or the effect any such regulations would have on the
Company. To the extent regulations make manufactured housing less competitive
with other housing alternatives, the Company's operations could be negatively
impacted.
EXECUTIVE OFFICERS
Name Age Position
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Jerry E. Kimmel......... 59 Chairman of the Board, President and
Chief Executive Officer
Clyde A. Reed, Jr....... 61 Executive Vice President, Chief Operating
Officer and Director
Ellis L. McKinley, Jr... 45 Vice President, Chief Financial Officer,
Treasurer and Director
Richard S. Tucker....... 53 Secretary and Director
C. Lee Denham........... 48 Vice President, Sunbelt
Jerry E. Kimmel is a founder of the Company and has spent his entire career
in this industry. Mr. Kimmel has served as President of Kevco since 1978 and
has served as Chairman of the Board and Chief Executive Officer of the Company
since 1993. In 1992, Mr. Kimmel was inducted into the MH/RV Hall of Fame. Mr.
Kimmel served as the Chairman of the Board of Governors of the Manufactured
Housing Institute ("MHI"), a leading manufactured housing trade group, in 1983
and 1984, and has served in various other MHI board capacities.
Clyde A. Reed joined the Company in 1965 and has served as Executive Vice
President since 1986 and Chief Operating Officer since 1991. From 1978 to 1986,
Mr. Reed served as Vice President of the Company. Mr. Reed has served as a
director of the Company since November 1996.
Ellis L. McKinley, Jr. joined the Company in 1995, has served as Vice
President and Chief Financial Officer since such time and has served as a
director and Treasurer of the Company since November 1996. From 1994 to 1995,
Mr. McKinley was Vice President of Finance, Chief Financial Officer, Secretary
and Treasurer of Renters Choice, Inc. From 1976 until 1994, Mr. McKinley was
employed with Grant Thornton, a public accounting firm in Dallas, Texas, where
he served as an audit partner from 1987 through 1994. Mr. McKinley received his
B.B.A. in Accounting from the University of Texas in 1976.
9
<PAGE>
Richard S. Tucker served as a director of the Company since 1976, as an
assistant secretary of the Company since 1988 and as the Secretary of the
Company since November 1996. Since 1995, Mr. Tucker has been a partner in the
law firm of Jackson & Walker, L.L.P., the Company's outside legal counsel. From
1984 to 1995, Mr. Tucker was a member of the law firm of Simon, Anisman, Doby, &
Wilson, a Professional Corporation, located in Fort Worth, Texas. Mr. Tucker
received his B.B.A. in Accounting from the University of Texas in 1966 and his
J.D. from Southern Methodist University School of Law in 1969.
C. Lee Denham has served as President of Kevco's Sunbelt subsidiary since
November 1996 and as Vice President of the Sunbelt Wood Components division of
Kevco from 1995 to November 1996. Mr. Denham was division manager of Sunbelt
Wood Components from 1991 to 1995. From 1981 to 1991, Mr. Denham was President
of Sunbelt Wood Components. From 1970 until founding Sunbelt Wood Components in
1981, Mr. Denham was employed by Universal Forest Products, Inc. Mr. Denham
received his B.B.A. in Marketing from the University of Georgia in 1970.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
This report contains forward-looking statements that involve risks and
uncertainties. Actual results could differ from those discussed in the forward-
looking statements as a result of certain factors, including those set forth
below and elsewhere in this report.
COMPETITION
The wholesale distribution industry relating to producers of manufactured
homes and RVs is highly competitive, and the barriers to entry are relatively
low. Competition exists in terms of price, product quality and features,
service, warranty terms and distribution facility location. The manufactured
roof truss industry is also highly competitive. There are numerous companies,
both public and private, that are in direct competition with the Company, and
many of these competitors have been operating longer and have substantially
greater financial and other resources than the Company. A downturn in the
manufactured housing or RV industries could result in increased competition
adversely affecting the Company's results of operations or financial condition.
In addition, there are certain product manufacturers that sell and distribute
their products directly to manufactured home and RV producers. There can be no
assurance that additional manufacturers of products distributed by the Company
will not elect to sell and distribute directly in the future. No assurance can
be given that the Company will be able to compete effectively in the future.
CYCLICAL NATURE AND SEASONALITY OF THE MANUFACTURED HOUSING AND RV MARKETS
Approximately 88% of the Company's net sales for the year ended December
31, 1996, were to producers of manufactured homes. The manufactured housing
market historically has been cyclical and is influenced by many of the same
national and regional economic and demographic factors that affect the broader
housing market, including consumer confidence, interest rates, availability and
terms of financing, regional population and employment trends, availability and
cost of alternative housing and general economic conditions, including
recessions. The RV market has also historically been cyclical and is also
influenced by factors such as interest rates, availability and terms of
financing and general economic conditions, as well as gasoline prices. The
Company may be adversely affected by these factors. The Company's operating
results for the past few years do not reflect the seasonality that historically
has been seen in the manufactured housing and RV industries.
GROWTH THROUGH ACQUISITIONS
Part of the Company's business strategy is to grow through strategic
acquisitions. There can be no assurance that Kevco will be able to identify
attractive or willing acquisition candidates or that it will be able to
10
<PAGE>
successfully integrate the operations of any companies it acquires. In
addition, there can be no assurance that such acquired companies would perform
in accordance with management's expectations or that the Company would not
encounter unanticipated problems or liabilities. Also, if Kevco does not have
sufficient cash resources for any acquisition, its growth could be limited.
There can be no assurance that Kevco will be able to obtain adequate financing
for any acquisition or that, if available, such financing will be on terms
acceptable to Kevco. The Company's credit facilities require the consent of the
Company's lenders prior to the consummation of any acquisition. There can be no
assurance such consents will be granted any time they are required or that Kevco
will be able to successfully implement its acquisition strategy.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent upon the continued services of the
Company's senior management, particularly its Chairman of the Board, President
and Chief Executive Officer, Jerry E. Kimmel. The loss of the services of Mr.
Kimmel could have a material adverse effect on the Company and its business. In
addition, the Company's success and continued growth will depend upon its
ability to attract and retain experienced, quality management personnel.
ITEM 2. PROPERTIES
FACILITIES
The following table sets forth certain information with respect to the
Company's distribution facilities and roof truss manufacturing facilities, all
but eight of which are leased. The Company also leases its executive offices of
approximately 9,200 square feet in Fort Worth, Texas and the location that
formed the executive offices of Bowen, of approximately 5,500 square feet, in
Americus, Georgia. Substantially all of the Company's assets, including its
owned facilities and its leasehold interests, are encumbered by liens granted
under security agreements in favor of the Company's lenders under the Company's
term loan and revolving credit facility.
<TABLE>
<CAPTION>
LOCATION APPROXIMATE
- -------- SQUARE FEET FUNCTION
----------- --------------
<S> <C> <C>
Alabama
Bear Creek*(2).............. 50,000 Distribution
Haleyville.................. 86,000 Distribution
Haleyville*(3)(4)........... 146,000 Manufacturing
Spruce Pine*(1)............. 54,000 Manufacturing
Arizona
Phoenix..................... 70,000 Distribution
California
San Bernardino.............. 42,000 Distribution
Woodland.................... 18,000 Distribution
Colorado
Fort Morgan................. 13,000 Distribution
Florida
Bartow(2)(5)................ 40,000 Distribution
Ocala*...................... 50,000 Distribution
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Georgia
Ashburn*(1)................. 100,000 Manufacturing
Cordele*.................... 60,000 Distribution
Douglas(2).................. 72,000 Distribution
Idaho
Caldwell.................... 15,000 Distribution
Indiana
Elkhart..................... 61,000 Distribution
Elkhart..................... 90,000 Distribution
Elkhart(2).................. 35,000 Distribution
Kansas
Newton...................... 38,000 Distribution
Minnesota
Round Lake.................. 11,000 Distribution
North Carolina
Albemarle................... 63,000 Distribution
Richfield*(2)............... 50,000 Distribution
Oregon
Tigard...................... 23,000 Distribution
Pennsylvania
Leola....................... 26,000 Distribution
Tennessee
Baxter(3)................... 55,000 Manufacturing
Cookeville.................. 30,000 Distribution
Texas
Hillsboro*(2)............... 42,000 Distribution
Waco........................ 90,000 Distribution
Waco(1)..................... 135,000 Manufacturing
</TABLE>
- ------------------------
* Company owned facility.
(1) Sunbelt facility.
(2) Acquired as a result of the acquisition of Bowen.
(3) Acquired as a result of the acquisition of Consolidated.
(4) In addition, the Company, through its Consolidated Forest Products, Inc.
subsidiary, leases two additional locations for lumber storage, which
locations are in Haleyville and Phil Campbell, Alabama.
(5) A portion of such location is subleased to a 90% owned subsidiary of Kevco
Delaware, Inc., which is a wholly owned subsidiary of the Company.
In 1995, the Company purchased an aircraft for approximately $2 million in
cash to facilitate management visits to the Company's various manufacturing and
distribution locations and its customers. The Company carries aircraft insurance
(in the indicated amounts) for bodily injury and property damage ($100 million
each occurrence), medical expenses ($10,000 per person), and hull damage ($2
million). The Company has a strict policy limiting the use of the aircraft for
business purposes only, with limited exceptions as permitted by the regulations
promulgated under the Internal Revenue Code.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
LITIGATION
The Company is, and may be in the future, party to litigation arising in
the course of its business. While the Company has no reason to believe that any
pending claims are material, there can be no assurance that the Company's
insurance coverage will be adequate to cover all liabilities arising out of such
claims or that any such claims will be covered by the Company's insurance. Any
material claim that is not covered by insurance may have an adverse effect on
the Company's business. Claims against the Company, regardless of their merit or
outcome, may also have an adverse effect on the Company's reputation and
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matter to a vote of securityholders
following the consummation of the Company's initial public offering on November
6, 1996, through the remainder of the fourth quarter of the fiscal year covered
by this report.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on The Nasdaq National Market
under the symbol "KVCO" since November 1, 1996. The high and low sales prices
for the Common Stock for the balance of the fourth quarter of 1996 following the
Company's initial public offering is set forth below.
Fiscal year ended December 31, 1996 High Low
------ ------
4th Quarter (beginning November 1, 1996) $14.75 $12.00
On March 19, 1997, the last reported sale price of the Common Stock on The
Nasdaq National Market was $17.00 and as of such date there were approximately
23 shareholders of record of the Common Stock and approximately 1,240 beneficial
owners. The Company's transfer agent is ChaseMellon Shareholder Services, L.L.C.
Prior to the consummation of the Company's initial public offering, the
Company's business was operated through an S corporation under Subchapter S of
the Internal Revenue Code and the Company made distributions to its shareholders
in amounts equal to at least the shareholders' tax liabilities attributable to
the Company's earnings. Following the Company's initial public offering, the
Company has not declared any dividends and the Company's present plan is to
retain earnings for the foreseeable future for use in the Company's business and
the financing of its growth.
Immediately prior to the consummation of the Company's initial public
offering, the Company issued 4,394,500 shares of Common Stock in a one-for-one
share exchange for shares of what is now Kevco Delaware, Inc., one of the
Company's operating companies, for the purpose of making Kevco, Inc. the holding
company to such operating company. Such transaction was effected without
registration in reliance upon Section 4(2) under the Securities Act of 1933, as
amended.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial information required by this item is included in the
Company's 1996 Annual Report to Shareholders (the "1996 Annual Report") under
the heading "Selected Consolidated Financial Data." Such information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required by this item is included in the 1996 Annual Report
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operation." Such information is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item are
included in this Annual Report on Form 10-K, or are included in the Company's
1996 Annual Report and are incorporated herein by reference, as indicated in the
following Index to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS AND
- --------------------------------- 1996 ANNUAL REPORT
FINANCIAL STATEMENT SCHEDULES ANNUAL REPORT PAGE ON FORM 10-K PAGE
- ----------------------------- ------------------ -----------------
<S> <C> <C>
Report of Independent Accountants
(Coopers & Lybrand L.L.P.)................... 28 -
Independent Auditors Report
(Rylander, Clay & Opitz, L.L.P.)............. - 16
Consolidated Balance Sheets at
December 31, 1996 and 1995................... 16 -
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994....... 17 -
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1996, 1995
and 1994..................................... 18 -
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and
1994........................................ 19 -
Notes to Consolidated Financial Statements........... 20 -
</TABLE>
All schedules are omitted since the required information is not present or
is not present in amounts sufficient to require submission of the schedules, or
because the information required is included in the consolidated financial
statements and notes thereto.
15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas
We have audited the balance sheet of Kevco, Inc. (an S-Corporation) as of
December 31, 1994, and the related statements of income, stockholders' equity,
and cash flows for the year ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kevco, Inc. as of December 31,
1994, and the results of its operations and its cash flows for the year ended
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ RYLANDER, CLAY & OPITZ, L.L.P
Fort Worth, Texas
March 24, 1995
16
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 14, 1995, the Company changed its independent auditors as
previously reported in the Company's registration statement on Form S-1 (333-
11173), which change did not involve any disagreement or any event described in
Item 304(a)(1)(v) of Regulation S-K.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the directors of the Company is set forth in the
proxy statement to be delivered to shareholders in connection with the Company's
annual meeting of shareholders to be held in 1997 (the "Proxy Statement") under
the heading "Election of Directors," which information is incorporated herein by
reference. The name, age and position of each executive officer of the Company
is set forth under the heading "Executive Officers" in Item 1 of this report,
which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Management Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Principal
Shareholders and Management Ownership," which information is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning relationships and related transactions is set
forth in the Proxy Statement under the heading "Certain Transactions" or under
the heading "Compensation Committee Interlocks and Insider Participation" which
information is incorporated herein by reference.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) Financial Statements:
The financial statements filed as a part of this report are
listed in the "Index to Financial Statements and Financial
Statement Schedules" at Item 8.
(2) Financial Statement Schedules:
The financial statement schedules filed as a part of this report
are listed in the "Index to Financial Statements and Financial
Statement Schedules" at Item 8.
(3) Exhibits:
The exhibits filed as a part of this report are listed under
"Exhibits" at subsection (c) of this Item 14.
(b) Reports of Form 8-K:
No report on Form 8-K was filed on behalf of the Company during the
last quarter of the period covered by this report.
(c) 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)
19
<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 the 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 - PaineWebber 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 PaineWebber
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 Delaware, 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
Delaware, Inc.).(1)
10.39 - Letter Agreement dated June 22, 1982, between Kevco, Inc.
(n/k/a Kevco Delaware, 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)
21
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
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)
13.1 - Portions of 1996 Annual Report to Shareholders that are
incorporated by reference into this Annual Report on Form 10-
K.(3)
21.1 - Subsidiaries.(3)
23.1 - Consent of Coopers & Lybrand L.L.P.(3)
23.2 - Consent of Rylander, Clay & Opitz, L.L.P.(3)
24.1 - Power of Attorney.(contained on the signature page of this
Annual Report on Form 10-K)
27.1 - Financial Data Schedule.(3)
________
(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) Filed herewith.
22
<PAGE>
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
jointly and severally, Jerry E. Kimmel, Richard S. Tucker and Ellis L. McKinley,
Jr., and each one of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1997 By: /s/ Jerry E. Kimmel
----------------------------------------
Jerry E. Kimmel,
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on March 28, 1997.
Signature Title
--------- -----
/s/ Jerry E. Kimmel Chairman of the Board, President
- ---------------------------------- and Chief Executive Officer
Jerry E. Kimmel (Principal Executive Officer)
/s/ Clyde A. Reed, Jr. Executive Vice President
- ---------------------------------- Chief Operating Officer and Director
Clyde A. Reed, Jr.
/s/ Ellis L. McKinley, Jr. Vice President, Chief Financial Officer,
- ---------------------------------- and Treasurer (Principal Financial
Ellis L. McKinley, Jr. Officer and Principal Accounting Officer)
/s/ Richard S. Tucker Secretary and Director
- ----------------------------------
Richard S. Tucker
/s/ Martin C. Bowen Director
- ----------------------------------
Martin C. Bowen
/s/ Richard Nevins Director
- ----------------------------------
Richard Nevins
23
<PAGE>
EXHIBIT INDEX
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)
24
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
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)
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)
25
<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 the 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 - PaineWebber 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 PaineWebber
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 Delaware, 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
Delaware, Inc.).(1)
10.39 - Letter Agreement dated June 22, 1982, between Kevco, Inc.
(n/k/a Kevco Delaware, 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)
26
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
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)
13.1 - Portions of 1996 Annual Report to Shareholders that are
incorporated by reference into this Annual Report on Form 10-
K.(3)
21.1 - Subsidiaries.(3)
23.1 - Consent of Coopers & Lybrand L.L.P.(3)
23.2 - Consent of Rylander, Clay & Opitz, L.L.P.(3)
24.1 - Power of Attorney.(contained on the signature page of this
Annual Report on Form 10-K)
27.1 - Financial Data Schedule.(3)
________
(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) Filed herewith.
27
<PAGE>
EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years ended December 31,
1996 are derived from the Company's audited consolidated financial statements.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1992 1993 1994 1995 /(1)/ 1996
------- -------- --------- ------------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 61,169 $ 80,257 $ 99,279 $ 182,519 $ 267,344
Cost of sales 50,619 67,087 83,625 155,877 226,765
-------- -------- -------- --------- ---------
Gross profit 10,550 13,170 15,654 26,642 40,579
Commission income 1,234 1,274 1,066 2,610 5,497
-------- -------- -------- --------- ---------
11,784 14,444 16,720 29,252 46,076
Selling, general and
administrative expenses 9,491 10,550 11,941 20,889 29,723
-------- -------- -------- --------- ---------
Operating income 2,293 3,894 4,779 8,363 16,353
Interest income - 83 346 355 151
Interest expense (334) (425) (627) (1,692) 2,209
Other income - - 800 - -
-------- -------- -------- --------- ---------
Income before income tax
provision 1,959 3,552 5,298 7,026 14,295
Income tax provision - - 51 45 1,307
-------- -------- -------- --------- ---------
Net income $ 1,959 $ 3,552 $ 5,247 $ 6,981 $ 12,988
======== ======== ======== ========= =========
PRO FORMA INFORMATION /(2)/:
Historical income before
income taxes $ 1,959 $ 3,552 $ 5,298 $ 7,026 $ 14,295
Income tax expense adjustments 764 1,385 2,066 2,740 5,432
-------- -------- -------- --------- ---------
Pro forma net income $ 1,195 $ 2,167 $ 3,232 $ 4,286 $ 8,863
======== ======== ======== ========= =========
Pro forma earnings per share $0.24 $0.44 $0.65 $0.87 $1.60
======== ======== ======== ========= =========
Weighted average shares
outstanding 4,946 4,946 4,946 4,946 5,531
December 31,
-----------------------------------------------------------------
1992 1993 1994 1995 /(1)/ 1996
------- -------- --------- ------------- ---------
BALANCE SHEET DATA (in thousands)
Working capital $ 4,531 $ 4,050 $ 4,496 $ 18,926 $ 23,959
Total assets 10,898 15,052 17,485 54,851 55,004
Total debt 1,815 5,547 6,385 31,263 9,831
Stockholders' equity 5,060 3,537 5,512 8,738 33,651
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(1) The Company acquired Service Supply on June 30, 1995. The acquisition was
accounted for as a purchase and accordingly, the operating results of
Service Supply have been included in the operating results of the Company
since June 30, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Acquisition of Service Supply."
(2) Prior to the initial public offering, the Company had elected to be treated
as an S corporation under the provisons of Subchapter S of the Internal
Revenue Code. As an S corporation, the Company was not subject to federal
and certain state income taxes. The pro forma data give effect to the
income taxes that would have been recorded had the Company been taxed as a
C corporation.
<PAGE>
EXHIBIT 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
From 1991 through 1996, the Company experienced significant growth in sales
and earnings. This growth was the result of internal expansion, including the
opening of new distribution centers, as well as the acquisition of distribution
and manufacturing facilities from Service Supply Systems, Inc. ("Service
Supply") in June 1995. From 1991 through 1996, the Company opened seven new
distribution centers. Through the acquisition of Service Supply, the Company
acquired five distribution and three manufacturing facilities, bringing the
number of its distribution and manufacturing facilities to 17 and three,
respectively. The Company will seek to continue to grow through the acquisition
and opening of distribution and manufacturing facilities and through the
expansion of the product lines offered by the Company.
The Company recognizes revenues from product sales at the time of shipment
(or the time of product receipt, in the case of direct shipments from suppliers
to customers). In some cases the Company sells on a commission basis.
Commissions are recognized when earned and represent amounts earned in selling,
warehousing and delivering products for certain manufacturers of building
products with which the Company has distribution agreements. Commission
arrangements do not require inventory investments or receivable financing, and
therefore are significantly less expensive to the Company than traditional
sales. To the extent the volume of items warehoused and shipped under commission
arrangements increases faster or slower than the volume of items related to
traditional sales, changes in net sales may not be representative of actual
shipment volume increases or decreases.
ACQUISITION OF SERVICE SUPPLY
In June 1995, the Company acquired Service Supply for a purchase price of
approximately $17.7 million. The entire purchase price was paid in cash. The
fair value of assets acquired was approximately $32.4 million and the amount of
liabilities assumed was approximately $14.7 million. There was no material
affiliation between Service Supply and Kevco prior to such acquisition. The
acquisition of Service Supply enabled Kevco to achieve its primary strategic
objective at that time of becoming a national distributor of building products
to the manufactured housing and recreational vehicle ("RV") industries and
significantly enhanced the Company's competitive position. Service Supply's
operations are located primarily in the southeastern United States, the only
region of the country not served by the Company at the time of the acquisition.
The Company benefits from Service Supply's product mix, which is weighted toward
plumbing products, but also includes a variety of other building products. In
particular, through its acquisition of Service Supply's wood products
subsidiary, the Company has become a wood products manufacturer for the
manufactured housing industry in the southeastern and southwestern United
States. The Company's wood products business is conducted through its
subsidiary, Sunbelt Wood Components, Inc. ("Sunbelt").
Since completing the Service Supply acquisition, the Company has primarily
focused on integrating and enhancing the performance of the acquired operations
and has achieved net sales growth of 10.6% from $241.8 million in 1995 (on a
combined basis as if the acquisition had occurred on January 1, 1995) to $267.3
million in 1996. Gross profit, as a percent of sales, on such a combined basis,
increased from 14.1% to 15.2% during the same time periods, primarily as a
result of purchasing opportunities available to the Company following the
completion of the acquisition of Service Supply.
Because of the Service Supply acquisition, the Company's historical results
of operations and period-to-period comparisons of such results and certain
financial data may not be meaningful or indicative of future results.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of Kevco's net sales.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Net sales............................ 100.0% 100.0% 100.0%
Cost of sales........................ 84.2 85.4 84.8
----- ----- -----
Gross profit......................... 15.8 14.6 15.2
Commission income.................... 1.1 1.4 2.0
----- ----- -----
16.9 16.0 17.2
Selling, general and administrative.. 12.0 11.4 11.1
----- ----- -----
Operating income..................... 4.9 4.6 6.1
Other income......................... 0.8 0.0 0.0
Interest income...................... 0.3 0.2 0.1
Interest expense..................... (0.6) (0.9) (0.8)
----- ----- -----
Income before income taxes........ 5.4% 3.9% 5.4%
===== ===== =====
</TABLE>
Comparison of Years Ended December 31, 1996 and 1995
Net sales increased by $84.8 million, or 46.5%, to $267.3 million in 1996
from $182.5 million in 1995. The increase in net sales was primarily
attributable to the inclusion of a full year of sales from the Service Supply
acquisition in 1996 compared to six months of sales from the Service Supply
acquisition in 1995. However, net sales, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1995, increased from
$241.8 million in 1995 to $267.3 million in 1996, an increase of 10.5%. The
increase in net sales on such a combined basis primarily resulted from an
increase in the volume and variety of products sold. Management believes the
increase in the volume and variety of products sold was primarily the result of
the establishment of national plumbing products accounts with several customers,
sales of Kevco product lines to existing Service Supply customers (as well as
sales of Service Supply product lines to existing Kevco customers) and improved
customer demand. The increase in net sales, on such a combined basis, was in
excess of the 6.8% increase in reported manufactured home shipments in 1996
compared to 1995 (approximately 363,000 homes reported shipped in 1996 compared
to approximately 340,000 homes reported shipped in 1995). Sales to the
manufactured housing industry represented approximately 90% of the Company's net
sales in 1996.
Gross profit increased by $14.0 million, or 52.6%, to $40.6 million in 1996
from $26.6 million in 1995. This increase in gross profit was primarily
attributable to the inclusion of a full year of gross profit from the Service
Supply acquisition in 1996 compared to six months gross profit from the Service
Supply acquisition in 1995. Gross profit, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1995, increased from
$34.0 million in 1995 to $40.6 million in 1996, an increase of 19.4%. This
increase in gross profit on such a combined basis resulted primarily from an
overall increase in the volume of net sales. Actual gross profit, as a percent
of actual net sales, increased to 15.2% in 1996 from 14.6% in 1995. This
increase was primarily the result of improving margins associated with Service
Supply's sales. Gross profit, as a percent of net sales, on a combined basis as
if the acquisition of Service Supply had occurred on January 1, 1995, increased
from 14.1% in 1995 to 15.2% in 1996. Management believes that both the increase
in actual gross profit, as a percent of net sales, and the increase in gross
profit, as a percent of net sales, on a combined basis are a direct result of
the Company's ability to take advantage of purchasing opportunities following
the acquisition of Service Supply.
<PAGE>
Commission income increased by $2.9 million, or 111.5%, to $5.5 million in
1996 from $2.6 million in 1995. Although a portion of the increase resulted
from the inclusion of a full year of commission income from the Service Supply
acquisition in 1996 compared to six months of commission income from the Service
Supply acquisition in 1995, the most significant factor in the increase was that
the Company entered into commission-based distribution arrangements with two
manufacturers of component products.
Selling, general and administrative expenses increased by $8.8 million, or
42.1%, to $29.7 million in 1996 from $20.9 million in 1995. The increase was
primarily related to the inclusion of a full year of selling, general and
administrative expenses from the Service Supply acquisition in 1996 compared to
six months of selling, general and administrative expenses in 1995 and, to a
lesser extent, the increased expenses related to the overall net sales increase.
Selling, general and administrative expenses, as a percent of net sales,
decreased to 11.1% in 1996 from 11.4% in 1995, reflecting the reduction of
redundant overhead and warehousing costs associated with Service Supply and,
generally, the Company's ability to increase sales without a proportionate
increase in related operating expenses.
Net income increased by $6.0 million, or 85.7%, to $13.0 million in 1996
from $7.0 million in 1995. The increase was primarily a result of the inclusion
of a full year of gross profit from the Service Supply acquisition in 1996
compared to six months of gross profit from the Service Supply acquisition in
1995, and the remainder of the increase was attributable to the increase in net
sales without a proportionate increase in operating expenses. The increase in
net income was net of additional interest expense incurred of $0.5 million in
1996 related to the term loan associated with the acquisition of Service Supply,
outstanding for a full year period compared to six months in 1995.
Comparison of Years Ended December 31, 1995 and 1994
Net sales increased by $83.2 million, or 83.8%, to $182.5 million in 1995
from $99.3 million in 1994. The increase in net sales was primarily attributable
to the inclusion of six months of sales from the Service Supply facilities in
1995. However, net sales, on a combined basis as if the acquisition of Service
Supply had occurred on January 1, 1994, also increased in 1995 to $241.8 million
from $200.2 million in 1994, an increase of 20.8%. The increase in net sales on
such a combined basis primarily resulted from an increase in the volume and
variety of products sold. Management believes the increase in the volume and
variety of products sold was primarily the result of the establishment of
national plumbing products accounts with several customers, sales of Kevco
product lines to existing Service Supply customers (as well as sales of Service
Supply product lines to existing Kevco customers) and improved customer demand.
The increase in net sales, on such a combined basis, was in excess of the 11.8%
increase in reported manufactured home shipments in 1995 compared to 1994
(approximately 340,000 homes reported shipped in 1995 compared to approximately
304,000 homes reported shipped in 1994). Sales to the manufactured housing
industry represented approximately 85% of the Company's net sales in 1995.
Gross profit increased by $10.9 million, or 69.4%, to $26.6 million in
1995 from $15.7 million in 1994. This increase in gross profit was primarily
attributable to the inclusion of six months of gross profit from the Service
Supply facilities in 1995. Gross profit, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1994, increased in 1995
to $34.0 million from $28.5 million in 1994, an increase of 19.3%. This increase
in gross profit on such a combined basis resulted primarily from an overall
increase in the volume of net sales. Actual gross profit, as a percent of actual
sales, decreased to 14.6% in 1995 from 15.8% in 1994. This decrease was
primarily the result of lower margins associated with Service Supply's sales.
Gross profit, as a percent of sales, on a combined basis as if the acquisition
of Service Supply had occurred on January 1, 1994, decreased to 14.1% in 1995
from 14.3% in 1994, a decrease which management believes was primarily the
result of competition from other suppliers attempting to increase their market
shares.
Commission income increased by $1.5 million, or 136.4%, to $2.6 million in
1995 from $1.1 million in 1994. A significant amount of the increase resulted
from the inclusion of six months of commission income from the Service Supply
facilities in 1995. An additional significant factor in this increase was the
increase in sales volume for which the Company is compensated on a commission
basis.
Selling, general and administrative expenses increased by $9.0 million, or
75.6%, to $20.9 million in 1995 from $11.9 million in 1994. The increase was
primarily related to the inclusion of six months of selling, general and
administrative expenses from the Service Supply facilities in 1995 and, to a
lesser extent, the increased expenses related to the overall net sales increase.
Selling, general and administrative expenses, as a percent of sales, decreased
to 11.4% in 1995 from 12.0% in 1994, reflecting the reduction of redundant
overhead and warehousing costs associated with Service Supply and, generally,
the Company's ability to increase sales without a proportionate increase in
related operating expenses.
Net income increased by $1.8 million, or 34.6%, to $7.0 million in 1995 from
$5.2 million in 1994. Excluding insurance proceeds of $0.8 million recognized as
income in 1994 related to a former officer's disability, the increase in net
income from
<PAGE>
1994 to 1995 would have been 59.1%. The increase was primarily a result of the
inclusion of six months of gross profit from the Service Supply facilities in
1995, and the remainder of the increase was attributable to the increase in net
sales without a proportionate increase in operating expenses. Also, the increase
in net income was net of additional interest expense incurred of $0.6 million in
1995 related to the term loan associated with the acquisition of Service Supply.
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 $12.2 million in
1996, and increased to $8.4 million in 1995 from $3.1 million in 1994. The
Company's capital expenditures were $1.6 million in 1996 and $2.8 million and
$0.4 million in 1995 and 1994, respectively. The Company is obligated to make
payments on various capital leases in varying amounts, maturing through 2007.
Additionally, the Company is obligated to make payments under noncompete and
consulting agreements, related to the Service Supply acquisition on June 30,
1995, in varying amounts, maturing through 1999. See Notes 4 and 6 to the
Company's Consolidated Financial Statements.
In connection with the Service Supply acquisition at June 30, 1995, the
Company arranged for a term loan and a revolving credit facility with a bank in
the aggregate amount of $35.0 million; the term loan comprising $15.0 million.
The purchase price of Service Supply was approximately $17.7 million, of which
$15.0 million was paid with proceeds from such term loan and the remaining $2.7
million was paid with a combination of cash on hand and proceeds from the
revolving credit facility. The fair value of assets acquired was $32.4 million
and liabilities assumed were $14.7 million. Of the $14.7 million of liabilities
assumed, $8.1 million was paid with funds borrowed under the Company's revolving
credit facility. 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. A portion of the net proceeds of the public
offering was used to permanently repay the then outstanding balance of the term
loan and the remainder to pay all of the then outstanding balance of the
revolving credit facility. Borrowings under the term loan required monthly, bi-
monthly or quarterly interest payments (depending on whether interest accrues
based on the prime rate or LIBOR) and quarterly principal payments of $0.6
million commencing on October 1, 1996 until maturity at June 30, 2001. Interest
was paid on the term loan at a blend of the bank's prime rate and LIBOR rates
based on pricing options selected by the Company plus a margin based on
operating statistics of the Company. Borrowings under the revolving credit
facility were (prior to the amendment described below) due June 30, 1998
(subject to the option of the lenders to grant one or more twelve month
extensions at Kevco's request), and require monthly, bi-monthly or quarterly
interest payments currently based on a blend of the bank's prime rate and LIBOR
rates based on pricing options selected by the Company plus a margin determined
by operating statistics of the Company (8.25% at December 31, 1996). The
borrower under the term loan was and revolving credit facility is one of the
Company's operating subsidiaries, and the obligations thereunder are guaranteed
by the Company. The term loan was 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 such agreement).
In February 1997, the Company amended its credit agreement to allow for a
term loan of $30.0 million and to increase the revolving credit facility to
$35.0 million from $20.0 million. The terms remain substantially the same as
discussed above, and the term loan and credit facility mature in October 2001.
Scheduled principal repayment of the term loan is $2.0 million in 1998; $8.0
million in 1999; $10.0 million in 2000; and $10.0 million in 2001. In February
1997, the Company purchased certain assets and assumed certain liabilities of
Consolidated Forest Products, L.L.C. and acquired Bowen Supply, Inc. with cash
borrowed from the Company's credit facilities. The aggregate cash price was
approximately $33.4 million and each will be accounted for as a purchase. The
assumed debt was approximately $8.4 million and was immediately paid with
proceeds from the term loan and credit facility.
Prior to the effective date of the initial public offering, the Company had
elected to be treated as an S corporation. As a result, the Company has made
distributions to its shareholders, including amounts equal to at least their
federal and state income tax liabilities attributable to the Company's earnings.
Distributions have generally been made on a quarterly basis as needed to satisfy
such tax liabilities, except as discussed in the paragraph below. The Company
made aggregate cash distributions to its shareholders of approximately $14.4
million, $4.7 million and $4.0 million in 1996, 1995 and 1994, respectively.
Concurrent with the consummation of the offering, the Company converted to a C
Corporation and is subject to federal and certain state income 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.
<PAGE>
Immediately prior to the consummation of the offering, the Company declared
and made an S corporation distribution of approximately $3.7 million,
representing previously taxed but undistributed earnings through 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 earning from July 1, 1996 to the consummation of the offering.
The Company intends to increase the number of its manufacturing, and to a
lesser extent, distribution facilities, primarily through acquisitions.
Management believes there are currently a number of acquisition opportunities in
the manufactured housing and RV industries, and from time to time additional
opportunities will arise. Possible acquisitions will vary in size and the
Company will consider larger acquisitions that could be material to the Company.
In order to finance any such possible acquisitions, the Company may use cash
flow from operations, may attempt to borrow additional amounts under its credit
arrangements, may seek to obtain additional debt or equity financing or may use
its equity securities as consideration. The availability and attractiveness of
any outside sources of financing will depend on a number of factors, some of
which will relate to the financial condition and performance of the Company, and
some of which will be beyond the Company's control, such as prevailing interest
rates and general economic conditions. The Company's existing credit facilities
require the Company to obtain the prior consent of the lenders for acquisitions
in excess of an aggregate of $15.0 million during any previous four quarters.
There can be no assurance that the Company will be able to acquire any
manufacturing or distribution facilities, or that any such facilities acquired
will be or become profitable.
Management believes the net proceeds from the initial public offering,
together with cash flow from operations and additional borrowings under its
revolving credit facility, will be adequate to fund the operations and current
expansion plans of the Company. However, in order to provide any additional
funds necessary for the continued pursuit of the Company's growth strategies,
the Company may incur, from time to time, additional short- and long-term bank
indebtedness and may issue, in public or private transactions, its equity and
debt securities, the availability and terms of which will depend upon market and
other conditions. There can be no assurance that such additional financing will
be available or, if available, will be on terms acceptable to the Company.
ASSET MANAGEMENT
The Company actively manages its assets and liabilities. All corporate and
profit center managers participate in an incentive-based compensation plan that
measures the individual's effectiveness in net asset control and return on net
assets employed. Managers are rewarded for receivables collection, inventory
control and profits in relation to these and other net assets employed.
For the year ended December 31, 1996, days sales in average receivables was
approximately 22 days, days sales in average inventory was approximately 33 days
and days sales in average payables was approximately 27 days.
INFLATION
Generally, inflation and changing prices have had a minimal impact on
Kevco's operating results, as increases in the sales prices of products have
closely followed increases in materials costs.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report which 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 RV 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
Prospectus relating to the Company's initial public offering.
<PAGE>
QUARTERLY RESULTS
The following table represents certain unaudited financial information for
the quarters indicated.
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996(1):
Net sales.................... $64,234 $71,364 $69,449 $62,296
Operating income............. 3,557 4,526 4,365 3,909
Income before income
taxes....................... 3,010 4,015 3,798 3,477
Pro forma net income(2)...... 1,836 2,449 2,355 2,156
Pro forma earnings per
share(2)(3)................. 0.39 0.51 0.46 0.35
YEAR ENDED DECEMBER
31, 1995(1):
Net sales.................... $27,567 $28,734 $62,714 $63,504
Operating income............. 1,198 1,056 2,826 3,283
Income before income
taxes....................... 1,151 943 2,173 2,759
Pro forma net income(2)...... 702 575 1,326 1,683
Pro forma earnings per
share(2)(3)................. 0.14 0.12 0.27 0.34
YEAR ENDED DECEMBER
31, 1994:
Net sales.................... $22,311 $24,837 $26,399 $25,732
Operating income............. 1,249 1,189 1,481 860
Income before income taxes... 1,182 1,122 2,209 785
</TABLE>
(1) The Company acquired Service Supply on June 30, 1995. The acquisition was
accounted for as a purchase and, accordingly, the operating results of
Service Supply have been included in the operating results of the Company
since June 30, 1995.
(2) Prior to the initial public offering, the Company had elected to be treated
as an S corporation under the provisions of Subchapter S of the Internal
Revenue Code. As an S corporation, the Company was not subject to federal
and certain state income taxes. The pro forma data give effect to the
income taxes that would have been recorded had the Company been taxed as a
C corporation.
(3) Reflects the assumed issuance of shares of Common Stock at the initial
public offering price of $12.00 per share, less underwriting discount, to
generate sufficient funds to pay an S corporation distribution in an amount
equal to undistributed earnings previously taxed at the stockholder level.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
December 31,
--------------------------------------
ASSETS 1996 1995
------------------ ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,078 $ 977
Trade receivables (less allowance for doubtful accounts
of $100 and $160 in 1996 and 1995, respectively) 9,458 14,769
Inventories 22,792 18,383
Prepaid expenses and other 338 343
Deferred income taxes 195 -
-------------- --------------
Total current assets 34,861 34,472
Property and equipment, net 10,208 9,758
Intangible assets, net 9,495 10,162
Other assets 440 459
-------------- --------------
Total assets $ 55,004 $ 54,851
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 6,666 $ 11,258
Accrued liabilities 3,107 3,231
Income taxes payable 762 -
Current portion of long-term debt 367 1,057
-------------- --------------
Total current liabilities 10,902 15,546
Long-term debt, less current portion 9,464 30,206
Deferred compensation obligation 383 361
Deferred income taxes 604 -
-------------- --------------
Total liabilities $ 21,353 $ 46,113
-------------- --------------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized;
6,809 and 4,700 shares issued in 1996 and 1995, respectively 68 47
Additional paid-in capital 32,854 3,034
Loan to stockholder - (3,437)
Retained earnings 729 9,842
Treasury stock, 306 shares at cost - (748)
-------------- --------------
Total stockholders' equity $ 33,651 $ 8,738
-------------- --------------
Total liabilities and stockholders' equity $ 55,004 $ 54,851
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C>
Net sales $ 267,344 $ 182,519 $ 99,279
Cost of sales 226,765 155,877 83,625
--------- --------- --------
Gross profit 40,579 26,642 15,654
Commission income 5,497 2,610 1,066
--------- --------- --------
46,076 29,252 16,720
Selling, general and administrative expenses 29,723 20,889 11,941
--------- --------- --------
Operating income 16,353 8,363 4,779
Interest income 151 355 346
Interest expense (2,209) (1,692) (627)
Other income - - 800
--------- --------- --------
Income before income tax provision 14,295 7,026 5,298
Income tax provision 1,307 45 51
--------- --------- --------
Net income $ 12,988 $ 6,981 $ 5,247
========= ========= ========
Pro forma information (unaudited) (Note 1):
Historical income before income taxes $ 14,295 $ 7,026 $ 5,298
Income tax expense adjustments 5,432 2,740 2,066
--------- --------- --------
Pro forma net income $ 8,863 $ 4,286 $ 3,232
========= ========= ========
Pro forma earnings per share $1.60 $0.87 $0.65
========= ========= ========
Weighted average shares outstanding 5,531 4,946 4,946
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Treasury Stock Additional
---------------- ---------------- Paid-in Loan to Retained
Shares Amount Shares Amount Capital Stockholder Earnings Total
------ ------ ------ ------ ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 4,700 $ 47 306 $ (748) $ 2,837 $ (4,937) $ 6,338 $ 3,537
Net income - - - - - - 5,247 5,247
Distribution to stockholders - - - - - - (4,022) (4,022)
Collections from stockholder - - - - - 750 - 750
------- ----- ------ ------ ---------- ----------- -------- --------
Balance at December 31, 1994 4,700 47 306 (748) 2,837 (4,187) 7,563 5,512
Net income - - - - - - 6,981 6,981
Distribution to stockholders - - - - - - (4,702) (4,702)
Collections from stockholder - - - - - 750 - 750
Contributed capital - - - - 197 - - 197
------- ----- ------ ------ ---------- ----------- -------- --------
Balance at December 31, 1995 4,700 47 306 (748) 3,034 (3,437) 9,842 8,738
Net income - - - - - - 12,988 12,988
Distribution to stockholders - - - - - - (14,407) (14,407)
Collections from stockholder - - - - - 375 - 375
Distribution of loan to
stockholders - - - - - 3,062 (3,062) -
Contributed capital - - - - 86 - - 86
Retirement of treasury stock (306) (3) (306) 748 (745) - - -
Contribution of S corporation
retained earnings with change
to C corporation status - - - - 4,632 - (4,632) -
Issuance of stock 2,415 24 - - 25,847 - - 25,871
------- ----- ------ ------ ---------- ----------- -------- --------
Balance at December 31, 1996 6,809 $ 68 - $ - $ 32,854 $ - $ 729 $ 33,651
======= ===== ====== ====== ========== =========== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,988 $ 6,981 $ 5,247
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,792 1,041 399
Gain on sale of assets (10) (16) (11)
Deferred compensation obligation 22 28 (7)
Deferred income taxes 409 - -
Changes in assets and liabilities,
net of effects from purchase of
Service Supply Systems, Inc.:
Trade receivables, net 5,311 (2,014) (835)
Inventories (4,409) (1,127) (1,335)
Prepaid expenses and other 5 71 (9)
Trade accounts payable (4,592) 3,650 (591)
Accrued liabilties (124) (166) 218
Income taxes payable 762 - -
--------- --------- ---------
Net cash provided by operating activities 12,154 8,448 3,076
--------- --------- ---------
Cash flows from investing activities:
Purchase of equipment (1,586) (2,844) (432)
Proceeds from sale of assets 21 594 11
Decrease in other assets 19 180 (47)
Purchase of Service Supply Systems, Inc.,
net of cash acquired - (17,449) -
Loan origination fees - (913) -
--------- --------- ---------
Net cash used by investing activities (1,546) (20,432) (468)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from initial public offering 25,871 - -
(Payment) proceeds from line of credit (6,500) (4,587) 2,400
Payments of long-term debt (14,932) (1,900) (1,578)
Proceeds from lont-term debt - 30,700 -
Payment of acquired debt - (8,124) -
Distributions paid (14,407) (4,702) (4,022)
Capital contributions 86 197 -
Collections on loan to stockholder 375 750 750
--------- --------- ---------
Net cash (used) provided by financing activities (9,507) 12,334 (2,450)
--------- --------- ---------
Net increase in cash and cash equivalents 1,101 350 158
Beginning cash and cash equivalents 977 627 469
--------- --------- ---------
Ending cash and cash equivalents $ 2,078 $ 977 $ 627
========= ========= =========
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 2,162 $ 1,471 $ 604
======== ======== =======
Income taxes $ 456 $ 45 $ 51
======== ======== =======
</TABLE>
Supplemental schedule of noncash investing and financing activities:
The Company distributed the loan to stockholder of $3,062 to the Company's
stockholders effective June 30, 1996.
During 1995, the Company purchased all of the capital stock of Service Supply
Systems, Inc. for $17,700. In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired $ 32,400
Cash paid for the capital stock 17,700
----------
Liabilities assumed $ 14,700
==========
Of the $14,700 in liabilities assumed, $8,100 was immediately paid off with the
proceeds from long-term debt.
Noncompete obligations of $544 were incurred when the Company purchased Service
Supply Systems, Inc. and entered into two noncompete agreements which are being
amortized over the life of the agreements.
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS
Kevco, Inc. manufactures and distributes products and materials for use by
the manufactured housing and recreational vehicle industries.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Kevco, Inc. and its wholly-owned subsidiaries (the "Company"). All
significant intercompany transactions and accounts have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, deposits with banks and all highly liquid investments with
original maturities of three months or less. The carrying value of cash
and cash equivalents approximates fair value as of December 31, 1996 and
1995.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventories
purchased for resale are valued using the last-in, first-out (LIFO) method.
Manufactured inventories are valued using the first-in, first-out (FIFO)
method. Had the first-in, first-out method been used to determine
purchased inventory cost, inventories would have increased by approximately
$1,474,000 and $1,258,000 at December 31, 1996 and 1995, respectively. For
the years ended December 31, 1996 and 1995, the percentage of inventory
valued at LIFO was 71% and 81%, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Additions to and major improvements of property and equipment are
capitalized. Maintenance and repair costs are expensed as incurred. When
assets are retired or otherwise disposed of, their costs and related
accumulated depreciation are removed from the accounts and any resulting
gains or losses are included in the operations for the period.
<PAGE>
PROPERTY AND EQUIPMENT, CONTINUED
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
Buildings 40 years
Furniture and equipment 5 to 10 years
Transportation equipment 4 to 10 years
Leasehold improvements 10 years
INTANGIBLE ASSETS
Intangible assets are comprised of noncompete agreements, loan origination
fees and goodwill. Noncompete agreements are amortized on a straight-line
basis over the terms of the related agreements (24 to 30 months). Loan
origination fees associated with the acquisition of the Company's term debt
and revolving credit facility have been capitalized and are being amortized
on a straight-line basis over five years. The excess of acquisition cost
of acquired businesses over the fair value of net assets acquired
("goodwill") is amortized, using the straight-line method, over 40 years.
The Company reviews goodwill to assess recoverability periodically. At
each balance sheet date, management assesses whether there has been a
permanent impairment in the value of goodwill by considering factors such
as expected future operating income, current operating results, and other
economic factors. Management believes no impairment has occurred.
DEFERRED COMPENSATION OBLIGATION
The Company has entered into deferred compensation agreements with certain
employees, whereby payments will be made upon death or retirement for a ten
year period and such liability has been recorded at the present value of
the anticipated future payments.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment or the
time of receipt in the case of direct shipments from vendors to customers.
Commissions are recognized as earned.
<PAGE>
INCOME TAXES
Income taxes are provided based on earnings reported for tax return
purposes in addition to a provision for deferred income taxes in accordance
with SFAS No. 109, Accounting for Income Taxes. The provision for income
taxes includes deferred taxes determined by the change in the deferred tax
liability (or asset) which is computed based on the differences between the
financial statement and income tax bases of assets and liabilities, all of
which are measured by applying enacted tax laws and rates. Deferred tax
expense is the result of changes in the deferred tax liability or asset.
INTEREST RATE HEDGE
The Company entered into an interest rate hedge agreement in conjunction
with its primary credit facility to alter interest rate exposure on both
the revolver and the term debt. Amounts expected to be paid or received on
the interest rate hedge are recognized as adjustments to interest expense.
Any gain or loss from the termination of this hedge agreement will be
recognized at that time.
CONCENTRATION OF CREDIT RISK
The Company's sales are primarily to the manufactured housing and
recreational vehicle industries across a wide geographical area and
generally require no advance payment from customers. The Company had
sales to two customers representing approximately 16% and 14% of net sales
in 1996.
The Company estimates future credit losses based on continual evaluation of
customers' financial condition, historical loss experience and current
economic conditions. The estimated future credit losses are expensed
through an allowance for doubtful accounts and actual credit losses are
charged to the allowance when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses in
the reporting periods. Actual results could differ from those estimates.
<PAGE>
STOCK SPLIT
On August 29, 1996, the Company effected a .47-for-1 reverse stock split of
its common stock. All share and per share amounts included in the
accompanying financial statements and notes have been restated to reflect
the stock split.
UNAUDITED PRO FORMA NET INCOME
Pro forma net income represents the results of operations adjusted to
reflect a provision for income tax on historical income before income
taxes, which gives effect to the change in the Company's income tax status
to a C corporation prior to the consummation of the Company's initial
public offering. The difference between the pro forma income tax rates
utilized and the federal statutory rate of 35% relates primarily to state
income taxes (5%, less effect of federal tax benefit).
UNAUDITED PRO FORMA EARNINGS PER SHARE
Historical net income per common share is not presented because it is not
indicative of the ongoing entity. Pro forma earnings per share have been
computed by dividing pro forma net income by the weighted average number of
shares of common stock outstanding during the period. Pro forma earnings
per share data has 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.
2. ACQUISITION:
The Company purchased all of the capital stock of Service Supply Systems,
Inc. ("Service Supply") on June 30, 1995 for approximately $17,700,000 and
at that date merged Service Supply with and into the Company. The
acquisition was accounted for as a purchase and, accordingly, the operating
results of Service Supply have been included in the operating results of
the Company since June 30, 1995. The acquisition cost in excess of the fair
value of net assets of Service Supply of $7,087,000 has been accounted for
as goodwill and will be amortized over its useful life of 40 years.
<PAGE>
3. INVENTORIES:
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1996 1995
--------- --------
<S> <C> <C>
Raw materials $ 4,385 $ 2,314
Work-in-process 332 303
Finished goods 1,324 828
Goods held for resale 16,751 14,938
--------- --------
$ 22,792 $ 18,383
========= ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1996 1995
--------- --------
<S> <C> <C>
Land $ 242 $ 242
Buildings 5,195 4,774
Furniture and equipment 6,181 5,213
Transportation equipment 3,277 3,232
Leasehold improvements 564 503
--------- --------
15,459 13,964
Less accumulated depreciation (5,251) (4,206)
--------- --------
Property and equipment, net $ 10,208 $ 9,758
========= ========
</TABLE>
Property and equipment under capital leases consists of buildings of
$2,231,000 and furniture and equipment of $640,000 for the years ended
December 31, 1996 and 1995, and accumulated depreciation of $1,982,000 and
$1,846,000 for the years ended December 31, 1996 and 1995, respectively.
<PAGE>
5. INTANGIBLE ASSETS:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Goodwill $ 9,113 $ 9,113
Loan origination fees 913 913
Noncompete agreements 544 544
-------- --------
10,570 10,570
Less accumulated amortization (1,075) (408)
-------- --------
Intangible assets, net $ 9,495 $ 10,162
======== ========
</TABLE>
6. LONG-TERM DEBT:
Long-term debt consists or the following (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1996 1995
------- --------
<S> <C> <C>
Revolving credit facility payable to a bank,
due June 30, 1998, with interest payable
monthly. Interest is paid at the bank's prime
rate or LIBOR rates based on pricing options
elected by the Company plus a margin
determined by operating statistics of the
Company (8.25% and 7.93% at December
31, 1996 and 1995, respectively), $11,611
net of an outstanding letter of credit in the
amount of $389, was available under the
credit facility at December 31, 1996. $ 8,000 $ 14,500
Term debt payable to a bank with interest
payable monthly and quarterly principal
payments of $625 commencing on
October 1, 1996 until maturity at June 30,
2001. Interest is paid at LIBOR rates
based on pricing options selected by the
Company plus a margin determined by
operating statistics of the Company
(7.54% at December 31, 1995). - 14,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended
December 31,
------------------
1996 1995
------- --------
(in thousands)
<S> <C> <C>
Capital lease obligations to a
related party,
collateralized by equipment,
maturing through
2007, with interest rates from
13.9% to 26.8%. $ 1,548 $ 1,681
Obligations payable under
noncompete and consulting agreements,
due in 24 to 48 months with payments
ranging from $3,000 to $10,833 per
month, maturing through 1999, interest
imputed at 8.50%. 283 582
------- --------
Totals 9,831 31,263
Less current portion (367) (1,057)
------- --------
$ 9,464 $ 30,206
======= ========
</TABLE>
The term debt and revolving credit facility are collateralized by
substantially all of the assets of the Company and its subsidiaries,
including a pledge of all outstanding capital stock of such subsidiaries.
The related credit agreement contains certain restrictions and conditions
which include cash flow requirements, limitations on acquisitions of
property and equipment, and restrictions on distributions to stockholders.
The following are scheduled maturities of debt (in thousands):
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997 $ 367
1998 8,131
1999 127
2000 114
2001 111
Thereafter 981
--------
$ 9,831
========
</TABLE>
In addition, in order to reduce interest rate risk on the credit facility,
the Company has entered into an interest rate hedge agreement in the
notional amount of $15.0 million, whereby the Company will receive interest
payments should LIBOR increase above 9.00% and, conversely, will make
interest payments should LIBOR decrease below 5.25%, the effect of which
limits the Company's interest expense within the range of 9.00% to 5.25%
LIBOR on $15.0 million of debt. Management intends to hold the
<PAGE>
interest rate hedge until maturity on August 28, 1998. The Company has
incurred no gain or loss related to this interest rate hedge for the year
ended December 31, 1996. The fair value of the interest rate hedge
agreement is not considered to be material.
The fair value of long-term debt was $10.6 and $32.0 million as of December
31, 1996 and 1995, respectively. The fair value of the Company's long-term
debt was calculated by discounting future cash flows using an estimated
fair market value interest rate.
In February 1997, the Company and its lender amended the credit agreement
in order to fund the acquisitions discussed in Note 13. The term debt was
increased to $30.0 million and the revolving credit facility increased to
$35.0 million, each maturing in 2001. The term debt will be payable $0 in
1997; $2 million in 1998; $8 million in 1999; $10 million in 2000; and $10
million in 2001. The interest rate structure, restrictions and conditions
are similar to the credit agreement prior to amendment.
7. INCOME TAXES:
Prior to November 6, 1996, the Company was treated for federal and state
income tax purposes as an S corporation under Subchapter S of the Internal
Revenue Code. As a result, the Company's earnings for such period were
taxed at the stockholder level. Effective November 6, 1996, the Company
terminated its S corporation status and restructured to create an operating
company with a subsidiary. From November 6, 1996, the Company's earnings
have been taxed as a C corporation and provisions for income taxes have
been reflected in the consolidated financial statements. The Company
recorded a nonrecurring net deferred tax provision of approximately
$353,000 associated with the recognition of a related deferred tax
liability due to the termination of the Company's S corporation status.
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Federal:
Current $ 559 $ - $ -
Deferred 352 - -
State:
Current 339 45 51
Deferred 57 - -
-------- -------- -------
$ 1,307 $ 45 $ 51
======== ======== =======
</TABLE>
<PAGE>
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the treatment of certain
items for financial statement purposes and the treatment of those items for
corporation tax purposes. The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which
will either be taxable or deductible when the assets and liabilities are
recovered or settled.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Accrued liabilities $ 205
Allowance for doubtful accounts 38
Inventory capitalization 188
Deferred compensation 148
Capital leases 254
Noncompete agreements 123
-------
Total gross deferred tax assets 956
-------
Deferred tax liabilities:
Depreciation (1,129)
Inventory valuation (236)
-------
Total gross deferred tax liabilities (1,365)
-------
Net deferred tax liabilities $ (409)
=======
Current deferred income tax asset $ 195
Noncurrent deferred income tax liability (604)
-------
Net deferred tax liabilities $ (409)
=======
</TABLE>
<PAGE>
The differences between the consolidated provision for income taxes and
income taxes computed using income before income taxes and the U.S. federal
income tax rate for the years ended December 31, 1996, 1995 and 1994 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Amount computed using statutory rate (35%) $ 5,003 $ 2,459 $ 1,854
Increase (decrease) in taxes resulting from:
Recognition of deferred tax liability
in connection with S corporation
termination 353 - -
State income taxes 225 45 51
Tax effect of income not subject to
federal tax due to corporation S status (4,290) (2,459) (1,854)
Other, net 16 - -
------- ------- -------
$ 1,307 $ 45 $ 51
======= ======= =======
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases various equipment and buildings under capital and
noncancelable operating leases with an initial term in excess of one year.
As of December 31, 1996, future minimum rental payments required under
these capital and operating leases are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ---------
<S> <C> <C>
1997 $ 432 $ 2,175
1998 363 1,926
1999 340 1,375
2000 340 995
2001 304 759
Thereafter 1,573 690
--------- --------
Total 3,352 $ 7,920
========
Less amount representing
interest (1,804)
---------
Present value of minimum
lease payments $ 1,548
=========
</TABLE>
<PAGE>
Rental expense for operating leases was $3,839,000, $2,640,000 and
$1,574,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with its majority
stockholder for a five-year term renewable annually and has entered into a
consulting agreement with a former stockholder through October 1998.
LITIGATION
There are claims and pending actions incident to the business operations of
the Company. Management does not expect resolution of these matters to have
a material adverse effect on the Company's financial position or future
results of operations or cash flows.
9. RETIREMENT PLAN:
The Company has a defined contribution retirement plan which covers
substantially all full-time employees and is qualified under Section 401(k)
of the Internal Revenue Code. Under the plan, employees may voluntarily
contribute a percentage of their compensation to the plan and the Company
may make discretionary contributions. The Company's contributions to the
plan for the years ended December 31, 1996, 1995 and 1994 were $100,000,
$225,000 and $150,000, respectively.
10. RELATED PARTY TRANSACTIONS:
The Company leases certain buildings and data processing equipment under
capital leases from partnerships partially owned by the majority
stockholder of the Company. Two of the leased warehouses were financed
through economic development and industrial revenue bonds; one series of
which was issued by Newton, Kansas in the original principal amount of
$575,000, and with respect to which, the Company is the sub-lessee of the
premises and a co-guarantor, and one series of which was issued by Elkhart,
Indiana in the original principal amount of $400,000, and with respect to
which, the Company is the lessee of the premises and has agreed to perform
the obligations of the lessor contained in the mortgage. Lease payments for
the facilities and equipment were approximately $672,000 in each of the
years ended 1996, 1995 and 1994.
<PAGE>
The Company loaned its majority stockholder $5.0 in 1993, payable in
monthly principal installments of $62,500 plus interest at 9% at December
31, 1995, due November 1997. The Company distributed the loan to
stockholder to the Company's stockholders effective June 30, 1996.
11. OTHER INCOME:
The Company received $800,000 in 1994 from a disability insurance policy on
a former stockholder who was determined disabled and used the proceeds to
retire a note payable to the former stockholder.
12. STOCK-BASED COMPENSATION PLANS:
The Company sponsors the Kevco, Inc. 1995 Stock Option Plan and the Kevco,
Inc. 1996 Stock Option Plan (the "Plans"), which are stock-based incentive
compensation plans. The Company applies APB Opinion 25 and related
standards in accounting for the Plans. In 1995, the FASB issued FASB
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123").
Adoption of the cost recognition provisions of SFAS 123 is optional and the
Company has decided not to elect these provisions of SFAS 123. However,
disclosures as if the Company adopted the cost recognition provisions of
SFAS 123 in 1995 are required by SFAS 123 and are presented below.
Under the Plans, the Company is authorized to issue up to 702,735 shares of
common stock pursuant to "Awards" granted in the form of incentive stock
options (intended to qualify under Section 422 of the Internal Revenue Code
of 1986, as amended) and nonqualified stock options. Awards may be granted
to selected employees and directors of the Company. During 1995 and 1996,
the Company granted only nonqualified stock options under the Plans.
NONQUALIFIED STOCK OPTIONS
The Plans provide that the exercise price of any stock option will be
determined by the Board of Directors on the date of grant. The stock
options granted in 1995 or 1996 vest over periods of 10 years and 7 years,
respectively. All options vested in November 1996, at the time of the
initial public offering. In accordance with APB 25, the Company has not
recognized any compensation cost for these stock options granted during
1995 and 1996.
<PAGE>
A summary of the status of the Company's stock options as of December 31,
1995 and 1996, and the changes during the year ended on those dates is
presented below:
<TABLE>
<CAPTION>
Nonqualified Stock Options
------------------------------------------
1996 1995
-------------------- --------------------
Number of Weighted Number of Weighted
Shares of Average Shares of Average
Underlying Exercise Underlying Exercise
Options Prices Options Prices
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 47,854 $ 5.64 - N/A
Granted 393,450 $11.17 47,854 $5.64
Exercised - N/A - N/A
Forfeited 26,108 $10.42 - N/A
Expired - N/A - N/A
Outstanding at end of year 415,196 $10.58 47,854 $5.64
Exercisable at end of year 415,196 $10.58 - N/A
Weighted-average fair value of
options granted during the year $1.84 - $ 1.39 -
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the minimum value method of option pricing with the following
weighted-average assumptions for grants in 1995 and 1996, respectively:
dividend yield of zero percent for both years; risk-free interest rates are
different for each grant and range from 5.77% to 6.19%; and the expected
lives of 5 and 3.5 years, respectively, for the 1995 and 1996 options. In
determining the "minimum value," SFAS 123 does not require the volatility
of the Company's common stock underlying the options to be calculated or
considered because the Company was not publicly-traded when the options
were granted.
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Exercise at December Remaining Exercise at December Exercise
Prices 31, 1996 Life Price 31, 1996 Price
--------- ------------- --------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$ 5.64 44,306 7.85 $ 5.64 44,306 $ 5.64
11.17 370,890 5.66 11.17 370,890 11.17
------- ---- ------ ------- ------
415,196 5.90 $10.58 415,196 $10.58
</TABLE>
NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1995 and 1996 would approximate the pro forma
amounts below (in thousands):
<TABLE>
<CAPTION>
SFAS 123 SFAS 123
As Reported Pro Forma As Reported Pro Forma
December 31, December 31, December 31, December 31,
1996 1996 1995 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
SFAS 123 charge - $711 - $34
Pro forma net income $8,863 $8,422 $4,286 $4,265
Pro forma net income
per common share $1.60 $1.52 $.87 $0.86
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
1995, and the Company anticipates making awards in the future under its
stock-based compensation plans.
<PAGE>
13. SUBSEQUENT EVENTS:
In February 1997, the Company acquired certain assets and liabilities of
Consolidated Forest Products, L.L.C. for approximately $13,870,000.
Consolidated Forest Products, L.L.C. is a privately held manufacturer of
wood products based in Haleyville, Alabama.
In February 1997, the Company acquired the common stock of Bowen Supply,
Inc. for approximately $19,500,000. Bowen Supply, Inc. is a privately held
distributor of building products to the manufactured housing and
recreational vehicle industries based in Americus, Georgia.
The Company will account for these transactions under the purchase method.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Kevco, Inc. as
of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Kevco, Inc. for the year ended December 31, 1994, were audited by
other auditors, whose report, dated March 24, 1995, expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kevco, Inc. as of
December 31, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYRBAND L.L.P.
Fort Worth, Texas
February 21, 1997
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES*
Kevco Delaware, Inc.,
a Delaware corporation
Sunbelt Wood Components, Inc.
a Delaware corporation
Consolidated Forest Products, Inc.,
a Delaware corporation
Bowen Supply, Inc.,
a Georgia corporation
* Direct and indirect subsidiaries of Kevco, Inc., a Texas corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Kevco, Inc. on Form S-8 (File No. 333-19959) of our report dated February 21,
1997, on our audits of the consolidated financial statements of Kevco, Inc. as
of December 31, 1996 and December 31, 1995 and for the years ended December 31,
1996 and 1995, which report is incorporated by reference in this Annual Report
on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Fort Worth, Texas
March 27, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statement of
Kevco, Inc. on Form S-8 (File No. 333-19959) of our report dated March 24, 1995,
on our audit of the financial statements of Kevco, Inc. as of December 31, 1994
and for the year then ended, which report is included in this Annual Report on
Form 10-K.
/s/ RYLANDER, CLAY & OPITZ, L.L.P.
Fort Worth, Texas
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 2,078 977
<SECURITIES> 0 0
<RECEIVABLES> 9,558 14,929
<ALLOWANCES> 100 160
<INVENTORY> 22,792 18,383
<CURRENT-ASSETS> 34,861 34,472
<PP&E> 15,459 13,964
<DEPRECIATION> 5,251 4,206
<TOTAL-ASSETS> 55,004 54,851
<CURRENT-LIABILITIES> 10,902 15,546
<BONDS> 0 0
0 0
0 0
<COMMON> 68 47
<OTHER-SE> 33,583 8,691
<TOTAL-LIABILITY-AND-EQUITY> 55,004 54,851
<SALES> 267,344 182,519
<TOTAL-REVENUES> 272,841 185,129
<CGS> 226,765 155,877
<TOTAL-COSTS> 259,853 178,148
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,209 1,692
<INCOME-PRETAX> 14,295 7,026
<INCOME-TAX> 1,307 45
<INCOME-CONTINUING> 12,988 6,981
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,988 6,981
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
