<PAGE> 1
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
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 ----------
incorporation or organization) (IRS Employer ID No.)
University Centre I
1300 S. University Drive
Suite 200
Fort Worth, Texas
----------------- 76107
(Address of principal -----
executive offices) (Zip Code)
(817-332-2758)
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding for each of the issuer's classes or
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 6,850,539 shares
- -------------------------------------- ----------------
(Class) (Outstanding as of November 10, 1998)
<PAGE> 2
KEVCO, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the three-month and nine-month
periods ended September 30, 1998 and 1997 (unaudited) . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 1998 and 1997 (unaudited). . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Exhibit index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 85 $ 271
Trade accounts receivable, less allowance for doubtful
accounts of $713 and $641 in 1998 and 1997, respectively 65,684 41,006
Inventories, less reserve for obsolete inventory of $2,643
and $2,692 in 1998 and 1997, respectively 94,430 83,540
Assets held for sale 1,065 3,032
Other current assets 4,551 4,981
-------------- --------------
Total current assets 165,815 132,830
Property and equipment, net 45,347 42,442
Intangible assets, net 120,782 120,190
Deferred tax asset 4,339 4,339
Other assets 7,828 8,393
-------------- --------------
Total assets $ 344,111 $ 308,194
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,704 $ 2,932
Trade accounts payable 63,936 47,007
Accrued liabilities 19,834 24,496
Other current liabilities 252 950
-------------- --------------
Total current liabilities 89,726 75,385
Long-term debt, less current portion 206,936 191,288
Deferred compensation obligation 693 874
-------------- --------------
Total liabilities 297,355 267,547
-------------- --------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 6,850 and
6,828 shares issued and outstanding in 1998 and 1997, respectively 69 68
Additional paid-in capital 33,300 33,020
Retained earnings 13,387 7,559
-------------- --------------
Total stockholders' equity 46,756 40,647
-------------- --------------
Total liabilities and stockholders' equity $ 344,111 $ 308,194
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
KEVCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 30, September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 234,625 $ 98,553 $ 678,643 $ 271,957
Cost of sales 204,481 85,728 587,605 235,138
----------- ----------- ----------- -----------
Gross profit 30,144 12,825 91,038 36,819
Commission income 1,850 1,506 5,550 4,413
----------- ----------- ----------- -----------
31,994 14,331 96,588 41,232
Selling, general and administrative expenses 25,507 10,960 70,343 28,738
----------- ----------- ----------- -----------
Operating income 6,487 3,371 26,245 12,494
Interest expense 5,443 858 15,649 2,354
----------- ----------- ----------- -----------
Income before income taxes 1,044 2,513 10,596 10,140
Income taxes 531 1,006 4,768 4,056
----------- ----------- ----------- -----------
Net income $ 513 $ 1,507 $ 5,828 $ 6,084
=========== =========== =========== ===========
Earnings per share - basic $ 0.07 $ 0.22 $ 0.85 $ 0.89
=========== =========== =========== ===========
Earnings per share - diluted $ 0.07 $ 0.22 $ 0.84 $ 0.88
=========== =========== =========== ===========
Weighted average shares outstanding - basic 6,850 6,815 6,841 6,812
=========== =========== =========== ===========
Weighted average shares outstanding - diluted 6,944 6,892 6,942 6,916
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,828 $ 6,084
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,989 2,172
Gain on sale of assets -- (3)
Deferred compensation obligation (181) 375
Changes in assets and liabilities (25,594) (2,390)
---------- ----------
Net cash provided (used) by operating activities (13,958) 6,238
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired -- (32,535)
Purchase of equipment (8,943) (2,000)
Proceeds from sale of assets 817 806
Proceeds from assets held for sale 2,968 --
(Increase) decrease in other assets 302 (509)
---------- ----------
Net cash used by investing activities (4,856) (34,238)
Cash flows from financing activities:
Proceeds from line of credit, net 11,418 4,600
Proceeds from long-term debt 10,000 30,000
Payments of long-term debt (2,998) (8,721)
Stock options exercised 281 120
Other (73) --
---------- ----------
Net cash provided by financing activities 18,628 25,999
---------- ----------
Net decrease in cash and cash equivalents (186) (2,001)
Beginning cash and cash equivalents 271 2,078
---------- ----------
Ending cash and cash equivalents $ 85 $ 77
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The Annual Report on Form 10-K for the year ended December 31, 1997,
for Kevco, Inc. includes a summary of significant accounting policies and should
be read in conjunction with this Form 10-Q. The accompanying consolidated
financial statements of Kevco, Inc. and its wholly-owned subsidiaries ("Kevco"
or the "Company") have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. All significant
intercompany transactions and accounts have been eliminated.
In the opinion of management, the consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair statement of the balance sheets as of September
30, 1998 and December 31, 1997, the statements of income for the three-month and
nine-month periods ended September 30, 1998 and 1997 and the statements of cash
flows for the nine-month periods ended September 30, 1998 and 1997. The results
of operations for the three-month and nine-month periods ended September 30,
1998 are not necessarily indicative of the results of operations for the entire
fiscal year ending December 31, 1998.
2. ACQUISITIONS
In December 1997, the Company acquired Shelter Components Corporation
(the "Shelter Acquisition") and the inventory and certain distribution rights
from Shepherd Products Company (the "Shepherd Acquisition"), for total purchase
prices approximating $144.8 million and $8.0 million, respectively. The
acquisitions were made utilizing borrowings under the Company's amended and
restated credit facility and, in the case of the Shelter Acquisition, net
proceeds from the issuance of $105 million of 10 3/8% senior subordinated notes
due 2007. Each of the acquisitions was accounted for as a purchase and the
results of operations of the acquired companies were included in the
consolidated results of operations of the Company from their respective
acquisition dates. As a result of such acquisitions, approximately $90.9 million
of goodwill was recorded by the Company, which reflects the adjustments
necessary to allocate the individual purchase prices to the fair value of assets
acquired, liabilities assumed and additional purchase liabilities recorded.
Additional purchase liabilities included approximately $1.7 million for
severance and related costs associated primarily with the elimination of certain
administrative and corporate positions recorded in connection with the Shelter
Acquisition in December, $0.4 million of which is outstanding at September 30,
1998. The Company expects to complete its termination of employees during 1998.
6
<PAGE> 7
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw materials $ 23,120 $ 17,006
Work-in process 829 1,317
Finished goods 7,964 3,760
Goods held for resale 62,517 61,457
---------- ----------
$ 94,430 $ 83,540
========== ==========
</TABLE>
4. CREDIT AGREEMENT
In December 1997, Kevco and its lender entered into the second
amended and restated credit agreement, which was subsequently amended on
February 12, 1998 (the "Credit Agreement") at closing of the Shelter Acquisition
(see Note 2) to allow for aggregate senior borrowings of up to $125 million
comprised of a revolving credit facility of $45 million and a term loan facility
of $80 million. The revolving credit facility and $40 million of the term loan
facility mature in 2003 with the remaining term loan facility maturing in 2004.
The term loan and revolving credit facilities are collateralized by
substantially all of the assets of the Company and its subsidiaries as well as
the capital stock of such subsidiaries.
In addition to funds available under the Credit Agreement, the
Company issued $105 million of 10 3/8% senior subordinated notes due 2007 (the
"Notes") under the indenture dated as of December 1, 1997, as supplemented (the
"Indenture"), to complete the acquisition of Shelter. Interest is payable on
June 1 and December 1 of each year commencing June 1, 1998. The Notes are
redeemable, in whole or in part, at the option of the Company, at any time on or
after December 1, 2002, at the redemption prices set forth in the Indenture. In
addition, at any time on or before December 1, 2000, the Company may redeem up
to 35% of the original aggregate principal amount of the Notes with the net
proceeds of a public equity offering at a redemption price equal to 110.375% of
the principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of redemption.
The Credit Agreement and Indenture contain certain restrictions and
conditions that include cash flow and various financial ratio requirements, and
limitations on incurrence of debt or liens, acquisitions of property and
equipment, distributions to stockholders and certain events constituting a
Change of Control (as defined in the agreements). At September 30, 1998, the
Company was in violation of a financial covenant contained in the Credit
Agreement which has been waived by the Company's lenders through a retroactive
amendment to the Credit Agreement. The Company is currently negotiating a
modification of the Credit Agreement which management expects to be effective
December 31, 1998.
7
<PAGE> 8
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. EARNINGS PER SHARE
Basic earnings per share excludes dilution, and diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted into common stock.
The reconciliation between basic and diluted weighted average shares
outstanding, follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Weighted average shares - basic 6,850 6,815 6,841 6,812
Plus shares applicable to stock
option plans 94 77 101 104
=========== =========== =========== ===========
Weighted average shares - diluted 6,944 6,892 6,942 6,916
=========== =========== =========== ===========
</TABLE>
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion includes the operations of Kevco for each of
the periods discussed. This discussion and analysis should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
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 whom the Company has distribution agreements. Commission
arrangements do not require inventory investments or receivables financing, and
therefore are significantly less expensive to the Company than traditional
sales. To the extent the volume of items warehoused and shipped under commission
arrangements increases faster or slower than the volume of items related to
traditional sales, changes in net sales may not be representative of actual
increases or decreases in shipment volume.
As discussed below, the Company acquired Shelter Components in
December 1997. Since that time, the Company has been integrating Shelter into
Kevco by, among other things, consolidating certain corporate functions,
consolidating overlapping distribution warehouses from 48 facilities to 34 and
integrating multiple Shelter and Kevco computer systems into one. Management
believes the consolidation and integration activities and related costs will
diminish, on a declining scale, with such activities and costs substantially
complete by the end of 1999.
ACQUISITIONS
Effective December 1, 1997, the Company acquired approximately 95.5%
of the common stock of Shelter through a tender offer for a purchase price of
$17.50 per share of common stock of Shelter; the Company acquired the remaining
untendered shares through a subsequent merger for a like price. The Shelter
Acquisition was accounted for as a purchase and, accordingly, the operating
results have been included in the operating results of the Company since
December 1, 1997. As a result of the Shelter Acquisition, approximately $84.1
million of goodwill was recorded by the Company, which reflects the acquisition
costs in excess of the fair value of net assets acquired. On June 27, 1997,
prior to the acquisition of Shelter by Kevco, Shelter acquired the net assets of
Plastic Solutions, Inc., a manufacturer of injection molded plastic parts, for
approximately $0.9 million in cash and $3.5 million in notes payable to the
sellers.
On December 12, 1997, the Company consummated the acquisition of the
inventory and certain distribution rights of certain building products
distributed by the manufactured housing and recreational vehicle division of
Shepherd Products Company for a cash purchase price of $6.0 million, with an
additional $2.0 million payable over a five year period following the
acquisition and an additional $2.0 million payable over a period of up to seven
years upon the satisfaction of certain conditions.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Consolidated Statements of Income data as a percentage of the Company's net
sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.2 86.9 86.6 86.4
----------- ----------- ----------- -----------
Gross profit 12.8 13.1 13.4 13.6
Commission income 0.8 1.5 0.8 1.6
----------- ----------- ----------- -----------
13.6 14.6 14.2 15.2
Selling, general and
administrative expenses 10.9 11.1 10.4 10.6
----------- ----------- ----------- -----------
Operating income 2.7 3.5 3.8 4.6
Interest expense, net 2.3 1.0 2.3 0.9
----------- ----------- ----------- -----------
Income before income taxes 0.4% 2.5% 1.5% 3.7%
=========== =========== =========== ===========
</TABLE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales increased by $136.1 million, or 138.2%, to $234.6 million
for the three month period ended September 30, 1998 from $98.5 million for the
comparable 1997 period. The net sales increase primarily resulted from the
effect of the Shelter Acquisition in December 1997.
Gross profit increased by $17.3 million, or 135.2%, to $30.1 million
for the three month period ended September 30, 1998 from $12.8 million for the
comparable 1997 period due primarily to the Shelter Acquisition. Gross profit,
as a percent of net sales, decreased to 12.8% for the three month period ended
September 30, 1998 from 13.1% for the comparable 1997 period. The decrease in
gross profit, as a percent of net sales, was related primarily to the effect of
wood products margins which, affected by lower than historical lumber prices,
continued to be lower than historical levels, to start-up costs related to the
opening of two wood products plants in Arizona and North Carolina (such wood
products represent approximately 19% of net sales) and to increased costs as a
result of the consolidation efforts to eliminate duplicate facilities resulting
from the Shelter Acquisition, as well as an otherwise general decline in
margins.
Selling, general and administrative expenses increased by $14.5
million, or 131.8%, to $25.5 million for the three month period ended September
30, 1998 from $11.0 million for the comparable 1997 period. The increase was
primarily due to costs associated with the Shelter Acquisition and related
integration. Selling, general and administrative expenses, as a percent of net
sales, decreased to 10.9% for 1998 from 11.1% for the comparable 1997 period.
Although selling, general and administrative expense, as a percent of net sales,
decreased from the prior comparable period, in order to maintain high levels of
customer service in a period of considerable consolidation and integration of
Shelter distribution operations (including integration of information systems),
the Company has incurred costs significantly in excess of anticipated amounts
which have negatively impacted earnings and cash flow relating to, among other
things, contract labor, overtime and freight charges. The Company has also
encountered longer than anticipated start-up periods for two new wood products
facilities that were opened earlier this year.
10
<PAGE> 11
Interest expense increased by $4.5 million to $5.4 million for the
three months ended September 30, 1998 from $0.9 million for the comparable 1997
period principally due to borrowings related to the acquisitions of Shelter and
Shepherd.
Net income decreased by $1.0 million, or 66.7%, to $0.5 million for
the three months ended September 30, 1998 from $1.5 million for the comparable
1997 period. The decrease is attributable primarily to a decrease in gross
margin percentage, an increase in selling, general and administrative expenses
and increased interest expense as described above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales increased by $406.6 million, or 149.5%, to $678.6 million
for the nine month period ended September 30, 1998 from $272.0 million for the
comparable 1997 period. The net sales increase primarily resulted from the
effect of the Shelter Acquisition in December 1997 as well as a reported
manufactured housing shipment increase of 7.0% from January through August 1998,
as compared to the prior period. Sales to the manufactured housing industry
represented approximately 77% of net sales for the nine months ended September
30, 1998.
Gross profit increased by $54.2 million, or 147.3%, to $91.0 million
for the nine month period ended September 30, 1998 from $36.8 million for the
comparable 1997 period due primarily to the Shelter Acquisition. Gross profit,
as a percent of net sales, decreased to 13.4% for the nine month period ended
September 30, 1998 from 13.6% for the comparable 1997 period. The decrease in
gross profit, as a percent of net sales, was related primarily to the fact that
wood products margins, affected by lower than historical lumber prices,
continued to be lower than historical levels, to start-up costs related to the
opening of two wood products plants in Arizona and North Carolina (such wood
products represent approximately 19% of year to date net sales) and to increased
costs in the third quarter as a result of the consolidation efforts to eliminate
duplicate facilities resulting from the Shelter Acquisition, as well as an
otherwise general decline in margins.
Selling, general and administrative expenses increased by $41.6
million, or 144.9%, to $70.3 million for the nine month period ended September
30, 1998 from $28.7 million for the comparable 1997 period. The increase was
primarily due to costs associated with the Shelter Acquisition and related
integration. Selling, general and administrative expenses, as a percent of net
sales, decreased to 10.4% for 1998 from 10.6% for the comparable 1997 period.
Although selling, general and administrative expense, as a percent of net sales,
decreased from the prior comparable period, in order to maintain high levels of
customer service in a period of considerable consolidation and integration of
Shelter distribution operations (including integration of information systems),
the Company has incurred costs significantly in excess of anticipated amounts
which have negatively impacted earnings and cash flow relating to, among other
things, contract labor, overtime and freight charges. The Company has also
encountered longer than anticipated start-up periods for two new wood products
facilities that were opened earlier this year.
Interest expense increased by $13.2 million to $15.6 million for the
nine months ended September 30, 1998 from $2.4 million for the comparable 1997
period principally due to borrowings related to the acquisitions of Shelter and
Shepherd.
11
<PAGE> 12
Net income decreased by $0.3 million, or 4.9%, to $5.8 million for
the nine months ended September 30, 1998 from $6.1 million for the comparable
1997 period. The decrease is due primarily to a decrease in gross margin
percentage, an increase in selling, general and administrative expenses and
increased interest expense as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth has been financed through cash flow from
operations, borrowings under its bank credit facilities, proceeds from the
November 1996 initial public offering, proceeds from the issuance of the Notes
and the expansion of trade credit. Net cash used by operating activities was
$13.9 million and capital expenditures were $8.9 million for the nine months
ended September 30, 1998. Kevco is obliged to make payments on various capital
leases in varying amounts, maturing through 2007 as well as payments under
various noncompete and consulting agreements, related to recent acquisitions, in
varying amounts, through 2002.
In December 1997, the Company acquired Shelter for an aggregate
purchase price of approximately $144.8 million. In connection with the
acquisition of Shelter, the Company entered into the Credit Agreement, which
increased the aggregate borrowings available under the existing credit facility
to $125.0 million consisting of an $80.0 million term loan facility and a $45.0
million revolving credit facility. The revolving credit facility and a portion
of the term loan mature in 2003 with the remaining term loan portion maturing in
2004.
Borrowings under the term loan and revolving credit facilities
require monthly, bi-monthly or quarterly interest payments (depending on whether
interest accrues based on prime rate or LIBOR) calculated as a blend of the
bank's prime rate and LIBOR based on pricing options selected by the Company
plus a margin determined by operating statistics of the Company. The term loan
and revolving credit facilities are collateralized by substantially all of the
assets of the Company and its subsidiaries as well as the capital stock of such
subsidiaries. The Credit Agreement contains certain restrictions and conditions
that include cash flow and various financial ratio requirements, and limitations
on incurrence of debt or liens, acquisitions of property and equipment,
distributions to stockholders and certain events constituting a Change of
Control (as defined in the Credit Agreement). At September 30, 1998, the Company
was in violation of a financial covenant contained in the Credit Agreement which
has been waived by the Company's lenders through a retroactive amendment to the
Credit Agreement. The Company is currently negotiating a modification of the
Credit Agreement which management expects to be effective December 31, 1998.
In addition to the funds available under the amended credit facility,
the Company issued $105.0 million of the Notes under the Indenture to complete
the acquisition of the outstanding shares of Shelter. The Indenture contains
certain covenants that include, but are not limited to, restrictions or
limitations on the following: the incurrence of additional debt or liens, the
payment of dividends by the Company, the payment of dividends by restricted
subsidiaries to the Company, the sale of certain assets, the ability to
consolidate with or merge into another person, the entering into certain
transactions with affiliates and the engagement in certain lines of business.
12
<PAGE> 13
ASSET MANAGEMENT
The Company actively manages its assets and liabilities through
compensating its corporate and facility managers for receivable collection,
inventory control and profits in relation to these and other net assets
employed.
For the nine months ended September 30, 1998, days sales in average
receivables was approximately 25 days, days sales in average inventory was
approximately 41 days and days sales in average payables was approximately 27
days.
YEAR 2000
The Year 2000 problem concerns the inability of information systems
to properly recognize date-sensitive information beyond January 1, 2000.
Kevco has begun a project to bring software and systems into Year
2000 compliance in time to minimize any significant detrimental effects on
operations. The project covers information systems infrastructure, financial and
administrative systems, operating systems, other non-information systems
equipment and significant vendors and customers.
The Company has adopted a five level process toward Year 2000
compliance: (1) awareness; (2) assessment (identification of where failures may
occur, solutions and workarounds and plans to repair or replace), (3) renovation
(repair, replace or retire systems that cannot properly process Year 2000
dates); (4) validation and (5) implementation. At September 30, 1998, the first
two levels have been substantially completed (except with respect to third
parties as discussed below) and level three is in varying stages of completion.
The Company is utilizing internal personnel, contract programmers and
vendors to identify Year 2000 noncompliance problems, modify code and test the
modifications. In some cases, non-compliant software and hardware will be
replaced.
The Company relies on third party suppliers for products, raw
materials, utilities and other key services. Interruption of supplier operations
due to Year 2000 issues could affect Company operations through reduced sales,
reduced inventory levels and cash flow reductions. The Company is currently
evaluating the status of suppliers' efforts to become Year 2000 compliant and to
determine alternatives and contingency plan requirements. Approaches to reducing
risks of interruption due to supplier failures will vary. These alternatives and
contingency plans, once developed, are intended to provide a means of managing
risk, but cannot eliminate the potential for disruption due to third party
failure.
The Company is also dependent upon customers for sales and cash flow.
Year 2000 interruptions in customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While these
events are possible, the Company is, however, taking steps to monitor the status
of customers as a means of determining risks and alternatives.
13
<PAGE> 14
The Company's distribution centers and manufacturing facilities rely
on control systems, which include inventory and production monitoring and
warehouse management. Failure of these systems could result in disruption of
delivery of product to customers in a timely manner. The Company is evaluating
alternatives and contingency plans to mitigate these risks.
The Company also relies on various financial applications, such as
order processing and collection systems. In the event of failure of order
processing, the Company's ability to fulfill customer demands could be impaired.
In the event of failure of collection systems, the Company may not be able to
properly apply payments to customer balances or correctly determine cash
balances, and then only to the extent that manual or other alternative processes
were not able to meet processing requirements. These applications are in various
stages of completion.
The current estimate of incremental costs to complete the Year 2000
project is $600,000, of which approximately $150,000 has already been incurred
and the remainder is expected to be incurred over the next nine months. While
the Company believes its efforts will provide reasonable assurance that material
disruptions will not occur due to internal failure, the potential for
interruption still exists. In addition, there is a risk that the Company's plans
for achieving Year 2000 compliance will not be completed on time. However, as
part of the plan, the Company would be aware in advance and steps would be taken
to mitigate this risk.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report consist of
forward-looking statements that involve risks and uncertainties, including, but
not limited to, the Company's substantial leverage and its effects on the
Company's ability to obtain additional capital as needed, the Company's ability
to integrate its operations and successfully implement new management
information systems, the Company's success in addressing and remediating Year
2000 related issues, the Company's ability to operate its new manufacturing
facilities, customer demand for manufactured housing and recreational vehicles,
the effect of economic conditions, the impact of raw materials prices, the
Company's ability to maintain profitability in the event of the loss of a
significant customer and other risks detailed from time to time in the reports
filed by the Company with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K.
14
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C> <C>
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)
2.7 - Agreement and Plan of Merger, dated as of October 21, 1997, between Kevco, Inc.,
SCC Acquisition Corp. and Shelter Components Corporation.(6)
3.1 - Articles of Incorporation of Kevco, Inc., as amended.(1)
3.2 - Bylaws of Kevco, Inc.(1)
4.1 - Form of certificate evidencing ownership of the Common Stock of Kevco, Inc.(1)
10.1 - Amendment No. 2 to 1995 Stock Option Plan (Amended and Restated 1995 Stock
Option Plan of Kevco, Inc.) and Supplementary Letter.(1)
10.2 - 1996 Stock Option Plan of Kevco, Inc., as amended, and Supplementary Letter.(1)
10.3 - Form of Amended and Restated Employment Agreement between Gerald E. Kimmel and
Kevco, Inc., joined therein by Kevco Delaware, Inc. and Sunbelt Wood Components,
Inc.(1)
10.4 - Employment Agreement between C. Lee Denham and Kevco, Inc. dated June 30, 1995.(1)
10.5 - Lease between K & E Land & Leasing and Kevco, Inc. dated December 1, 1977.(1)
10.6 - Amendment No. 1 to Lease, by and between K & E Land & Leasing and Kevco, Inc. dated
March , 1982.(1)
10.7 - Amendment No. 2 to Lease, by and between K & E Land & Leasing and Kevco, Inc. dated
May 30, 1983.(1)
10.8 - Amendment No. 3 to Lease, by and between K & E Land & Leasing and Kevco, Inc. dated
February 1, 1993.(1)
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
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)
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)
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C>
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)
10.42 - Consent and Waiver, dated as of October 21, 1996, by and among NationsBank of Texas, N.A.,
The Sumitomo Bank, Ltd. and Kevco Texas, Inc.(1)
10.43 - Amended and Restated Credit Agreement, dated as of February 27, 1997, by and among Kevco
Delaware, Inc., certain lenders and NationsBank of Texas, N.A.(4)
10.44 - Amendment No. 1 to Amended and Restated 1995 Stock Option Plan of Kevco, Inc. (10)
10.45 - Senior Commitment Letter dated October 27, 1997 from NationsBank of Texas, N.A. and
NationsBanc Montgomery Securities, Inc.(6) 10.46 - First Amendment to Amended and Restated
Credit Agreement dated as of November 25, 1997 Kevco Delaware, Inc., certain lenders and
NationsBank of Texas, N.A.(7)
10.47 - Second Amended and Restated Credit Agreement dated December 1, 1997 between Kevco, Inc.,
certain lenders and NationsBank of Texas, N.A.(7)(8)
10.48 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and NationsBank of Texas,
N.A. in the original principal amount of $11,666,666.66.(7)
10.49 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and National City Bank of
Kentucky in the original principal amount of $8,166,666.67.(7)
10.50 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and Guaranty Federal Bank,
F.S.B. in the original principal amount of $7,000,000.00.(7)
10.51 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and The Sumitomo Bank,
Limited in the original principal amount of $8,166,666.67.(7)
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C> <C>
10.52 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc. and NationsBank of
Texas, N.A. in the original principal amount of $13,333,333.34.(7)
10.53 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc. and National City
Bank Kentucky in the original principal amount of $9,333,333.33.(7)
10.54 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc. and Guaranty Federal
Bank, F.S.B. in the original principal amount of $8,000,000.00.(7)
10.55 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc. and The Sumitomo Bank,
Limited in the original principal amount of $9,333,333.33.(7)
10.56 - Facility B Term Loan Note dated December 1, 1997 between Kevco, Inc. and NationsBank of
Texas, N.A. in the original principal amount of $50,000,000.00.(7)
10.57 - Security Agreement dated December 1, 1997 between Kevco, Inc. and NationsBank of Texas,
N.A. as Administrative Agent.(7) 10.58 - Registration Rights Agreement dated December 1,
1997 by and among Kevco, Inc., as Issuer, the Subsidiaries of Kevco, Inc. identified therein
as Subsidiary Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation and
NationsBanc Montgomery Securities, Inc., as Initial Purchasers.(9)
10.59 - Indenture dated December 1, 1997 among Kevco, Inc., SCC Acquisition Corp., Kevco Delaware,
Inc., Sunbelt Wood Components, Inc., Consolidated Forest Products, Inc., Bowen Supply, Inc.
and Encore Industries, Inc., as Subsidiary Guarantors and United States Trust Company of New
York, as Trustee.(9)
10.60 - Supplemental Indenture between Shelter Components Corporation, a Subsidiary of Kevco, Inc.,
and United States Trust Company of New York, as Trustee.(9)
10.61 - Supplemental Indenture dated as of December 1, 1997 between Shelter Distribution, L.P., a
Subsidiary of Kevco, Inc., and United States Trust Company of New York, as Trustee.(9)
10.62 - Supplemental Indenture dated as of December 1, 1997 between DCM, Inc., a Subsidiary of Kevco,
Inc., and United States Trust Company of New York, as Trustee.(9)
10.63 - Supplemental Indenture dated as of December 1, 1997 between Duo-Form of Michigan, Inc., a
Subsidiary of Kevco, Inc., and United States Trust Company of New York, as Trustee.(9)
10.64 - Supplemental Indenture dated as of December 1, 1997 between Design Components, Inc., a
Subsidiary of Kevco, Inc., and United States Trust Company of New York, as Trustee.(9)
10.65 - Supplemental Indenture dated as of December 1, 1997 between Shelter Components of Indiana,
Inc., a Subsidiary of Kevco, Inc., and United States Trust Company of New York, as Trustee.(9)
10.66 - Supplemental Indenture dated as of December 1, 1997 between BPR Holdings, Inc., a Subsidiary
of Kevco, Inc., and United States Trust Company of New York, as Trustee.(9)
10.67 - First Amendment to Credit Agreement dated February 12, 1998 between Kevco, Inc., certain
lenders and NationsBank of Texas, N.A.(10)
10.68 - Registered Global Note dated March 5, 1998 among Kevco, Inc., Kevco Delaware, Inc., Sunbelt
Wood Components, Inc., Bowen Supply, Inc., Encore Industries, Inc., Shelter
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C>
Components Corporation, BPR Holdings, Inc., Shelter Components of Indiana, Inc.,
Design Components, Inc., Duo-Form of Michigan, Inc., DCM, Inc. and Shelter
Distribution, L.P., as Subsidiary Guarantors and United States Trust Company of
New York, as Trustee.(11)
27.1 - Financial Data Schedule.(12)
</TABLE>
- -----------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 333-11173) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated February 27, 1997, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's registration statement
on Form S-8 (No. 333-19959), and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q, for the quarter ended March 31, 1997 and incorporated herein by
reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q, for the quarter ended June 30, 1997 and incorporated herein by
reference.
(6) Previously filed as an exhibit to the Company's Tender Offer Statement
on Schedule 14D-1, filed October 28, 1997, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Tender Offer Statement
on Schedule 14D-1/A, filed December 12, 1997, and incorporated herein by
reference.
(8) Schedules and similar attachments to this exhibit have not been
previously file herewith, but the nature of their contents is described
in the body of this exhibit. The Company agrees to furnish a copy of any
such omitted schedules and attachments to the Securities and Exchange
Commission upon request.
(9) Previously filed as an exhibit to the Company's registration statement
on Form S-4 (No. 333-43691), and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, for the year ended December 31, 1997 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q, for the quarter ended March 31, 1998 and incorporated herein by
reference.
(12) Filed herewith.
(b) REPORTS ON FORM 8-K
None.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Commission
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
KEVCO, INC.
Date: November 12, 1998 By: /s/ Jerry E. Kimmel
-----------------------------------
Jerry E. Kimmel
Chairman of the Board, President
and Chief Executive Officer
Date: November 12, 1998 By: /s/ Ellis L. McKinley, Jr.
-----------------------------------
Ellis L. McKinley, Jr.
Vice President, Chief Financial
Officer, Treasurer and Director
(Principal Financial Officer)
20
<PAGE> 21
KEVCO, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF KEVCO, INC. FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 85
<SECURITIES> 0<F1>
<RECEIVABLES> 66,397<F2>
<ALLOWANCES> 713
<INVENTORY> 94,430
<CURRENT-ASSETS> 165,815
<PP&E> 55,405
<DEPRECIATION> 10,058
<TOTAL-ASSETS> 344,111
<CURRENT-LIABILITIES> 89,726
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 46,687
<TOTAL-LIABILITY-AND-EQUITY> 344,111
<SALES> 678,643
<TOTAL-REVENUES> 684,193
<CGS> 587,605
<TOTAL-COSTS> 657,948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,649
<INCOME-PRETAX> 10,596
<INCOME-TAX> 4,768
<INCOME-CONTINUING> 5,828
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,828
<EPS-PRIMARY> $0.85
<EPS-DILUTED> $0.84
<FN>
<F1>Amounts inapplicable or not disclosed as a separate line on the Statement of
Financial Position or Results of Operations are reported as 0 herein.
<F2>Notes and accounts receivable - trade are reported net of allowances for
doubtful accounts in the Statement of Financial Position.
</FN>
</TABLE>
