<PAGE>
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, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___.
Commission file number 000-21621
KEVCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2666013
(State or other jurisdiction of (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 Stock 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. [x]
The aggregate market value of voting stock of the Registrant held by non-
affiliates of the registrant was $52,793,228 on March 12, 1998, based on the
closing price of the registrant's common stock on such date of $18.50 per share,
as reported on The Nasdaq Stock Market.
As of March 12, 1998, 6,831,159 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, 1997 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 1998 are incorporated by reference into Part III of
this report.
<PAGE>
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, 1997, without giving pro forma
effect to the acquisitions described below under the heading "Recent
Acquisitions." Through its 47 distribution centers, the Company distributes
more than 75,000 different inventory items to approximately 530 manufactured
housing and RV and other 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, laminated wallboard,
thermoformed bathtubs and shower enclosures for the manufactured housing
industry. From 1993 to 1997, the Company's net sales increased from $80.3
million to $394.2 million, a compound annual growth rate of approximately 48.9%.
Since its founding in 1964, the Company's growth has been fueled by internal
growth and acquisitions. On November 6, 1996, the Company consummated its
initial public offering.
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 believes that it 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 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, vinyl and wood windows, wood and vinyl siding,
fireplaces, electrical components and hardware, fasteners, power tools and mill
supplies. The Company also manufactures wood products including roof trusses and
lumber cut to customer specifications, laminated wallboard products, plastic
injection molded products and thermoformed bathtubs, shower enclosures and tub
wall surrounds. In 1997, approximately 32% of the Company's net sales were
derived from plumbing products, 34% from wood products and 34% from other
building products.
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 Forest"), an Alabama limited
liability company (a manufacturer of wood products for the manufactured housing
industry) in exchange for approximately $13.0 million in cash and two promissory
notes in the aggregate original principal amount of approximately $0.7 million.
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 $18.0 million in cash and promissory
notes in the aggregate original principal amount of $1.5 million.
On December 1, 1997, the Company consummated the acquisition of
approximately 95.5% of the then issued and outstanding shares of common stock of
Shelter Components Corporation ("Shelter") pursuant to a tender offer; the
Company acquired the remaining untendered shares through a subsequent merger for
a like price. The total purchase
2
<PAGE>
price of the Shelter acquisition was approximately $144.8 million. On June 27,
1997, Shelter consummated the acquisition of the net assets of Plastic
Solutions, Inc. ("PSI"), a manufacturer of plastic 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 payable at closing 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.
INDUSTRY
For the year ended December 31, 1997, 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 1996 the average cost per square foot was $25.18 for a single-section
manufactured home and $29.56 for a multi-section manufactured home, as compared
to an average cost of $58.66 per square foot for a site-built home, each
excluding land costs. In 1996, reported sales of new manufactured homes totaled
approximately $14.0 billion (at retail). Approximately 353,000 manufactured
homes were reported as shipped in 1997 (which would represent approximately
30.6% of all new single family homes sold in 1997). Reported shipments of new
manufactured homes experienced compound annual growth of approximately 8.6% for
the four years ended December 31, 1997.
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 1996 reportedly
accounted for approximately 71% 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, 1997, approximately 7% 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 $12.4 billion (at retail) in 1996.
Although reported RV shipments declined approximately 6.0% in 1997, the RV
industry has experienced compound annual growth in reported shipments of
approximately 1.1% since 1993. 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 maintain and strengthen its position as 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:
3
<PAGE>
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 ten 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. 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.
Expand Manufacturing Capabilities. The Company intends to expand its
manufacturing capabilities through internal growth and opportunistic vertical
acquisitions. By manufacturing certain of its own products, the Company
believes it can achieve greater profitability from its sales, while obtaining
direct control over product availability and quality. The Company currently
operates six wood products manufacturing facilities and plans to expand to new
markets, including opening a new manufacturing facility in North Carolina by the
end of the second quarter of 1998. Through the Shelter acquisition, the Company
obtained additional manufacturing platforms, including plastic thermoforming,
injection molding and laminated wallboard operations. The Company believes that
there are significant opportunities to grow its manufacturing business through
additional acquisitions and new facilities.
Pursue Opportunistic Acquisitions. The Company intends to selectively
explore the acquisition of other distributors and manufacturers of building
products. The Company seeks to acquire distributors that offer complementary
product lines to extend its existing offerings and realize significant operating
synergies.
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 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.
4
<PAGE>
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. The Company'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 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. Additionally, developing and following QS-9000 based
policies and procedures has provided substantial savings on the products
produced by PSI, and the engineering staff of PSI is prepared to assist
customers with part consolidation and redesign.
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
The Company believes it distributes one of the most comprehensive product
lines to the manufactured housing and RV industries. Prior to the acquisition
of Shelter, Kevco distributed approximately 10,000 SKUs and Shelter distributed
approximately 62,000 SKUs. Some of Kevco's and Shelter's SKUs overlap, and the
Company intends to rationalize and reduce total SKUs as Shelter is integrated
into the Company's operations. 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, fittings,
drain waste vent systems and potable water systems. Kevco supplies
substantially everything necessary to carry water into and out of a manufactured
home or RV.
Building Products. Kevco distributes a wide variety of building products,
including vinyl, aluminum and wood windows, wood moulding, exterior wood and
vinyl siding, visqueen, gypsum board, parquet wood flooring, insulation, roof
shingles, patio doors, fireplaces, kitchen cabinetry and water heaters (under an
exclusive arrangement with State Industries).
5
<PAGE>
Wood Products. Kevco, through Sunbelt, 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.
Hardware, Fasteners, Power Tools and Mill Supplies. Kevco distributes
screws, bolts and nuts of various sizes and dimensions, lock sets, cabinet door
pulls, hinges, door slides and drapery hardware, stationary power tools, table
saws, hoists and related equipment used in the manufactured home and RV
manufacturing cycle, including complete plant set-ups, plastic film, tape, glue,
caulking, chemicals and abrasives.
Electrical Components. Kevco distributes electrical components, including
wire, wiring devices, power generators, load-centers, circuit breakers, panels,
air conditioners, mill supplies and machinery.
Thermoformed Products. Kevco, through its Better Bath subsidiary,
manufactures and distributes bathtubs, shower enclosures and tub wall surrounds
for the manufactured housing and RV industry using the thermoforming process.
Laminated Wallboards. Kevco, through its Design Components subsidiary,
manufactures and distributes laminated wallboard products primarily for the
manufactured housing and RV industries and, to a lesser extent, manufactures
laminated wall shelving systems for the retail home improvement industry.
Plastic Injection Molded Products. Kevco, through its PSI subsidiary,
manufactures custom thermoplastic injection molded products for the automotive,
sporting goods, medical and manufactured housing industries. PSI also designs
parts and builds injection molds for its customers.
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, as well as its just-in-time delivery
capabilities, regular calling program, dedication to Total Quality Management
and competitive pricing.
The Company's national accounts are each supported by a senior account
executive. As a company, Kevco provides technical support through its marketing
group and service support through its local business units, each unit being
supported by a sales manager and an operational manager. Each customer within a
business unit's geographical reach is contacted weekly by the Company's local
sales team. 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 Kevco's distribution
centers or manufacturing facilities and is actively supported by a manager at
such distribution center or facility.
Sales representatives, consisting of salespersons and sales managers, are
all Company employees and are generally compensated on a salary and incentive-
based compensation arrangement. The incentive portion of a salesperson's
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 returns as well as a discretionary element.
Kevco maintains active customer relationships with approximately 530
manufactured home production plants and RV production plants in 45 states. The
Company's two largest customers, Champion Enterprises, Inc. and Fleetwood
Enterprises, Inc., accounted for approximately 14% each of Kevco's net sales in
1997. 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.
6
<PAGE>
DISTRIBUTION
Kevco distributes products through 47 distribution centers 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.
Substantially all of Kevco's distribution centers (other than those
recently acquired in connection with the acquisition of Shelter which will be
consolidated into Kevco's management information systems during 1998) 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 FIFO 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 2,000 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
7
<PAGE>
products in each of its product lines are available. In addition, raw material
used by the Company for its manufactured products are generally available from a
number of sources and loss of any one source would not have a material adverse
effect on the Company. The Company believes its relations with its suppliers
are good.
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 manufactures wood products, laminated wallboard products, plastic
injection molded products and thermoformed bathtubs, shower enclosures and tub
wall surrounds.
The Company 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 is 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 has roof truss manufacturing facilities in
Spruce Pine, Alabama, Ashburn, Georgia, Waco, Texas, Haleyville, Alabama and
Baxter, Tennessee. The Company opened a new facility in Arizona in January 1998
and is planning to open a new facility in North Carolina by the end of the
second quarter of 1998.
The Company manufactures laminated wallboard products through Design
Components, a wholly-owned subsidiary, primarily for the manufactured housing
and RV industries and, to a lesser extent, manufactures laminated wall shelving
systems for the retail home improvement industry. Decorative paper or vinyl
wall coverings are laminated onto 4' x 8' sheets of gypsum, MDF or lauan and are
shipped directly to the customers from one of Kevco's five manufacturing
facilities located in Indiana, Georgia, Tennessee and Texas (2 plants).
The Company, through its wholly-owned subsidiary Better Bath, manufactures
bathtubs, shower enclosures and tub wall surrounds for the manufactured housing
and RV industry using the thermoforming process. Thermoforming is the heating
of plastic sheet to a softening temperature and forcing the hot flexible
material over a mold by the use of mechanical and vacuum pressure. Allowed to
cool, the plastic retains the shape and detail of the mold.
The Company, through its injection molding subsidiary, designs, builds and
molds high tolerance functional component parts. The process uses custom built
molds and thermoplastic molding machines to liquefy, inject and form parts for
its customers. This process can accommodate small and large parts and hold
tolerances up to .002 of an inch. PSI has 27 molding machines ranging in size
from 35 ton to 700 ton of clamp pressure.
In June 1995, the Company acquired Sunbelt Wood Components in connection
with its acquisition of Service Supply, which added wood products manufacturing
for the manufactured housing and RV industries to its operations. In February
1997, the Company acquired Consolidated Forest, which substantially strengthened
the Company's position in this wood products industry. The acquisition of
Shelter furthered the Company's vertical integration strategy through the
addition of manufacturing platforms in laminated wallboard products, plastic
injection molded products and thermoformed bath products. The Company intends
to continue to seek vertical acquisitions on a selective basis as opportunities
arise.
8
<PAGE>
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 1997 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 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. The Company
also maintains a limited warranty on its thermoformed products, which generally
ranges from one to five years, covers defects in materials and workmanship by
repair or replacement of the defective item and excludes labor and consequential
damages.
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.
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, 1997, the Company employed 2,107 persons. The Company
is a party to (i) a collective bargaining agreement, which covered, as of
December 31, 1997, 11 employees at one of the Company's facilities in Elkhart,
Indiana and (ii) a two-year collective bargaining agreement effective February
1, 1997, which covers certain employees at a plastics operation plant in Texas.
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 III. 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.
9
<PAGE>
EXECUTIVE OFFICERS
Name Age Position
- ---- --- --------
Jerry E. Kimmel......... 60 Chairman of the Board, President and
Chief Executive Officer
Clyde A. Reed, Jr....... 62 Executive Vice President, Chief Operating Officer
and Director
Ellis L. McKinley, Jr... 46 Vice President, Chief Financial Officer, Treasurer
and Director
Richard S. Tucker....... 53 Secretary and Director
C. Lee Denham........... 49 President, Sunbelt
Gregory G. Kimmel....... 29 Senior Vice President, Corporate Development and
Director
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, Jr. 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 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.
Richard S. Tucker has 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 division of Kevco from 1995
to November 1996. Mr. Denham was division manager of Sunbelt from 1991 to 1995.
From 1981 to 1991, Mr. Denham was President of Sunbelt. From 1970 until
founding Sunbelt 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.
Gregory G. Kimmel joined the Company in 1994 and has served as Vice
President since January 1996, as Vice President, Corporate Development since
August 1997, Senior Vice President, Corporate Development since January 1998 and
as a director of the Company since May 1997. Mr. Kimmel received his B.S. in
Education from McMurry University in 1994. Gregory G. Kimmel is the son of
Jerry E. Kimmel, the Chairman, President and Chief Executive Officer of the
Company.
10
<PAGE>
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.
SUBSTANTIAL LEVERAGE
The Company has a substantial amount of indebtedness. As of December 31,
1997, the Company had approximately $194.2 million of consolidated indebtedness
and a ratio of debt to total capitalization of 82.7%. The degree to which the
Company is leveraged could have important consequences to the Company including
the following: (i) funds available to the Company for its operations and
general corporate purposes or for capital expenditures will be reduced as a
result of the dedication of a substantial portion of the Company's consolidated
cash flow from operations to the payment of the principal and interest on its
indebtedness, (ii) the Company may be more highly leveraged than certain of its
competitors, which may place it at a competitive disadvantage, (iii) the
agreements governing the Company's and its subsidiaries' long-term indebtedness
and bank loans contain restrictive financial and operating covenants, and an
event of default (not cured or waived) under financial and operating covenants
contained in the Company's or its subsidiaries' debt instruments could occur and
have a material adverse effect on the Company, (iv) certain of the borrowings
under debt agreements of the Company's subsidiaries have floating rates of
interest, which causes the Company and its subsidiaries to be vulnerable to
increases in interest rates and (v) the Company's substantial degree of leverage
could make it more vulnerable to a downturn in general economic conditions.
The ability of the Company and its subsidiaries to make principal and
interest payments under long-term indebtedness and bank loans will be dependent
upon their future performance, which is subject to financial, economic and other
factors affecting the Company and its subsidiaries, some of which are beyond
their control. There can be no assurance that the current level of operating
results of the Company and its subsidiaries will continue to improve. The
Company believes that it will need to access the capital markets in the future
in order to provide the funds necessary to repay a significant portion of its
indebtedness. There can be no assurance that any such refinancing will be
possible or that any additional financing can be obtained, particularly in view
of the Company's anticipated high levels of debt and the debt incurrence
restrictions under its existing debt agreements. If no such refinancing or
additional financing were available, the Company and/or its subsidiaries could
default on their respective debt obligations. In such case, virtually all other
debt of the Company and its subsidiaries could be immediately due and payable.
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 87% of the Company's net sales for the year ended December
31, 1997, were to producers of manufactured homes and RVs. 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
11
<PAGE>
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
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 senior credit facilities require the consent
of the Company's lenders prior to the consummation of certain acquisitions.
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.
RISKS RELATED TO THE INTEGRATION OF KEVCO AND SHELTER
The Shelter acquisition involves the integration of two companies that have
previously operated independently. The assimilation of the companies may be
difficult and will require integration and coordination of the Company's product
offering, management, systems, manufacturing and sales and marketing efforts.
In addition, the process of integrating the operations of Kevco and Shelter will
require substantial attention from management and could cause the interruption
of, or a loss of momentum in, the business activities of the Company, which
could have an adverse effect on the Company's financial position, results of
operations and cash flows. Accordingly, no assurance can be given that
difficulties will not be encountered in integrating the operations of Kevco and
Shelter or that the efficiencies and benefits expected from such integration
will be realized.
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 and manufacturing facilities, which are leased unless
otherwise indicated. The Company also leases its executive offices of
approximately 12,000 square feet in Fort Worth, Texas, offices of 1,300 square
feet in Atlanta, Georgia and the location that formed the executive offices of
Shelter, of approximately 19,000 square feet, in Elkhart, Indiana.
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 senior credit
facilities.
12
<PAGE>
APPROXIMATE
LOCATION SQUARE FEET FUNCTION
- -------- ----------- --------
Alabama
Bear Creek*........................ 50,000 Distribution
Bear Creek*........................ 90,000 Distribution
Haleyville*........................ 86,000 Distribution
Haleyville......................... 146,000 Manufacturing
Haleyville......................... 44,000 Manufacturing
Phil Campbell...................... 30,000 Manufacturing
Spruce Pine*....................... 54,000 Manufacturing
Arizona
Phoenix............................ 70,000 Distribution
Phoenix............................ 59,000 Distribution
Glendale*.......................... 45,000 Manufacturing
California
Riverside.......................... 35,000 Distribution
San Bernardino..................... 42,000 Distribution
Woodland........................... 18,000 Distribution
Colorado
Fort Morgan........................ 13,000 Distribution
Florida
Lakeland........................... 36,000 Distribution
Ocala*............................. 50,000 Distribution
Georgia
Americus........................... 6,000 Distribution
Ashburn*........................... 100,000 Manufacturing
Cordele*........................... 60,000 Distribution
Douglas............................ 72,000 Distribution
Tifton*............................ 22,000 Manufacturing
Valdosta........................... 73,000 Distribution
Idaho
Caldwell........................... 24,000 Distribution
Indiana
Elkhart............................ 61,000 Distribution
Elkhart............................ 90,000 Distribution
Elkhart............................ 35,000 Distribution
Elkhart............................ 57,000 Distribution
Elkhart*........................... 91,000 Distribution
Elkhart............................ 15,000 Distribution
Elkhart*........................... 65,000 Distribution
Elkhart*........................... 70,000 Distribution
Elkhart*........................... 22,000 Distribution
Elkhart............................ 8,000 Distribution
13
<PAGE>
Elkhart*........................... 74,000 Manufacturing
Elkhart*........................... 20,000 Manufacturing
Plymouth........................... 5,000 Distribution
South Bend......................... 43,000 Manufacturing
Warsaw............................. 10,000 Distribution
Kansas
Newton............................. 38,000 Distribution
Newton*............................ 85,000 Distribution
Michigan
Edwardsburg*....................... 70,000 Manufacturing
Edwardsburg........................ 7,000 Manufacturing
Minnesota
Redwood Falls*..................... 24,000 Distribution
Worthington........................ 15,000 Distribution
New Mexico
Albuquerque........................ 16,000 Distribution
Albuquerque........................ 15,000 Distribution
North Carolina
Albemarle.......................... 62,000 Distribution
Concord*........................... 65,000 Distribution
Richfield*......................... 44,000 Distribution
Oregon
Milwaukee.......................... 38,000 Distribution
Tigard............................. 23,000 Distribution
Pennsylvania
Lancaster.......................... 119,000 Distribution
Leola.............................. 11,000 Distribution
Leola.............................. 26,000 Distribution
Tennessee
Baxter............................. 55,000 Manufacturing
Cookeville......................... 30,000 Distribution
Madisonville....................... 38,000 Manufacturing
Morristown......................... 42,000 Distribution
Texas
Fort Worth......................... 110,000 Distribution
Hillsboro*......................... 48,000 Distribution
Mansfield*......................... 25,000 Manufacturing
Temple............................. 44,000 Manufacturing
Waco............................... 90,000 Distribution
Waco............................... 135,000 Manufacturing
Waxahachie*........................ 192,000 Manufacturing
- --------------------
* Company owned facility.
14
<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 security holders during
the fourth quarter of the fiscal year covered by this report.
15
<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 Stock 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 and for the year ended December 31, 1997 is
set forth below.
High Low
---- ---
Fiscal year ended December 31, 1996
4/th/ Quarter (beginning November 1, 1996) $14.75 $12.00
Fiscal year ended December 31, 1997
1/st/ Quarter $18.75 $13.75
2/nd/ Quarter $15.50 $12.25
3/rd/ Quarter $14.38 $10.13
4/th/ Quarter $17.88 $11.88
On March 12, 1998, the last reported sale price of the Common Stock on The
Nasdaq Stock Market was $18.50 and as of such date there were approximately 41
shareholders of record of the Common Stock and approximately 725 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. The Company's indenture dated as of December 1, 1997
related to the issuance of $105 million of 10 3/8% senior subordinated notes due
2007 ("Indenture") and the Company's credit agreement generally prohibit the
payment of dividends by the Company on its common stock. Additionally, the
Indenture restricts the payment of dividends by restricted subsidiaries to the
Company. 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.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial information required by this item is included in the
Company's 1997 Annual Report to Shareholders (the "1997 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 1997 Annual Report
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Such information is incorporated herein by
reference.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item are
included in the Company's 1997 Annual Report and are incorporated herein by
reference, as indicated in the following Index to Financial Statements.
INDEX TO FINANCIAL STATEMENTS AND
- --------------------------------- 1997
FINANCIAL STATEMENT SCHEDULES ANNUAL REPORT PAGE
- ----------------------------- ------------------
Report of Independent Accountants
(Coopers & Lybrand L.L.P.).................... 41
Consolidated Balance Sheets at
December 31, 1997 and 1996.................... 27
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995........ 28
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1997, 1996
and 1995...................................... 29
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and
1995.......................................... 30
Notes to Consolidated Financial Statements 31
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the years ended December 31, 1997 and 1996.
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 May 1998 (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:
The Company filed a Current Report on Form 8-K dated November 6, 1997,
announcing plans to issue senior subordinated notes due 2007.
On December 16, 1997, the Company filed a Current Report on Form 8-K
dated December 1, 1997, reporting the acquisition of approximately
95.5% of the common stock of Shelter Components Corporation through
the consummation of a cash tender offer for a purchase price of $17.50
per share of common stock of Shelter. Financial statements of the
Company and Shelter and the pro forma financial data for the year
ended December 31, 1996, the twelve months ended September 30, 1997
and the nine months ended September 30, 1997 were included in this
filing.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- ----------------------------------------------
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)
19
<PAGE>
3.1 - Articles of Incorporation of Kevco, Inc., as amended.(1)
3.2 - Bylaws of Kevco, Inc.(1)
3.3 - Certificate of Incorporation of Kevco Delaware, Inc.(9)
3.4 - Bylaws of Kevco Delaware, Inc.(9)
3.5 - Certificate of Incorporation of Sunbelt Wood Components, Inc.(9)
3.6 - Bylaws of Sunbelt Wood Components, Inc.(9)
3.7 - Articles of Incorporation of Bowen Supply, Inc. and amendments.(9)
3.8 - Bylaws of Bowen Supply, Inc.(9)
3.9 - Articles of Incorporation of Encore Industries, Inc.(9)
3.10 - Bylaws of Encore Industries, Inc.(9)
3.11 - Certificate of Limited Partnership of Shelter Distribution, L.P.(9)
3.12 - Limited Partnership Agreement of Shelter Distribution, L.P.(9)
3.13 - Articles of Restatement of the Articles of Incorporation of Shelter
Newco, Inc. n/k/a Shelter Components Corporation.(9)
3.14 - Bylaws of Shelter Components Corporation.(9)
3.15 - Articles of Incorporation of BPR Holdings, Inc.(9)
3.16 - Bylaws of BPR Holdings, Inc.(9)
3.17 - Restated Articles of Incorporation of SC Acquisition Corp. n/k/a Shelter
Components of Indiana, Inc. and amendment.(9)
3.18 - Bylaws of SC Acquisition Corp. n/k/a Shelter Components of Indiana,
Inc.(9)
3.19 - Articles of Incorporation of MP Acquisition Corp. n/k/a Design
Components, Inc. and amendments.(9)
3.20 - Bylaws of Design Components, Inc.(9)
3.21 - Articles of Incorporation of Duo-Form of Michigan, Inc. and
amendments.(9)
3.22 - Bylaws of Duo-Form of Michigan, Inc.(9)
3.23 - Restated Charter of Danube Carpet Mills, Inc. n/k/a DCM, Inc. and
amendments.(9)
3.24 - Bylaws of Danube Carpet Mills, Inc. n/k/a DCM, Inc.(9)
4.1 - Form of certificate evidencing ownership of the Common Stock of Kevco,
Inc.(1)
10.1 - Amendment No. 2 to 1995 Stock Option Plan (Amended and Restated 1995
Stock Option Plan of Kevco, Inc.) and Supplementary Letter.(1)
10.2 - 1996 Stock Option Plan of Kevco, Inc., as amended, and Supplementary
Letter.(1)
10.3 - Form of Amended and Restated Employment Agreement between Gerald E.
Kimmel and Kevco, Inc., joined therein by Kevco Delaware, Inc. and
Sunbelt Wood Components, Inc.(1)
10.4 - Employment Agreement between C. Lee Denham and Kevco, Inc. dated June
30, 1995.(1)
10.5 - Lease between K & E Land & Leasing and Kevco, Inc. dated December 1,
1977.(1)
10.6 - Amendment No. 1 to Lease, by and between K & E Land & Leasing and
Kevco, Inc. dated March , 1982.(1)
10.7 - Amendment No. 2 to Lease, by and between K & E Land & Leasing and Kevco,
Inc. dated May 30, 1983.(1)
10.8 - Amendment No. 3 to Lease, by and between K & E Land & Leasing and Kevco,
Inc. dated February 1, 1993.(1)
10.9 - Lease dated April 1, 1980 between City of Newton, Kansas and K & E Land
& Leasing.(1)
20
<PAGE>
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)
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)
21
<PAGE>
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 between 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)
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)
22
<PAGE>
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)
13.1 - Portions of 1997 Annual Report to Shareholders that are incorporated by
reference into this Annual Report on Form 10-K.(10)
18.1 - Letter on change in accounting principle.(5)
21.1 - Subsidiaries.(10)
23.1 - Consent of Coopers & Lybrand L.L.P.(10)
24.1 - Power of Attorney.(contained on the signature page of this Annual Report
on Form 10-K)
27.1 - Financial Data Schedule.(10)
- --------
(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) Filed herewith.
23
<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 17, 1998 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 17, 1998.
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,
- ------------------------------ Treasurer and Director (Principal Financial
Ellis L. McKinley, Jr. Officer and Principal Accounting Officer)
/s/ Gregory G. Kimmel Senior Vice President, Corporate Development
- ------------------------------ and Director
Gregory G. Kimmel
/s/ Richard S. Tucker Secretary and Director
- ------------------------------
Richard S. Tucker
/s/ Martin C. Bowen Director
- ------------------------------
Martin C. Bowen
/s/ Richard Nevins Director
- ------------------------------
Richard Nevins
24
<PAGE>
Exhibit 10.44
AMENDMENT NO. 1 TO AMENDED AND RESTATED
1995 STOCK OPTION PLAN
OF
KEVCO, INC.
This Amendment No. 1 (the "Amendment") to the Amended and Restated 1995
Stock Option Plan (the "Plan") of Kevco, Inc., a Texas corporation, and its
direct and indirect subsidiaries and their respective successors, if any
(collectively, the "Company"), shall be and become effective as of January 20,
1998.
WITNESSETH:
WHEREAS, the Company has heretofore adopted the Plan; and
WHEREAS, the Compensation Committee of the Board of Directors of Kevco,
Inc. has recommended amending the Plan to the extent hereinafter set forth; and
WHEREAS, the Company, in accordance with said recommendation, desires to
amend the Plan to the extent hereinafter set forth;
NOW THEREFORE, the Plan is hereby amended in the following respects:
1. Section 15(e) is hereby amended in its entirety to hereafter read as
follows:
(e). Any option granted to an Optionee under the Plan which is not an
Incentive Option, shall not be exercisable by the Optionee unless and
until at all times beginning with the date of the grant of an option
hereunder and ending on the date of exercise of such option, the
Optionee (A) shall have been in the continuous employment of the
Company or then serving as a member of the board of directors of the
Company, or (B) at the discretion of the Board (or the Committee to
the extent designated by the Board), was then serving as a consultant
to the Company; provided, however, subject to the provisions hereof,
for a period of sixty (60) days after termination of employment or
ceasing to serve as a director or as a consultant to the Company for
any reason other than termination or removal for cause, the Optionee
shall have the right to exercise that portion, if any, of the Option
theretofore vested; and further provided, however, that if the option
is an Incentive Option, an option granted shall not be exercisable by
the Optionee unless at all times beginning with the date of grant and
[except as otherwise provided in this Section 15(e)] ending on the
date three months before the
Page 1
<PAGE>
date of exercise of such option, the Optionee shall have been in the
continuous employment of the Company, a parent or subsidiary of the
Company, or a corporation (or parent or subsidiary of that
corporation) which has assumed the option of another corporation as a
result of a corporate reorganization, liquidation or similar event. If
the option is an Incentive Option, then the following provisions shall
apply on the death or permanent and total disability of the Optionee:
(i) In the event of the death of the Optionee while in the employ
of the Company or any subsidiary of the Company, and before the date
of expiration of any option granted to him, the option to the extent
unexercised as of the date of death shall terminate on the earlier of
the date of its expiration in accordance with its terms or that day
which is three (3) months after the date of the death of the Optionee.
After the death of the Optionee, his executors, administrators or any
person or persons to whom his option may be transferred by will, or by
the laws of descent and distribution shall have the right at any time
during the period specified in this subparagraph (i) to exercise that
portion, if any, of the Option theretofore vested to the extent
unexercised, in whole or in part.
(ii) If before the date of expiration of any option granted
herein to the extent unexercised, the Optionee shall terminate his
employment with the Company or any subsidiary of the Company by reason
of his permanent and total disability, the option to the extent vested
and unexercised as of such time shall terminate on the earlier of its
date of expiration or a day which is one year after the date of such
permanent and total disability.
Notwithstanding the foregoing, the requisite employment
relationship with respect to an option granted hereunder will be
treated as continuing intact while the Optionee (with the prior
approval of the Board of the Company or any subsidiary of the Company)
is on military leave, sick leave or other bona fide leave of absence
(such as temporary employment by the United States Government) if the
period of such leave does not exceed 90 days, or, if longer, so long
as the Optionee's right to reemployment is guaranteed by statute or by
contract.
Page 2
<PAGE>
Exhibit 10.67
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "First Amendment"),
dated as of February 12, 1998, is entered into among KEVCO, INC., a Texas
corporation (the "Borrower"), the banks listed on the signature pages hereof
(collectively, the "Lenders"), and NATIONSBANK OF TEXAS, N.A., as the
Administrative Agent (in said capacity, the "Administrative Agent").
A. The Borrower, certain of the Lenders and the Administrative Agent
heretofore entered into that certain Second Amended and Restated Credit
Agreement, dated as of December 1, 1997 (the "Credit Agreement"; the terms
defined in the Credit Agreement and not otherwise defined herein shall be used
herein as defined in the Credit Agreement).
B. The Borrower, the Lenders and the Administrative Agent desire to
amend the Credit Agreement.
NOW, THEREFORE, in consideration of the covenants, conditions and
agreements hereafter set forth, and for other good and valuable consideration,
the receipt and adequacy of which are all hereby acknowledged, the Borrower, the
Lenders and the Administrative Agent covenant and agree as follows:
1. AMENDMENTS TO CREDIT AGREEMENT.
------------------------------
a. The definition of "Facility B Term Loan Commitment" set forth
in Section 1.1 of the Credit Agreement is hereby amended to read as follows:
-----------
"'Facility B Term Loan Commitment' means $40,000,000, as
-------------------------------
terminated pursuant to Section 2.1(c) hereof."
--------------
b. The definition of "Revolving Credit Commitment" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read as follows:
- -----------
"'Revolving Credit Commitment' means $45,000,000, as reduced or
-----------------------------
terminated pursuant to Sections 2.6 or 8.2 hereof."
------------ ---
c. The second sentence of Section 2.1(c) of the Credit Agreement
--------------
is hereby amended to read as follows:
"The Facility B Term Loan Advances shall be made in two Advances,
the first of
<PAGE>
such Advances in the aggregate amount of $30,000,000 shall occur on
December 4, 1997 and the second of such Advances in the aggregate
amount of $10,000,000 shall occur no later than January 5, 1998."
d. Section 2.8(c) of the Credit Agreement is hereby amended to
-------------
read as follows:
" (c) Facility B Term Loan Advances. To the extent not otherwise
-----------------------------
required to be paid earlier as provided herein, the principal amount
of the Facility B Term Loan Advances shall be repaid on each Quarterly
Date and on the Facility B Term Loan Maturity Date in such amounts as
set forth next to each such date below:
-2-
<PAGE>
<TABLE>
<CAPTION>
Amount of Reduction of Facility B
Quarterly Date Term Loan Advances as of each Date
- -------------- ----------------------------------
<S> <C>
March 31, 1998 $ 100,000
June 30, 1998 $ 100,000
September 30, 1998 $ 100,000
December 31, 1998 $ 100,000
March 31, 1999 $ 100,000
June 30, 1999 $ 100,000
September 30, 1999 $ 100,000
December 31, 1999 $ 100,000
March 30, 2000 $ 100,000
June 30, 2000 $ 100,000
September 30, 2000 $ 100,000
December 31, 2000 $ 100,000
March 31, 2001 $ 100,000
June 30, 2001 $ 100,000
September 30, 2001 $ 100,000
December 31, 2001 $ 100,000
March 31, 2002 $ 100,000
June 30, 2002 $ 100,000
September 30, 2002 $ 100,000
December 31, 2002 $ 100,000
March 31, 2003 $ 100,000
June 30, 2003 $ 100,000
September 30, 2003 $ 100,000
December 31, 2003 $ 100,000
March 31, 2004 $9,400,000
June 30, 2004 $9,400,000
</TABLE>
-3-
<PAGE>
<TABLE>
<S> <C>
September 30, 2004 $9,400,000
December 31, 2004 $9,400,000
or such other amount of Facility B
Term Loan Advances then outstanding"
</TABLE>
e. Schedule 1 to the Credit Agreement is hereby amended to be in
----------
the form of Schedule 1 hereto
----------
f. Schedule 2 to the Credit Agreement is hereby amended to be in
----------
the form of Schedule 2 hereto.
----------
2. REPRESENTATIONS AND WARRANTIES TRUE; NO EVENT OF DEFAULT. By its
--------------------------------------------------------
execution and delivery hereof, the Borrower represents and warrants that, as of
the date hereof and after giving effect to the amendments contemplated by the
foregoing Section 1:
(a) the representations and warranties contained in the Credit
Agreement are true and correct on and as of the date hereof as if made on and as
of such date;
(b) no event has occurred and is continuing which constitutes a
Default or an Event of Default;
-4-
<PAGE>
(c) the Borrower has full power and authority to execute and deliver
this First Amendment, the $10,588,235.29 Revolving Credit Note, the
$9,411,764.71 Facility A Term Loan Note and the $16,000,000.00 Facility B Term
Loan Note, each payable to the order of NationsBank of Texas, N.A. (the
"NationsBank Notes"), the $9,264,705.88 Revolving Credit Note and the
$8,235,294.12 Facility A Term Loan Note, each payable to the order of The
Sumitomo Bank, Limited (the "Sumitomo Notes"), the $9,264,705.88 Revolving
Credit Note and the $8,235,294.12 Facility A Term Loan Note, each payable to the
order of National City Bank Kentucky (the "Kentucky Notes"), the $7,941,176.47
Revolving Credit Note and the $7,058,823.53 Facility A Term Loan Note, each
payable to the order of Guaranty Federal Bank, F.S.B. (the "Guaranty Notes"),
the $7,941,176.47 Revolving Credit Note and the $7,058,823.53 Facility A Term
Loan Note, each payable to the order of Wells Fargo Bank, N.A. (the "Wells Fargo
Notes"), the $8,000,000.00 Facility B Term Loan Note payable to the order of
Pilgrim America Prime Rate Trust (the "Pilgrim Note"), the $8,000,000.00
Facility B Term Loan Note payable to the order of Archimedes Funding, L.L.C.
(the "Archimedes Note"), and the $8,000,000.00 Facility B Term Loan Note payable
to the order of Alliance Capital Funding, L.L.C. (the "Alliance Note") (the
NationsBank Notes, the Sumitomo Notes, the Kentucky Notes, the Guaranty Notes,
the Wells Fargo Notes, the Pilgrim Note, the Archimedes Note and the Alliance
Note are collectively referred to herein as the "Notes"), and this First
Amendment, the Credit Agreement, as amended hereby, and the Notes constitute the
legal, valid and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their respective terms, except as enforceability may
be limited by applicable debtor relief laws and by general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law) and except as rights to indemnity may be limited by federal or state
securities laws; and
(d) no authorization, approval, consent, or other action by, notice
to, or filing with, any governmental authority or other Person (other than the
Board of Directors of the Borrower), is required for the execution, delivery or
performance by the Borrower of this First Amendment or the Notes or the
acknowledgement of this First Amendment by any Subsidiary that executed a
Subsidiary Guaranty.
3. CONDITIONS OF EFFECTIVENESS. This First Amendment shall be
---------------------------
effective as of February 12, 1998, subject to the following:
(a) the Administrative Agent shall have received a counterpart of this
First Amendment executed by each Lender;
(b) the Administrative Agent shall have received counterparts of this
First Amendment executed by the Borrower and acknowledged by each Subsidiary
that executed a Subsidiary Guaranty;
(c) each Lender shall have received its respective Notes executed by
the Borrower;
-5-
<PAGE>
(d) the representations and warranties set forth in Section 2 of this
First Amendment shall be true and correct;
(e) the Administrative Agent shall have received a certified
resolution of the Board of Directors of the Borrower authorizing the execution,
delivery and performance of this First Amendment and the Notes; and
(f) the Administrative Agent and the Lenders shall have received in
form and substance satisfactory to the Administrative Agent and the Lenders,
such other documents and certificates as the Administrative Agent shall require.
4. PRIOR NOTES. Upon satisfaction of the Conditions of Effectiveness
-----------
set forth in Section 3 hereof, the following Notes shall be marked "RENEWED AND
REPLACED" by the Lenders and delivered to the Borrower:
(a) Revolving Credit Note dated December 1, 1997, executed by the
Borrower and payable to the order of NationsBank of Texas, N.A. in the
original principal amount of $11,666,666.66;
(b) Facility A Term Loan Note dated December 1, 1997, executed by
the Borrower and payable to the order of NationsBank of Texas, N.A. in
the original principal amount of $13,333,333.34;
(c) Facility B Term Loan Note dated December 1, 1997, executed by
the Borrower and payable to the order of NationsBank of Texas, N.A. in
the original principal amount of $50,000,000.00;
(d) Revolving Credit Note dated December 1, 1997, executed by the
Borrower and payable to the order of The Sumitomo Bank, Limited in the
original principal amount of $8,166,666.67;
(e) Facility A Term Loan Note dated December 1, 1997, executed by
the Borrower and payable to the order of The Sumitomo Bank, Limited in
the original principal amount of $9,333,333.33;
(f) Revolving Credit Note dated December 1, 1997, executed by the
Borrower and payable to the order of National City Bank Kentucky in
the original principal amount of $8,166,666.67;
(g) Facility A Term Loan Note dated December 1, 1997, executed by
the Borrower and payable to the order of National City Bank Kentucky
in the original principal amount of $9,333,333.33;
-6-
<PAGE>
(h) Revolving Credit Note dated December 1, 1997, executed by the
Borrower and payable to the order of Guaranty Federal Bank, F.S.B. in
the original principal amount of $7,000,000.00; and
(i) Facility A Term Loan Note dated December 1, 1997, executed by
the Borrower and payable to the order of Guaranty Federal Bank, F.S.B.
in the original principal amount of $8,000,000.00.
The new Notes are replacements of the existing Notes and do not represent a
repayment or novation of the existing Obligations.
5. SUBSIDIARIES ACKNOWLEDGMENT. By signing below, each of the
---------------------------
Subsidiaries which has executed a Subsidiary Guaranty (i) acknowledges, consents
and agrees to the execution, delivery and performance by the Borrower of this
First Amendment, (ii) acknowledges and agrees that its obligations in respect of
its Subsidiary Guaranty (A) are not released, diminished, waived, modified,
impaired or affected in any manner by this First Amendment or any of the
provisions contemplated herein, and (B) cover, among other things, the Revolving
Credit Commitment and the Facility B Term Loan Commitment as revised by this
First Amendment, (iii) ratifies and confirms its obligations under its
Subsidiary Guaranty, and (iv) acknowledges and agrees that it has no claims or
offsets against, or defenses or counterclaims to, its Subsidiary Guaranty.
6. REFERENCE TO THE CREDIT AGREEMENT.
---------------------------------
(a) Upon the effectiveness of this First Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", or words of like import
shall mean and be a reference to the Credit Agreement, as affected and amended
by this First Amendment.
(b) The Credit Agreement, as amended by this First Amendment, and all
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
7. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand
-------------------------
all costs and expenses of the Administrative Agent in connection with the
preparation, reproduction, execution and delivery of this First Amendment, the
Notes, and the other instruments and documents to be delivered hereunder
(including the reasonable fees and out-of-pocket expenses of counsel for the
Administrative Agent with respect thereto and with respect to advising the
Administrative Agent as to its rights and responsibilities under the Credit
Agreement, as amended by this First Amendment).
8. ADVANCES. Upon effectiveness of this First Amendment, each of the
--------
appropriate Lenders, through the Administrative Agent, by assignments,
purchases, and adjustments in each case without recourse (which shall occur and
shall be deemed to occur automatically upon such effectiveness), shall have
purchased or sold Advances so that after
-7-
<PAGE>
giving effect to such assignments, purchases and adjustments, each Lender shall
hold Advances and Reimbursement Obligations in accordance with its Specified
Percentage, as amended or established hereby. The parties hereto agree that the
requirements of Section 11.6 of the Credit Agreement with respect to assignments
------------
are hereby waived for purposes of this First Amendment only.
9. EXECUTION IN COUNTERPARTS. This First Amendment may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which when taken together shall constitute but one and
the same instrument.
10. GOVERNING LAW; BINDING EFFECT. This First Amendment shall be
-----------------------------
governed by and construed in accordance with the laws of the State of Texas and
shall be binding upon the Borrower and each Lender and their respective
successors and assigns.
11. HEADINGS. Section headings in this First Amendment are included
--------
herein for convenience of reference only and shall not constitute a part of this
First Amendment for any other purpose.
12. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS FIRST
----------------
AMENDMENT, AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AS TO THE SUBJECT MATTER THEREIN AND HEREIN AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BETWEEN THE PARTIES.
================================================================================
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
================================================================================
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date first above written.
BORROWER: KEVCO, INC.
By: /s/ JERRY E. KIMMEL
------------------------------------
Name: Jerry E. Kimmel
Title: Chairman, President and CEO
ADMINISTRATIVE AGENT: NATIONSBANK OF TEXAS, N.A. as the Administrative
Agent
By: /s/ TODD SHIPLEY
------------------------------------
Name: Todd Shipley
Title: Senior Vice President
LENDERS: NATIONSBANK OF TEXAS, N.A., as a Lender
By: /s/ TODD SHIPLEY
------------------------------------
Name: Todd Shipley
Title: Senior Vice President
-9-
<PAGE>
THE SUMITOMO BANK, LIMITED
By: /s/ KIRK L. STATES
------------------------------------
Name: Kirk L. States
-------------------------------
Title: VP and Manager
-------------------------------
By: /s/ JULIE A. SCHELL
------------------------------------
Name: Julie A. Schell
-------------------------------
Title: Vice President
-------------------------------
NATIONAL CITY BANK KENTUCKY
By: /s/ DON PULLEN
------------------------------------
Name: Don Pullen
-------------------------------
Title: Vice President
-------------------------------
GUARANTY FEDERAL BANK, F.S.B.
By: /s/ ROBERT S. HAYS
------------------------------------
Name: Robert S. Hays
-------------------------------
Title: Vice President
-------------------------------
WELLS FARGO BANK, N.A.
By: /s/ DANA CAGLE
------------------------------------
Name: Dana Cagle
-------------------------------
Title: Vice President
-------------------------------
-10-
<PAGE>
PILGRIM AMERICA PRIME RATE TRUST
By: /s/ MICHAEL J. BACEVICH
------------------------------------
Name: Michael J. Bacevich
-------------------------------
Title: Vice President
-------------------------------
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as Collateral
Manager
By: /s/ MICHAEL D. HATLEY
------------------------------------
Name: Michael D. Hatley
-------------------------------
Title: Vice President & Portfolio Manager
-------------------------------
ALLIANCE CAPITAL FUNDING, L.L.C.
By: Alliance Capital Management, L.P., as
Manager on behalf of ALLIANCE CAPITAL FUNDING,
L.L.C.
By: ALLIANCE CAPITAL MANAGEMENT
CORPORATION, General Partner of Alliance
Capital Management, L.P.
By: /s/ JOEL SEREBRANSKY
------------------------------------
Name: Joel Serebransky
-------------------------------
Title: Vice President
-------------------------------
-11-
<PAGE>
ACKNOWLEDGED AND AGREED:
KEVCO DELAWARE, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman, President and CEO
SUNBELT WOOD COMPONENTS, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
BOWEN SUPPLY, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
CONSOLIDATED FOREST PRODUCTS, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
-12-
<PAGE>
ENCORE INDUSTRIES, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
SCC ACQUISITION CORP.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
SHELTER COMPONENTS CORPORATION
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
BPR HOLDINGS, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
DCM, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
-13-
<PAGE>
DESIGN COMPONENTS, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
SHELTER DISTRIBUTION, L.P.
By: BPR Holdings, Inc., its General Partner
By: /s/ JERRY E. KIMMEL
---------------------------------
Name: Jerry E. Kimmel
Title: Chairman
DUO-FORM OF MICHIGAN, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
SHELTER COMPONENTS OF INDIANA, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------
Name: Jerry E. Kimmel
Title: Chairman
-14-
<PAGE>
SCHEDULE 1
----------
COMMITMENTS AND SPECIFIED PERCENTAGES
NATIONSBANK OF TEXAS, N.A.
Revolving Credit Specified Percentage 23.52941176%
Facility A Term Loan Specified Percentage 23.52941176%
Facility B Term Loan Specified Percentage 40.00000000%
Total Specified Percentage 28.80000000%
THE SUMITOMO BANK, LIMITED
Revolving Credit Specified Percentage 20.58823529%
Facility A Term Loan Specified Percentage 20.58823529%
Facility B Term Loan Specified Percentage 0.00000000%
Total Specified Percentage 14.00000000%
NATIONAL CITY BANK KENTUCKY
Revolving Credit Specified Percentage 20.58823529%
Facility A Term Loan Specified Percentage 20.58823529%
Facility B Term Loan Specified Percentage 0.00000000%
Total Specified Percentage 14.00000000%
-15-
<PAGE>
GUARANTY FEDERAL BANK, F.S.B.
Revolving Credit Specified Percentage 17.64705882%
Facility A Term Loan Specified Percentage 17.64705882%
Facility B Term Loan Specified Percentage 0.00000000%
Total Specified Percentage 12.00000000%
WELLS FARGO BANK, N.A.
Revolving Credit Specified Percentage 17.64705882%
Facility A Term Loan Specified Percentage 17.64705882%
Facility B Term Loan Specified Percentage 0.00000000%
Total Specified Percentage 12.00000000%
PILGRIM AMERICA PRIME RATE TRUST
Revolving Credit Specified Percentage 0.00000000%
Facility A Term Loan Specified Percentage 0.00000000%
Facility B Term Loan Specified Percentage 20.00000000%
Total Specified Percentage 6.40000000%
-16-
<PAGE>
ARCHIMEDES FUNDING, L.L.C.
Revolving Credit Specified Percentage 0.00000000%
Facility A Term Loan Specified Percentage 0.00000000%
Facility B Term Loan Specified Percentage 20.00000000%
Total Specified Percentage 6.40000000%
ALLIANCE CAPITAL FUNDING, L.L.C.
Revolving Credit Specified Percentage 0.00000000%
Facility A Term Loan Specified Percentage 0.00000000%
Facility B Term Loan Specified Percentage 20.00000000%
Total Specified Percentage 6.40000000%
-17-
<PAGE>
SCHEDULE 2
----------
LIBOR LENDING OFFICES
NATIONSBANK OF TEXAS, N.A.
901 Main Street, 67th Floor
Dallas, Texas 75202
THE SUMITOMO BANK, LIMITED
233 South Wacker Drive, Suite 5400
Chicago, Illinois 60606
NATIONAL CITY BANK KENTUCKY
101 South 5th Street
Louisville, Kentucky 40202
GUARANTY FEDERAL BANK, F.S.B.
8333 Douglas Avenue
Dallas, Texas 75225
WELLS FARGO BANK, N.A.
420 Montgomery Street, 9th Floor
San Francisco, California 94104
PILGRIM AMERICA PRIME RATE TRUST
Two Renaissance Square
40 North Central Avenue, Suite 1200
Phoenix, Arizona 85004-3444
ARCHIMEDES FUNDING, L.L.C.
c/o ING Capital Advisors, Inc.
333 S. Grand Avenue, Suite 4250
Los Angeles, California 90071
-18-
<PAGE>
ALLIANCE CAPITAL FUNDING, L.L.C.
Alliance Capital Management, L.P.
1345 Avenue of the Americas - 38th Floor
New York, New York 10105
-19-
<PAGE>
Exhibit 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data for the five years ended December 31,
1997 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 notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997(1) 1996 1995(2) 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 394,206 $ 267,344 $ 182,519 $ 99,279 $ 80,257
Cost of sales 341,362 226,653 155,641 83,356 67,884
--------- --------- --------- --------- ---------
Gross profit 52,844 40,691 26,878 15,923 12,373
Commission income 5,914 5,497 2,610 1,066 1,274
--------- --------- --------- --------- ---------
58,758 46,188 29,488 16,989 13,647
Selling, general and administrative expenses 43,149 29,723 20,889 11,941 10,550
--------- --------- --------- --------- ---------
Operating income 15,609 16,465 8,599 5,048 3,097
Other income - - - 800 -
Interest expense (4,767) (2,058) (1,337) (281) (342)
--------- --------- --------- --------- ---------
Income before income taxes 10,842 14,407 7,262 5,567 2,755
Income taxes 4,554 1,695 45 51 -
--------- --------- --------- --------- ---------
Net income $ 6,288 $ 12,712 $ 7,217 $ 5,516 $ 2,755
========= ========= ========= ========= =========
Earnings per share - basic $ 0.92
=========
Earnings per share - diluted $ 0.90
=========
Weighted average shares outstanding - basic 6,815
=========
Weighted average shares outstanding - diluted 6,959
=========
Pro forma information (unaudited)(3)
Historical income before income taxes $ 14,407 $ 7,262 $ 5,567 $ 2,755
Income tax expense adjustments 5,475 2,832 2,171 1,074
--------- --------- --------- ---------
Pro forma net income $ 8,932 $ 4,430 $ 3,396 $ 1,681
========= ========= ========= =========
Pro forma earnings per share - basic $ 1.64 $ 1.01 $ 0.77 $ 0.38
========= ========= ========= =========
Pro forma earnings per share - diluted $ 1.61 $ 0.90 $ 0.69 $ 0.34
========= ========= ========= =========
Weighted average shares outstanding - basic 5,430 4,394 4,394 4,394
========= ========= ========= =========
Weighted average shares outstanding - diluted 5,531 4,946 4,946 4,946
========= ========= ========= =========
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $57,445 $24,526 $19,744 $5,078 $4,363
Total assets 308,194 55,739 55,669 18,067 15,365
Total debt 194,220 9,831 31,263 6,385 5,547
Stockholders' equity 40,647 34,193 9,556 6,094 3,850
</TABLE>
(1) The Company acquired Shelter Components Corporation on December 1, 1997,
Bowen Supply, Inc. on February 28, 1997 and Consolidated Forest Products,
L.L.C. on February 27, 1997. The acquisitions were accounted for as
purchases and accordingly, the operating results of the acquired companies
have been included in the operating results of the Company
since their respective acquisition dates. See "Management's Discussion
and Analysis of Financial Condition and Results of
Operations - Acquisitions."
(2) 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 and Results
of Operations - Acquisitions."
(3) Prior to the initial public offering, the Company had elected to be
treated as an S corporation under 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.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
GENERAL
From 1993 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, for approximately $17.7 million in cash. 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 21 and three, respectively at December 31, 1996. In
1997, Kevco continued its expansion strategy through the acquisitions of
Consolidated Forest Products, L.L.C. ("Consolidated Forest") and Bowen Supply,
Inc. ("Bowen") in February 1997 for an aggregate purchase price of $34.3
million, the acquisition of Shelter Components Corporation ("Shelter") in
December 1997 for a purchase price of $144.8 million, the acquisition in
December 1997 of inventory and certain distribution rights of certain building
products distributed by Shepherd Products Company for a cash purchase price of
$6.0 million with future payment obligations as disclosed herein and the opening
of one new distribution facility and one new manufacturing facility. The
expansion in 1997 increased the number of Kevco's distribution facilities and
manufacturing facilities to 47 and 17, respectively, at December 31, 1997 from
21 and three, respectively, at December 31, 1996.
Management expects the consolidation of the operations of the companies acquired
in 1997 to result in substantial cost savings to the combined company over time.
The Company will seek to capitalize on the significant common geographic
presence of Kevco, Shelter and Bowen and shared customer relationships to obtain
distribution and sales cost reductions. In addition, the Company will seek to
obtain greater utilization of its existing corporate administrative resources to
reduce the combined overhead expense. The Company also intends to pursue
opportunities to achieve greater benefits over time through the combination of
multiple warehouse facilities in single, larger facilities in certain markets
and the achievement of economies of scale in purchasing materials and supplies
as a larger combined entity. There can be no assurance that the Company will be
able to successfully implement such cost savings measures, that the cost savings
discussed will be realized or that there will not be significant delays in
achieving such cost savings.
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.
ACQUISITIONS
In June 1995, the Company acquired Service Supply for a purchase price of
approximately $17.7 million in cash. The fair value of assets acquired was
approximately $32.4 million and the amount of liabilities assumed was
approximately $14.7 million. 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. Through its acquisition of Service
20
<PAGE>
Supply's wood products subsidiary, Sunbelt Wood Components, Inc. ("Sunbelt"),
the Company became a wood products manufacturer for the manufactured housing
industry in the southeastern and southwestern United States.
On February 27, 1997, the Company continued its expansion in the wood
manufacturing industry through the acquisition of substantially all of the
assets, and assumed certain liabilities, of Consolidated Forest (a manufacturer
of wood products for the manufactured housing industry) in exchange for
approximately $13.0 million in cash and promissory notes in the aggregate
principal amount of approximately $0.7 million. On February 28, 1997, the
Company consummated the acquisition of all of the outstanding stock of Bowen (a
wholesale distributor of building products to the manufactured housing and RV
industries) in exchange for approximately $18.0 million in cash and promissory
notes in the aggregate principal amount of $1.5 million. The Bowen acquisition
expanded the Company's product lines by adding new products in electronics,
drapery and door hardware, industrial tape, adhesives and caulks. The
Consolidated Forest and Bowen acquisitions were accounted for as purchases and,
accordingly, the operating results of the acquired companies have been included
in the operating results of the Company since their respective acquisition
dates. The aggregate Consolidated Forest and Bowen acquisition cost in excess
of the fair value of net assets acquired of approximately $24.2 million has been
accounted for as goodwill.
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 $81.6
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.
The inclusion of Shelter, Bowen and Consolidated Forest contributed
approximately $140.0 million in net sales for the year ended December 31, 1997.
On a pro forma basis, giving effect to the acquisitions consummated in 1997
described above as if the acquisitions had occurred on January 1, 1997, net
sales were approximately $862.0 million.
Through the acquisitions consummated in 1997, and primarily through the Shelter
acquisition, Kevco believes it became the largest wholesale distributor of
building products to the manufactured housing and recreational vehicle
industries. Because of the acquisitions in 1997, 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.
21
<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,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 86.6 84.8 85.3
----------- ----------- -----------
Gross profit 13.4 15.2 14.7
Commission income 1.5 2.1 1.4
----------- ----------- -----------
14.9 17.3 16.1
Selling, general and
administrative expenses 10.9 11.1 11.4
----------- ----------- -----------
Operating income 4.0 6.2 4.7
Interest expense (1.2) (0.8) (0.7)
----------- ----------- -----------
Income before income taxes 2.8% 5.4% 4.0%
=========== =========== ===========
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales increased by $126.9 million, or 47.5%, to $394.2 million in 1997 from
$267.3 million in 1996. The acquisitions of Shelter, Bowen and Consolidated
Forest (the "1997 Acquisitions") contributed approximately $140.0 million in
sales in 1997. Net sales, without the effect of the 1997 Acquisitions,
decreased from $267.3 million to $254.2 million, or 4.9%. Management believes
that such decrease is primarily attributable to the reported manufactured
housing shipment decline of 2.8% for 1997 compared to 1996 (approximately
353,400 homes reported shipped in 1997 compared to approximately 363,400 homes
reported shipped in 1996) as well as a decline in lumber prices in 1997 compared
to 1996.
Gross profit increased by $12.1 million, or 29.7%, to $52.8 million in 1997 from
$40.7 million in 1996 due primarily to the 1997 Acquisitions. Gross profit, as
a percent of net sales, decreased to 13.4% in 1997 from 15.2% in 1996. The
decrease in gross profit, as a percent of net sales, is a result of lower gross
margins associated with the Consolidated Forest acquisition and lower margin
dollars earned from wood products as a whole due to declining lumber prices
throughout 1997 (such wood products represented approximately 20% of net sales
in 1997). To a lesser extent, gross margins from non-lumber related business
decreased primarily as a result of temporary price increases of a major product
line.
Commission income increased by $0.4 million, or 7.2%, to $5.9 million in 1997
from $5.5 million in 1996. The increase was primarily attributable to Kevco's
expansion in commission-based distribution arrangements in 1997.
Selling, general and administrative expenses increased by $13.4 million, or
45.1%, to $43.1 million in 1997 from $29.7 million in 1996. The increase is
primarily due to increased sales volume related to the 1997 Acquisitions.
Selling, general and administrative expenses, as a percent of net sales,
decreased to 10.9% for 1997 from 11.1% for 1996. The decrease reflects Kevco's
continued efforts in increasing efficiency.
Net income decreased by $2.6 million, or 29.2%, to $6.3 million in 1997 from
$8.9 million in 1996 on a pro forma basis giving effect to the Company's
conversion from an S corporation to a C corporation. The decrease in net income
is primarily attributable to (i) lower gross margins as discussed above, (ii)
increased interest expense in 1997 compared to 1996 principally due to
borrowings related to the 1997 Acquisitions and (iii) an increase in the
Company's effective tax rate to 42.0% in 1997 from 38.0% in 1996 resulting
primarily from the non-deductible goodwill recorded in connection with the 1997
Acquisitions.
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
22
<PAGE>
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 6.9%
increase in reported manufactured home shipments in 1996 compared to 1995
(approximately 363,400 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 Kevco's net sales in 1996.
Gross profit increased by $13.8 million, or 51.3%, to $40.7 million in 1996 from
$26.9 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 14.7% 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 Service Supply
acquisition 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 Kevco's ability
to take advantage of purchasing opportunities following the acquisition of
Service Supply.
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
Kevco 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, Kevco's ability to increase sales without a proportionate increase in
related operating expenses.
Net income increased by $7.1 million, or 97.3%, to $14.4 million in 1996 from
$7.3 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.
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 $105 million of 10 3/8%
senior subordinated notes
23
<PAGE>
due 2007 and the expansion of trade credit. Net cash provided by operating
activities (which does not include cash flow from acquisitions prior to the
acquisition dates) was $16.4 million, $12.2 million and $8.4 million in 1997,
1996 and 1995, respectively. 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, maturing through 2002. See Notes 2, 4 and 6 to
the consolidated financial statements.
In connection with the Service Supply acquisition at June 30, 1995, the Company
entered into a term loan and 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.
In connection with the acquisitions of Consolidated Forest and Bowen, 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 aggregate cash purchase price of these acquisitions was
approximately $33.4 million, and the assumed debt of approximately $8.4 million
was immediately paid with proceeds from the term loan.
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 a second amended and restated credit facility, which
increased the aggregate borrowings available under the 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 matures in 2003 with the remaining term loan maturing in 2004. See
Note 6 to the consolidated financial statements.
Borrowings under the term loan and revolving credit facility 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
facility are collateralized by substantially all of the assets of the Company
and its subsidiaries as well as the capital stock of such subsidiaries. The
related credit agreement contains certain restrictions and conditions that
include cash flow and various financial ratio requirements, and limitations on
incurrence of debt or liens, acquisitions of property and equipment,
distributions to stockholders and certain events constituting a Change of
Control (as defined in the credit agreement).
In addition to the funds available under the amended credit facility, the
Company issued $105.0 million of 10 3/8% senior subordinated notes due 2007
under the indenture dated as of December 1, 1997, as supplemented, (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
24
<PAGE>
into another person, the entering into certain transactions with affiliates and
the engagement in certain lines of business.
On December 12, 1997, the Company acquired 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 funded through borrowings under the 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 and $4.7 million in 1996 and 1995, respectively. Concurrent with the
consummation of the initial public offering, the Company converted to a C
corporation and is subject to federal and certain state income taxes. The
Indenture and credit agreement generally prohibit the payment of dividends by
the Company on its common stock. 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.
Immediately prior to the consummation of the Company's initial public 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 initial public offering, which notes were the final S
corporation distribution and represented earnings from July 1, 1996 to the
consummation of the initial public offering.
The Company intends to increase the number of its manufacturing, and to a lesser
extent, distribution facilities, primarily through acquisitions to the extent
permitted by its credit facilities and the Indenture. 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 agreement, 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 agreement limits
acquisitions to an aggregate of $25 million during any previous four quarters of
operations. 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 that cash flow from operations, plus, if necessary,
additional borrowings under the credit facility, will be sufficient to meet its
capital and operating needs and debt service requirements. However, in order to
provide any additional funds necessary for the continued growth strategies, the
Company may incur, from time to time, additional short- and long-term
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.
25
<PAGE>
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, 1997, days sales in average receivables was
approximately 22 days, days sales in average inventory was approximately 37 days
and days sales in average payables was approximately 22 days.
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.
QUARTERLY RESULTS
The following table represents certain unaudited financial information for the
quarters indicated restated for the effect of the change in method of accounting
for inventories in the second quarter of 1997.
<TABLE>
<CAPTION> First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(in thousand, except per share data)
<S> <C> <C> <C> <C>
Year ended December 31, 1997 (1)
Net sales $ 72,099 $101,305 $ 98,553 $122,249
Operating income 3,721 5,402 3,371 3,115
Income before income taxes 3,193 4,434 2,513 702
Net income 1,916 2,661 1,507 204
Earnings per share - basic 0.28 0.39 0.22 0.03
Earnings per share - diluted 0.27 0.38 0.22 0.03
Year ended December 31, 1996 (2)
Net sales $ 64,234 $ 71,364 $ 69,449 $ 62,297
Operating income 3,552 4,521 4,434 3,958
Income before income taxes 3,005 4,010 3,867 3,525
Pro forma net income (3) 1,863 2,486 2,397 2,186
Pro forma earnings per share - basic (4) 0.42 0.57 0.55 0.36
Pro form earnings per share - diluted (4) 0.39 0.52 0.50 0.35
</TABLE>
(1) The Company acquired Shelter Components Corporation on December 1, 1997,
Bowen Supply, Inc. on February 28, 1997 and Consolidated Forest Products,
L.L.C. on February 27, 1997. The acquisitions were accounted for as
purchases and accordingly, the operating results of the acquired companies
have been included in the operating results of the Company since their
respective acquisition dates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Acquisitions."
(2) 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 and Results
of Operations - Acquisitions."
(3) Prior to the initial public offering, the Company had elected to be
treated as an S corporation under 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.
(4) 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.
26
<PAGE>
KEVCO, INC.
Consolidated Balance Sheets
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 271 $ 2,078
Trade accounts receivable, less allowance for
doubtful accounts of $641 and $100 in
1997 and 1996, respectively 41,006 9,458
Inventories, less reserve for obsolete inventory of $2,692
and $544 in 1997 and 1996, respectively 83,540 23,722
Assets held for sale 3,032 -
Other current assets 4,981 338
-------- --------
Total current assets 132,830 35,596
Property and equipment, net 42,442 10,208
Intangible assets, net 120,190 8,856
Deferred tax asset 4,339 -
Other assets 8,393 1,079
-------- --------
Total assets $308,194 $ 55,739
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,932 $ 367
Trade accounts payable 47,007 6,666
Accrued liabilities 24,496 3,107
Other current liabilities 950 930
-------- --------
Total current liabilities 75,385 11,070
Long-term debt, less current portion 191,288 9,464
Deferred income taxes - 629
Deferred compensation obligation 874 383
-------- --------
Total liabilities 267,547 21,546
-------- --------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $.01 par value; 100,000
shares authorized; 6,828 and 6,809
shares issued and outstanding in
1997 and 1996, respectively 68 68
Additional paid-in capital 33,020 32,854
Retained earnings 7,559 1,271
-------- --------
Total stockholders' equity 40,647 34,193
-------- --------
Total liabilities and stockholders' equity $308,194 $ 55,739
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
27
<PAGE>
KEVCO, INC.
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales $394,206 $267,344 $182,519
Cost of sales 341,362 226,653 155,641
-------- -------- --------
Gross profit 52,844 40,691 26,878
Commission income 5,914 5,497 2,610
-------- -------- --------
58,758 46,188 29,488
Selling, general and administrative expenses 43,149 29,723 20,889
-------- -------- --------
Operating income 15,609 16,465 8,599
Interest expense 4,767 2,058 1,337
-------- -------- --------
Income before income taxes 10,842 14,407 7,262
Income taxes 4,554 1,695 45
-------- -------- --------
Net income $ 6,288 $ 12,712 $ 7,217
======== ======== ========
Earnings per share - basic $ 0.92
========
Earnings per share - diluted $ 0.90
========
Weighted average shares outstanding - basic 6,815
========
Weighted average shares outstanding - diluted 6,959
========
Pro forma information (unaudited)
Historical income before income taxes $ 14,407 $ 7,262
Income tax expense adjustments 5,475 2,832
-------- --------
Pro forma net income $ 8,932 $ 4,430
======== ========
Pro forma earnings per share - basic $ 1.64 $ 1.01
======== ========
Pro forma earnings per share - diluted $ 1.61 $ 0.90
======== ========
Weighted average shares outstanding - basic 5,430 4,395
======== ========
Weighted average shares outstanding - diluted 5,531 4,946
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
28
<PAGE>
KEVCO, INC.
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, 1994 4,700 $ 47 306 ($ 748) $ 2,837 ($ 4,187) $ 8,145 $ 6,094
Net income - - - - - - 7,217 7,217
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) 10,660 9,556
Net income - - - - - - 12,712 12,712
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
changes 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 - 1,271 34,193
Net income - - - - - - 6,288 6,288
Stock options exercised 15 - - - 166 - - 166
Issuance of stock 4 - - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 6,828 $ 68 - $ - $ 33,020 $ - $ 7,559 $ 40,647
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
KEVCO, INC.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,288 $ 12,712 $ 7,217
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,315 1,792 1,041
Gain on sale of assets (9) (10) (16)
Deferred compensation obligation 60 22 28
Deferred income taxes 452 797 -
Changes in assets and liabilities, net of effects from
acquisitions
Trade receivables, net 8,998 5,311 (2,014)
Inventories, net (7,464) (4,521) (1,363)
Prepaid expenses and other (629) 5 71
Trade accounts payable 9,635 (4,592) 3,650
Accrued liabilities (2,023) (124) (166)
Income taxes payable (2,252) 762 -
--------- --------- ---------
Net cash provided by operating activities 16,371 12,154 8,448
--------- --------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (161,000) - (17,449)
Purchase of equipment (3,577) (1,586) (2,844)
Proceeds from sale of assets 832 21 594
(Increase) decrease in other assets (6,605) 19 (733)
--------- --------- ---------
Net cash used by investing activities (170,350) (1,546) (20,432)
Cash flows from financing activities:
Net proceeds from initial public offering - 25,871 -
Proceeds (payments) on line of credit, net 2,675 (6,500) (4,587)
Payments of long-term debt (1,062) (14,932) (1,900)
Proceeds from long-term debt 175,000 - 30,700
Payment of acquired debt (24,592) - (8,124)
Exercise of stock options 151 - -
Distributions paid - (14,407) (4,702)
Capital contributions - 86 197
Collections on loan to stockholder - 375 750
--------- --------- ---------
Net cash provided (used) by financing activities 152,172 (9,507) 12,334
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (1,807) 1,101 350
Beginning cash and cash equivalents 2,078 977 627
--------- --------- ---------
Ending cash and cash equivalents $ 271 $ 2,078 $ 977
========= ========= =========
SUPPLEMENTAL DATA:
Cash paid for interest $ 2,727 $ 2,162 $ 1,471
Cash paid for income taxes $ 6,262 $ 456 $ 45
NONCASH INVESTING AND FINANCING ACTIVITIES:
Distribution of loan to stockholder $ - $ 3,062 $ -
Noncompete obligations $ 492 $ - $ 544
Acquisitions:
Fair value of assets acquired $ 255,600 $ - $ 32,400
Cash paid 168,700 - 17,700
--------- --------- ---------
Liabilities assumed $ 86,900 $ - $ 14,700
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
30
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF OPERATIONS
Kevco, Inc. manufactures and distributes products and materials primarily
for use by the manufactured housing and recreational vehicle industries.
BASIS OF PRESENTATION
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.
All of the Company's subsidiaries have guaranteed the 10 3/8% senior
subordinated notes (see Note 6) on a full, unconditional and joint and
several basis. As a result, separate financial statements of the
subsidiaries are not included.
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, 1997 and
1996.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventories
purchased for resale and manufactured inventories are valued using the
first-in, first-out (FIFO) method. The carrying value of inventories
approximates fair value as of December 31, 1997 and 1996.
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.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. The carrying value of property and equipment
approximates fair value as of December 31, 1997 and 1996.
ASSETS HELD FOR SALE
Assets held for sale consist of certain net assets to be sold as part of
the acquisition of Shelter Components Corporation.
INTANGIBLE ASSETS
Intangible assets are comprised of noncompete agreements and goodwill.
Noncompete agreements are amortized on a straight-line basis over the terms
of the related agreements. 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.
LOAN ORIGINATION COSTS
Loan origination costs, included in other assets, associated with the
acquisition of the Company's senior credit facility and senior subordinated
notes have been capitalized and are being amortized over the term of the
related debt.
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.
31
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
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 FAS 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,
adjusted for the effect of any acquisitions.
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
over the term of the agreement. 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 14% each of net sales in 1997
and 16% and 14% 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.
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).
EARNINGS PER SHARE
Earnings per share is calculated as required by the Financial Accounting
Standards Board ("FASB"), Statement of Financial Accounting Standards No.
128 "Earnings per Share" ("FAS 128"), which is effective for financial
statements issued for periods ending after December 15, 1997. This
standard requires dual presentation of basic and diluted earnings per share
and a reconciliation between the two amounts. 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 Company has
implemented FAS 128 and prior period earnings per share have been restated
to comply with the standard.
32
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The reconciliation between basic and diluted weighted average shares
outstanding, follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Weighted average shares - basic 6,815 5,430 4,395
Plus shares applicable to stock
option plans 144 101 49
Plus shares necessary to fund
S corp distribution - - 502
----- ----- -----
Weighted average shares - diluted 6,959 5,531 4,946
===== ===== =====
</TABLE>
Historical earnings per share for 1996 and 1995 is not presented because it
is not indicative of the ongoing entity. Pro forma earnings per share has
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 have been presented to reflect the effect of the
assumed issuance of that number of shares of common stock that would
generate sufficient cash to pay an S corporation distribution in an amount
equal to previously taxed but undistributed earnings at December 31, 1996
and 1995.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 "Disclosure of Information about Capital Structure" ("FAS
129"). FAS 129 is effective for periods ending after December 15, 1997.
The Company is in compliance with footnote disclosures concerning
securities which are required by the statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for reporting comprehensive income and its components in a full
set of financial statements. The new standard requires that all items that
are to be recognized under accounting standards as components of
comprehensive income, including an amount representing total comprehensive
income, be reported in a financial statement that is displayed with the
same prominence as other financial statements. FAS 130 is effective for
fiscal years beginning after December 15, 1997 and has no impact on the
financial condition or results of operations of the Company, but may
require changes to the Company's disclosure requirements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"). FAS 131 establishes reporting standards for a
company's operating segments in annual financial statements and the
reporting of selected information about operating segments in interim
financial reports. The new pronouncement also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The statement is effective for financial statements for periods
beginning after December 15, 1997. The statement has no impact on the
financial condition or results of operations of the Company, but may
require changes in the Company's disclosure requirements.
2. ACQUISITIONS
During the year ended December 31, 1997, Kevco acquired Shelter Components
Corporation on December 1, 1997 (the "Shelter Acquisition"), the inventory
and certain distribution rights from Shepherd Products Company on December
12, 1997 (the "Shepherd Acquisition"), Bowen Supply, Inc. on February 28,
1997 (the "Bowen Acquisition") and Consolidated Forest Products, L.L.C. on
February 27, 1997 (the "Consolidated Forest Acquisition") for total
purchase prices approximating $144.8 million, $8.0 million, $20.2 million
and $14.1 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 the acquisitions, approximately $105.8 million of goodwill was
recorded by the Company, which reflects the adjustments necessary to
allocate the individual
33
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
purchase prices to the fair value of assets acquired, liabilities assumed
and additional purchase liabilities recorded. Additional purchase
liabilities included approximately $1.2 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, the balance of which is outstanding at December 31, 1997. The
Company expects to complete its termination of employees during 1998.
The following unaudited pro forma data summarize the results of operations
for the periods indicated as if these acquisitions had been completed at
the beginning of each period presented. The pro forma data give effect to
actual operating results prior to the acquisition and adjustments to
interest expense, goodwill amortization and income taxes. These pro forma
amounts do not purport to be indicative of the results that would have
actually been obtained if the acquisitions had occurred at the beginning of
each period presented or that may be obtained in the future.
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
---- -----
(in thousands, except per share data)
<S> <C> <C>
Net sales $858,023 $854,960
Net income $ 6,948 $ 11,053
Earnings per share - basic $ 1.02 $ 2.03
Earnings per share - diluted $ 1.00 $ 2.00
</TABLE>
The Company purchased all of the capital stock of Service Supply Systems,
Inc. ("Service Supply") on June 30, 1995 for approximately $17.7 million
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 $7.1 million has been accounted
for as goodwill.
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- --------
(in thousands)
<S> <C> <C>
Raw materials $17,006 $ 4,385
Work-in process 1,317 332
Finished goods 3,760 1,324
Goods held for resale 61,457 17,681
------- -------
$83,540 $23,722
======= =======
</TABLE>
During the second quarter of 1997, the Company adopted the FIFO method to
value inventories for which the LIFO method had previously been utilized
for determining cost. The FIFO method will better measure the current
value of such inventories, provide a more appropriate matching of revenues
and expenses, and conform all inventories of the Company to the same
accounting method. Additionally, the change will enhance the comparability
of the Company's financial statements by changing to the predominant method
utilized in its industry.
As required by generally accepted accounting principles, the Company
applied this change retroactively, which resulted in a decrease in net
income of approximately $276,000 for the year ended December 31, 1996 and
an increase in net income of approximately $236,000 for the year ended
December 31, 1995. The cumulative effect of this restatement on retained
earnings at January 1, 1995 was an increase of $592,000. Pro forma net
income (see Note 1) increased approximately $69,000 and $144,000 for the
years ended December 31, 1996 and 1995, respectively and pro forma earnings
per share increased by $0.01 and $0.03 for the years ended December 31,
1996 and 1995, respectively, as a result of applying the change
retroactively.
34
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
December 31, useful
1997 1996 lives
------ ------- -------------
(in thousands) (in years)
<S> <C> <C> <C>
Land $2,631 $242
Buildings 23,736 5,195 31 to 40
Machinery and equipment 13,711 4,267 5 to 15
Furniture and fixtures 3,285 1,914 3 to 10
Transportation equipment 5,354 3,277 3 to 10
Leasehold improvements 682 564 7 to 15
------- -------
49,399 15,459
Less accumulated depreciation (6,957) (5,251)
------- -------
Property and equipment, net $42,442 $10,208
======= =======
</TABLE>
Property and equipment under capital leases consists of buildings of
$2,761,000 and $2,231,000 for the years ended December 31, 1997 and 1996,
respectively and machinery and equipment of $70,000 and furniture and
fixtures of $570,000 for the years ended December 31, 1997 and 1996.
Accumulated depreciation was $2,166,000 and $1,982,000 for the years ended
December 31, 1997 and 1996, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
--------- ---------
(in thousands)
<S> <C> <C>
Goodwill $121,151 $9,113
Noncompete agreements 1,036 544
-------- ------
122,187 9,657
Less accumulated amortization (1,997) (801)
-------- ------
Intangible assets, net $120,190 $8,856
======== ======
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists or the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
10 3/8% senior subordinated notes due 2007;
interest payable semi-annually $ 105,000 $ -
Term loan facility payable to a bank, due 2003 to 2004, with interest
payable monthly 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 (8.42% at December 31, 1997) 70,000 -
Revolving credit facility payable to a bank, due 2003, interest
payable monthly 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 (8.50% and 8.25% at December 31, 1997 and 1996,
respectively), $33,366 net of an outstanding letter of credit of $959, was
available under the credit facility at December 31, 1997 10,675 8,000
Unsecured notes payable, payable in quarterly or monthly
installments, with interest from 7.0% to 10.0%, due from 1998 to 2006 6,095 -
Capital lease obligations, collateralized by equipment,
maturing through 2007, with interest rates from 7.66% to 26.8% 1,792 1,548
Obligations payable under noncompete and consulting agreements,
maturing through 2002 with payments of approximately $3,000
per month, with interest from 7.00% to 8.50% 658 283
--------- ---------
194,220 9,831
Less current portion (2,932) (367)
--------- ---------
$ 191,288 $ 9,464
========= =========
</TABLE>
35
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In February 1997, the Company and its lender amended and restated the
credit agreement in order to fund the Consolidated Forest and Bowen
acquisitions discussed in Note 2. The term debt was increased to $30.0
million and the revolving credit facility increased to $35.0 million, each
maturing in 2001.
In December 1997, Kevco and its lender entered into the second amended and
restated credit agreement at closing of the Shelter Acquisition 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 facility 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).
The following are scheduled maturities of debt (in thousands):
Year Ending
December 31,
------------------
1998 $ 2,932
1999 7,195
2000 9,220
2001 8,983
2002 10,757
Thereafter 155,133
--------
$194,220
========
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 $30.0 million, whereby the Company will receive interest
payments should LIBOR increase above 7.0% and, conversely, will make
interest payments should LIBOR decrease below 5.41%, the effect of which
limits the Company's interest expense within the range of 5.41% to 7.0%
LIBOR on $30.0 million of debt. Management intends to hold the interest
rate hedge until maturity on January 2, 2001. The Company has incurred no
gain or loss related to this interest rate hedge for the year ended
December 31, 1997. The fair value of the interest rate hedge agreement is
not considered to be material.
The fair value of long-term debt was $194.8 and $10.6 million as of
December 31, 1997 and 1996, 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.
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 the organization to
create a holding company with operating company subsidiaries. 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
36
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$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, 1997, 1996
and 1995 consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal:
Current $3,489 $559 $ -
Deferred 512 692 -
State:
Current 490 339 45
Deferred 63 105 -
------ ------ ------
$4,554 $1,695 $45
====== ====== ======
</TABLE>
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, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities $ 1,318 $ 353
Reserves and allowances 985 38
Inventory adjustments 755 -
Intangibles 4,802 123
Other 129 -
------- -------
Total gross deferred tax assets 7,989 514
------- -------
Deferred tax liabilities:
Property and equipment (1,491) (875)
Inventory adjustments - (436)
Other (235) -
------- -------
Total gross deferred tax liabilities (1,726) (1,311)
------- -------
Net deferred tax asset (liability) $ 6,263 ($ 797)
======= =======
Current deferred income tax asset (liability) $ 1,924 ($ 193)
Noncurrent deferred income tax asset (liability) 4,339 (604)
------- -------
Net deferred tax asset (liability) $ 6,263 ($ 797)
======= =======
</TABLE>
Management believes that the Company will generate sufficient future
taxable income to realize the entire deferred tax asset and that the
realization of the net deferred tax asset is more likely than not.
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, 1997, 1996 and 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Amount computed using statutory rate (35%) $ 3,795 $ 5,042 $ 2,542
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit 353 225 45
Deferred tax liability related to
S corp termination - 353 -
Change in method of valuing inventory - 388 -
S corp income not subject to federal tax - (4,329) (2,542)
Non-deductible expenses 341 - -
Other, net 65 16 -
------- ------- -------
$ 4,554 $ 1,695 $ 45
======= ======= =======
</TABLE>
37
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 1997, 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>
1998 $560 $5,218
1999 493 4,209
2000 433 2,977
2001 315 2,150
2002 304 1,159
Thereafter 1,269 2,471
------ -------
Total 3,374 $18,184
=======
Less amount representing interest (1,582)
------
Present value of minimum
lease payments $1,792
======
</TABLE>
Rental expense for operating leases was $5,060,000, $3,839,000 and
$2,640,000 for the years ended December 31, 1997, 1996 and 1995,
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.
YEAR 2000 IMPACT
The Company has taken actions to understand the nature and extent of the
work required to make its systems Year 2000 compliant. The Company is
utilizing both internal and external resources to identify, correct or
reprogram and test systems for Year 2000 compliance, but it has not yet
completed that process. The Company anticipates Year 2000 compliance
expenses will not be material to the financial statements, and the process
is expected to be completed by the third quarter of 1999. While this is an
ongoing process and these efforts will involve additional costs, the
Company believes, based on currently available information, that it will be
able to manage its total Year 2000 transition without any material adverse
effect on its business operations.
9. RETIREMENT PLAN
The Company has defined contribution retirement plans which cover
substantially all full-time employees and are qualified under Section
401(k) of the Internal Revenue Code. Under the plans, employees may
voluntarily contribute a percentage of their compensation to the plans and
the Company may make discretionary contributions. The Company's
contributions to the plans for the years ended December 31, 1997, 1996 and
1995 were $135,000, $100,000 and $225,000, 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 1997, 1996 and 1995. Debt related to the capital leases was
$1,398,000 and $1,548,000 at December 31, 1997 and 1996, respectively.
38
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company loaned its majority stockholder $5.0 million in 1993, payable
in monthly principal installments of $62,500 plus interest at 9.0% at
December 31, 1995, due November 1997. The Company distributed the loan to
stockholder to the Company's stockholders effective June 30, 1996.
11. 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" ("FAS 123").
Adoption of the cost recognition provisions of FAS 123 is optional and the
Company has decided not to elect these provisions of FAS 123. However,
disclosures as if the Company adopted the cost recognition provisions of
FAS 123 in 1995 are required by FAS 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 1997, 1996 and
1995, 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 after November 1996 vest over 10 years. All options
granted prior to November 1996 vested in November 1996, at the time of the
initial public offering. The options have been granted at prices equal to
the market value of the shares at the date of grant and expire not more
than 7 and 10 years after the date of grant for the 1996 and 1995 plans,
respectively. In accordance with APB 25, the Company has not recognized
any compensation cost for these stock options granted during 1997, 1996 and
1995.
A summary of the status of the Company's stock options as of December 31,
1997, 1996 and 1995, and the changes during the year ended on those dates
is presented below:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
--------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES OF AVERAGE SHARES OF AVERAGE SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- ---------- ------------ ----------- ----------- ------------
Outstanding at beginning of year 415,196 $10.58 47,854 $5.64 - N/A
Granted 24,500 $13.62 393,450 $11.17 47,854 $5.64
Exercised (14,464) $10.49 - N/A - N/A
Forfeited (3,760) $11.17 (26,108) $10.42 - N/A
Expired - N/A - N/A - N/A
Outstanding at end of year 421,472 $10.76 415,196 $10.58 47,854 $5.64
Exercisable at end of year 405,072 $10.65 415,196 $10.58 - N/A
Weighted-average fair value of
options granted during the year $8.06 - $1.84 - $1.39 -
</TABLE>
39
<PAGE>
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 1997, 1996 and 1995,
respectively: dividend yield of zero percent for all years; risk-free
interest rates are different for each grant and range from 5.45% to 6.19%;
the expected lives of 6.7 and 9.8 years, respectively, for the options
under the 1996 and 1995 Plans; and expected volatility of 48.0% for options
granted in 1997. In determining the "minimum value," FAS 123 does not
require the volatility of the Company's common stock underlying the options
to be calculated or considered for options granted in 1996 or 1995 because
the Company was not publicly-traded when the options were granted.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
Number Number
Outstanding Weighted Weighted Exercisable Weighted
at Average Average at Average
Exercise December 31, Remaining Exercise December 31, Exercise
Prices 1997 Life Price 1997 Price
- ------------------ --------------- ------------- ------------ --------------- -------------
$5.64 42,532 7.5 $5.64 42,532 $5.64
$11.17 353,440 5.0 $11.17 353,440 $11.17
$13.50 to $13.88 25,500 9.0 $13.63 9,100 $13.81
-------- -------
421,472 5.5 $10.76 405,072 $10.65
======== =======
</TABLE>
NET INCOME AND EARNINGS PER SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with FAS 123, the Company's net income and
earnings per share for 1997, 1996 and 1995 would approximate the pro forma
amounts below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income As reported $6,288 $8,932 $4,430
Pro forma 6,237 8,491 4,409
Earnings per share - basic As reported $0.92 $1.64 $1.01
Pro forma 0.92 1.56 1.00
Earnings per share - diluted As reported $0.90 $1.61 $0.90
Pro forma 0.90 1.54 0.89
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. FAS 123 does not apply to awards prior to
1995, and the Company anticipates making awards in the future under its
stock-based compensation plans.
40
<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, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, Kevco, Inc.
retroactively changed its method of accounting for inventory from the last-in,
first-out method to the first-in, first-out method and the consolidated
financial statements for all years presented have been restated accordingly.
/s/ COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
February 9, 1998
41
<PAGE>
EXHIBIT 21.1
Kevco Delaware, Inc.,
a Delaware corporation.
Sunbelt Wood Components, Inc.,
a Delaware corporation.
Bowen Supply, Inc.,
a Georgia corporation.
Shelter Components Corporation,
an Indiana corporation.
BPR Holdings, Inc.,
an Indiana corporation.
Shelter Components of Indiana, Inc.,
an Indiana corporation.
Design Components, Inc.,
an Indiana corporation.
Duo-Form of Michigan, Inc.
a Michigan corporation.
DCM, Inc.,
an Indiana corporation.
Shelter Distribution, L.P.,
an Indiana listed partnership(1).
(1) Sole general partner is BPR Holdings, Inc.; sole limited partner is Shelter
Components of Indiana, Inc.
<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 9,
1998, on our audits of the consolidated financial statements of Kevco, Inc. as
of December 31, 1997, and December 31, 1996 and for each of the three years
in the period ended December 31, 1997, which report is incorporated by
reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Fort Worth, Texas
March 17, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 271
<SECURITIES> 0
<RECEIVABLES> 41,647
<ALLOWANCES> 641
<INVENTORY> 83,540
<CURRENT-ASSETS> 132,830
<PP&E> 49,399
<DEPRECIATION> 6,957
<TOTAL-ASSETS> 308,194
<CURRENT-LIABILITIES> 75,385
<BONDS> 0
0
0
<COMMON> 68
<OTHER-SE> 33,020
<TOTAL-LIABILITY-AND-EQUITY> 308,194
<SALES> 394,206
<TOTAL-REVENUES> 400,120
<CGS> 341,362
<TOTAL-COSTS> 384,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,767
<INCOME-PRETAX> 10,842
<INCOME-TAX> 4,554
<INCOME-CONTINUING> 6,288
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,288
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
