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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___.
Commission file number 000-21621
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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
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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.
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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 $21,877,460 on March 25, 1999, based on the
closing price of the registrant's Common Stock on such date of $5.50 per share,
as reported on The Nasdaq Stock Market.
As of March 25, 1999, 6,856,437 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders
of the registrant to be held during 1999 are incorporated by reference into Part
III of this report.
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PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report, including but not limited to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which can be identified by the
use of forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. Similar statements herein that
describe the Company's business strategy, outlook, objectives, plans, intentions
or goals are also forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable,
there can be no assurance that such expectations will prove to have been
correct. All such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those in
forward-looking statements. These risks and uncertainties are beyond the ability
of the Company to control, and in many cases, the Company cannot predict all the
risks and uncertainties that could cause its actual results to differ materially
from those indicated by the forward looking statements. Important factors that
could cause actual results to differ materially from the Company's expectations
("cautionary statements") are disclosed in this report, including, but not
limited to, the information disclosed under "Factors That Could Affect Future
Performance." All forward-looking statements are expressly qualified by such
cautionary statements.
ITEM 1. BUSINESS.
GENERAL
Kevco, Inc. ("Kevco" or the "Company," and includes, unless the context
otherwise requires, its direct and indirect subsidiaries) believes it is the
largest 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, 1998.
Through its 27 distribution centers (as of March 17, 1999), 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 1994 to 1998, the Company's net sales increased from
$99.3 million to $897.5 million, a compound annual growth rate of approximately
73%. 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. During the second quarter of 1998, the Company's
subsidiary structure was reorganized.
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
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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 1998, approximately 13% of the Company's net sales were
derived from plumbing products, 9% from electrical products, 9% from hardware,
fasteners, tools and mill supplies, 18% from wood products, 5% from thermoformed
plastic products, 8% from laminated wallboards and 38% from other building
products. See note 13 to the consolidated financial statements for additional
segment data.
INDUSTRY
For the year ended December 31, 1998, approximately 90% 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 1997 the average cost per square foot was $25.78 for a
single-section manufactured home and $30.65 for a multi-section manufactured
home, as compared to an average cost of $61.47 per square foot for a site-built
home, each excluding land costs. In 1997, reported sales of new manufactured
homes totaled approximately $14.5 billion (at retail). Approximately 373,000
manufactured homes were reported as shipped in 1998 (which would represent
approximately 29.6% of all new single family homes sold in 1998).
The Company believes steady employment growth, greater availability of
retail financing for the home buyer and enhanced quality of manufactured homes
have contributed to industry conditions. Although the manufactured housing
industry has experienced significant growth over the past five 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,
consumer confidence levels and retail inventory 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 1997
reportedly accounted for approximately 80% 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, 1998, 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 293,000 units in 1998. 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.
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BUSINESS STRATEGY
Kevco's primary objective is to maintain and strengthen its position as
one of the largest national distributors of building products to the
manufactured housing and RV industries. To achieve its objective, the Company
has adopted a strategy based on the following key elements:
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.
REALIZE SHELTER ACQUISITION BENEFITS. The Company believes that its
continued success will depend in part on its effectively integrating the
Company's operations with those it acquired through the acquisition of Shelter.
The Company has prioritized the integration of its various distribution
information systems into a single hardware and software platform, which the
Company believes will ultimately result in better inventory management and lower
distribution costs. The Company intends to continue to reduce administrative and
facility redundancies such as through the integration and streamlining of the
Company's accounting systems, the consolidation of warehouses and the sale or
subletting of vacant facilities. The Company is also exploring methods of
reducing its debt leverage, created in part as a result of the Shelter
acquisition in order to enhance its competitiveness. Until such integration is
substantially complete, levels of debt reduced and profitability restored, the
Company does not anticipate effectuating additional acquisitions.
LEVERAGE NATIONAL DISTRIBUTION NETWORK. Kevco intends to continue to
use its national distribution network as a platform for internal growth. 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 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 largest 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 an
opportunity to supply a greater portion of its customers' building products
needs as the customers seek to reduce the number of their suppliers. With its
existing national distribution infrastructure, the Company believes that
additional products from its existing product lines can be offered to customers
without significant additional overhead cost.
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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.
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 Kevco, and the engineering staff of Kevco is prepared to assist
customers with parts 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.
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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 continues 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 windows, wood moulding, vinyl siding, visqueen, gypsum
board, parquet wood flooring, insulation, roof shingles, patio doors,
fireplaces, kitchen cabinetry and water heaters.
WOOD PRODUCTS. Kevco manufactures roof trusses and lumber cut to
customer specifications for use in manufactured homes. Roof trusses are
rectangular or triangular structures that form the principal roof support for a
manufactured home. Kevco also distributes plywood and mill direct lumber.
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 and 110 and 12 volt lighting.
THERMOFORMED PRODUCTS. Kevco manufactures and distributes bathtubs,
shower enclosures and tub wall surrounds for the manufactured housing and RV
industry using the thermoforming process.
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LAMINATED WALLBOARD PRODUCTS. Kevco 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 manufactures custom
thermoplastic injection molded products for the automotive, sporting goods,
medical and manufactured housing industries. Kevco 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 15% and 12%, respectively of
Kevco's net sales in 1998. Although the Company has ongoing supply relationships
with these customers, it does not have a formal supply contract with these
customers or most of its other customers. The Company's business could be
adversely affected if these customers, or other major customers, substantially
reduced or discontinued purchases from the Company. Further, the Company can
give no assurance that its sales to such customers will continue at historical
levels. The Company believes that it has good relationships with each of its
manufactured home and RV customers.
DISTRIBUTION
Kevco distributes products through 27 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.
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Substantially all of Kevco's distribution centers 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 systems to monitor sales, inventory and profitability by
distribution center. As a result of the Shelter acquisition, the Company
maintains multiple management information systems, some of which co-exist in
individual warehouse distribution centers. The Company is currently in the
process of merging the multiple systems into one, with the process scheduled to
be complete in early 2000. Although each system provides accurate management and
financial information, the multiple systems are less efficient than one system
in disseminating management information on a timely and accurate basis.
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 in the Consolidated Statements of Income.
PURCHASING AND SUPPLIERS
Kevco obtains its products from more than 1,000 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
has, from time to time, 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.
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While the loss of a major supplier could have a material adverse effect
on the Company's business, the Company believes alternative suppliers for
similar products in each of its product lines are generally 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 generally good, though the Company believes
that its substantial leverage and decline in profitability has strained its
relationship with its suppliers. In the event a group of the Company's suppliers
were to decline to sell product to the Company on credit at a time when the
Company did not have the necessary liquidity to make payment within normal
payment terms or otherwise make acceptable payment assurances, the Company's
business could be materially and adversely affected unless alternative suppliers
were then willing to sell such product to the Company on credit.
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
Alabama (2), Arizona, Georgia, North Carolina, Tennessee and Texas.
The Company manufactures 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.
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 six manufacturing facilities located in Indiana, Georgia, North
Carolina, Tennessee and Texas (2).
The Company 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.
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The Company designs, builds and molds high tolerance functional
component parts. The process uses custom built molds and thermoplastic molding
machines to liquify, inject and form parts for its customers. This process can
accommodate small and large parts and hold tolerances up to .002 of an inch.
Kevco has 27 molding machines ranging in size from 35 ton to 700 ton of clamp
pressure.
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 1998 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 had one 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, 1998, the Company employed 2,153 persons. The
Company is a party to (i) a collective bargaining agreement, which covers
certain employees at one of the Company's facilities in Elkhart, Indiana and
(ii) a collective bargaining agreement effective through March 31, 1999, 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.
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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.
MANAGEMENT
The following table sets forth certain information as of March 25,
1999, concerning the Company's officers and certain key employees. Inclusion in
this list as an officer or key employee is not intended to act as an admission
that such individual is or will become subject to Section 16 under the Exchange
Act.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jerry E. Kimmel ............ 61 Chairman of the Board, President and Chief Executive Officer
Clyde A. Reed, Jr .......... 63 Executive Vice President and Chief Operating Officer
Ellis L. McKinley, Jr ...... 47 Vice President, Chief Financial Officer, Treasurer and Director
Richard S. Tucker .......... 55 Secretary and Director
C. Lee Denham .............. 50 President, Kevco Manufacturing, L.P.
Gregory G. Kimmel .......... 30 Senior Vice President, Corporate Development and Director
</TABLE>
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 served
as a director of the Company from November 1996 to January 1999.
12
<PAGE> 13
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 Manufacturing, L.P.
since its formation in 1998 and of its predecessor, Kevco's former subsidiary
Sunbelt, 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.
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.
SALES BY SUPPLIERS
The Company generally purchases its products from suppliers on open
account. In the event that a group of the Company's suppliers were to decline to
sell product to the Company on credit at a time when the Company did not have
the necessary liquidity to make payment within normal payment terms or otherwise
make acceptable payment assurances, the Company's business could be materially
and adversely affected unless alternative suppliers were then willing to sell
such product to the Company on credit. Further, a perceived strain between the
Company and its suppliers could ultimately strain the Company's relationship
with its customers, which could have a material adverse effect on the Company.
13
<PAGE> 14
NASDAQ LISTING
The Company's Common Stock is currently listed for trading on The
Nasdaq National Market System ("NASDAQ"). Under applicable NASDAQ listing
standards, the Company is required to have two independent directors. One of the
Company's independent directors, Martin C. Bowen, resigned effective as of
December 2, 1998, and the Company has not nominated a successor independent
director to stand for election at the Company's 1999 annual meeting of
shareholders. Further, since September 1, 1997, Richard Nevins, the Company's
other independent director, has acted as a consultant at times for the Company
and at times for Jerry E. Kimmel, the Company's Chairman of the Board, President
and Chief Executive Officer. As such, NASDAQ may not consider Mr. Nevins to be
an independent director for such purposes. The Company has had informal
discussions with NASDAQ regarding its independent director status; however,
NASDAQ has not formally notified the Company that its shares of Common Stock are
subject to delisting as a result of this noncompliance. Ordinarily, before
delisting, NASDAQ would provide notice and an opportunity to effectuate a plan
for compliance with listing requirements.
If the Company is unable to comply with such listing requirement, the
shares of the Company's Common Stock could be delisted by NASDAQ, which could
result in a substantial reduction in the liquidity and price of the Company's
Common Stock.
RISKS RELATED TO THE INTEGRATION OF KEVCO AND SHELTER
The integration of Shelter with the Company involves the integration of
two companies that have previously operated independently. The assimilation of
the companies requires the integration and coordination of the Company's product
offering, management, systems, manufacturing and sales and marketing efforts.
The Company has already experienced greater than anticipated expenses relating
to the nonuniform information systems and accounting systems acquired with
Shelter and the Company may continue to experience greater than expected
integration related costs. In addition, the process of integrating the
operations of Kevco and Shelter requires 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 further difficulties will not be encountered in
integrating the operations of Kevco and Shelter or that the efficiencies and
benefits expected from such integration will ultimately be realized.
YEAR 2000
The Company is in the process of addressing and attempting to ensure
its Year 2000 readiness. The Year 2000 problem concerns systems and equipment
designed and developed using two digits, rather than four, to specify the year,
which may result in the inability of information systems to properly recognize
date-sensitive information on and beyond January 1, 2000. Certain risks and
uncertainties relating specifically to the Company's Year 2000 efforts include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all date
sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of various third parties with
respect to Year 2000 problems. While the Company believes its efforts will
provide reasonable assurance that material disruptions will not occur due to
internal failure and is attempting to assess and minimize potential disruption
due to third party failure, the potential for interruption still exists and may
materially adversely affect the Company's business. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Year 2000."
14
<PAGE> 15
SUBSTANTIAL LEVERAGE
The Company has a substantial amount of indebtedness. As of December
31, 1998, the Company had approximately $210.6 million of consolidated
indebtedness and a percentage of debt to total capitalization of 83.1%. 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 have been
and will continue to 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
and its 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 and raise concerns about the Company's
liquidity with the Company's vendors and customers.
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 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.
CYCLICAL NATURE AND SEASONALITY OF THE MANUFACTURED HOUSING AND RV MARKETS
Over 90% of the Company's net sales for the year ended December 31,
1998, 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
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.
15
<PAGE> 16
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.
ITEM 2. PROPERTIES.
FACILITIES
The following table sets forth certain information as of March 25,
1999, 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 and
the location that formed the executive offices of Shelter, of approximately
19,000 square feet, in Elkhart, Indiana. The Company also leases six and owns
four former distribution facilities, which were closed to achieve efficiencies
and eliminate redundancies following the acquisition of Shelter. Such vacant
facilities are in various stages of being sublet or sold. 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.
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET FUNCTION
<S> <C> <C>
Alabama
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 ..................... 94,000 Distribution
Glendale* ................... 45,000 Manufacturing
California
Riverside ................... 35,000 Distribution
San Bernardino .............. 42,000 Distribution
Woodland .................... 55,000 Distribution
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET FUNCTION
<S> <C> <C>
Colorado
Fort Morgan ................. 44,000 Distribution
Florida
Ocala* ...................... 50,000 Distribution
Ocala ....................... 17,000 Distribution
(satellite)
Georgia
Adel ........................ 37,000 Manufacturing
Ashburn* .................... 100,000 Manufacturing
Cordele* .................... 60,000 Distribution
Douglas ..................... 72,000 Distribution
Idaho
Caldwell .................... 24,000 Distribution
Caldwell .................... 20,000 Distribution
(satellite)
Indiana
Elkhart ..................... 61,000 Distribution
Elkhart ..................... 90,000 Distribution
Elkhart ..................... 35,000 Distribution
(satellite)
Elkhart ..................... 57,000 Distribution
Elkhart* .................... 91,000 Distribution
Elkhart ..................... 15,000 Distribution
Elkhart* .................... 65,000 Distribution
Elkhart* .................... 70,000 Distribution
Elkhart ..................... 8,000 Distribution
Elkhart* .................... 74,000 Manufacturing
Elkhart* .................... 20,000 Manufacturing
Elkhart County .............. 29,000 Manufacturing
South Bend .................. 43,000 Manufacturing
Kansas
Newton* ..................... 85,000 Distribution
Michigan
Edwardsburg* ................ 70,000 Manufacturing
Edwardsburg ................. 7,000 Manufacturing
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FEET FUNCTION
<S> <C> <C>
Minnesota
Redwood Falls ............... 53,000 Distribution
Nebraska
Aurora ...................... 50,000 Distribution
New Mexico
Albuquerque ................. 15,000 Distribution
North Carolina
New London* ................. 165,000 Distribution
New London* ................. 30,000 Manufacturing
Richfield* .................. 44,000 Manufacturing
Oregon
Wilsonville ................. 67,000 Distribution
Pennsylvania
Lancaster ................... 119,000 Distribution
Tennessee
Baxter ...................... 55,000 Manufacturing
Cookeville .................. 30,000 Distribution
(satellite)
Cookeville .................. 35,000 Distribution
Madisonville ................ 38,000 Manufacturing
Texas
Fort Worth .................. 110,000 Distribution
Mansfield* .................. 25,000 Manufacturing
Temple ...................... 44,000 Manufacturing
Waco ........................ 130,000 Distribution
Waco ........................ 135,000 Manufacturing
Waco ........................ 22,000 Manufacturing
Waco ........................ 14,000 Manufacturing
Waxahachie* ................. 192,000 Manufacturing
</TABLE>
- -------------------------
* Company owned facility.
18
<PAGE> 19
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.
19
<PAGE> 20
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 following table sets forth
the high and low sales prices of the Company's Common Stock for each quarterly
period within the two most recent fiscal years.
<TABLE>
<CAPTION>
HIGH LOW
========= =========
<S> <C> <C>
Fiscal year ended December 31, 1997
1st Quarter .................................. $ 18.75 $ 13.75
2nd Quarter .................................. $ 15.50 $ 12.25
3rd Quarter .................................. $ 14.38 $ 10.13
4th Quarter .................................. $ 17.88 $ 11.88
<CAPTION>
HIGH LOW
========= =========
Fiscal year ended December 31, 1998
1st Quarter .................................. $ 18.75 $ 16.50
2nd Quarter .................................. $ 26.00 $ 19.08
3rd Quarter .................................. $ 22.13 $ 16.25
4th Quarter .................................. $ 16.00 $ 6.75
</TABLE>
On March 25, 1999, the last reported sale price of the Common Stock on
The Nasdaq Stock Market was $5.50 and as of such date there were approximately
85 shareholders of record of the Common Stock. The Company's transfer agent is
ChaseMellon Shareholder Services, L.L.C.
The Company has not paid any cash dividends on its Common Stock during
the past two fiscal years. 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 repay indebtedness. 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.
20
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The selected consolidated financial data for the five years ended December 31,
1998 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,
------------------------------------------------------------
1998 1997(1) 1996 1995(2) 1994
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales ........................................... $897,450 $390,662 $264,210 $182,519 $ 99,279
Cost of sales ....................................... 781,339 338,045 223,519 155,641 83,356
-------- -------- -------- -------- --------
Gross profit ................................... 116,111 52,617 40,691 26,878 15,923
Commission income ................................... 7,397 5,914 5,497 2,610 1,066
-------- -------- -------- -------- --------
123,508 58,531 46,188 29,488 16,989
Selling, general and administrative expenses ........ 99,943 42,922 29,723 20,889 11,941
-------- -------- -------- -------- --------
Operating income ............................... 23,565 15,609 16,465 8,599 5,048
Other income ........................................ 2,577 -- -- -- 800
Interest expense, net ............................... 21,143 4,767 2,058 1,337 281
-------- -------- -------- -------- --------
Income before income taxes ..................... 4,999 10,842 14,407 7,262 5,567
Income taxes ........................................ 3,132 4,554 1,695 45 51
-------- -------- -------- -------- --------
Net income ..................................... $ 1,867 $ 6,288 $ 12,712 $ 7,217 $ 5,516
======== ======== ======== ======== ========
Earnings per share - basic .......................... $ 0.27 $ 0.92
======== ========
Earnings per share - diluted ........................ $ 0.27 $ 0.90
======== ========
Weighted average shares outstanding - basic ......... 6,845 6,815
======== ========
Weighted average shares outstanding - diluted ....... 6,865 6,959
======== ========
PRO FORMA INFORMATION (UNAUDITED)(3)
Historical income before income taxes ............. $ 14,407 $ 7,262 $ 5,567
Income tax expense adjustments 5,475 2,832 2,171
-------- -------- --------
Pro forma net income .............................. $ 8,932 $ 4,430 $ 3,396
======== ======== ========
Pro forma earnings per share - basic .............. $ 1.64 $ 1.01 $ 0.77
======== ======== ========
Pro forma earnings per share - diluted ............ $ 1.61 $ 0.90 $ 0.69
======== ======== ========
Weighted average shares outstanding - basic ....... 5,430 4,394 4,394
======== ======== ========
Weighted average shares outstanding - diluted ... 5,531 4,946 4,946
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .................................. $ 73,134 $ 57,445 $ 24,526 $ 19,744 $ 5,078
Total assets ..................................... 331,835 308,194 55,739 55,669 18,067
Total debt ....................................... 210,579 194,220 9,831 31,263 6,385
Stockholders' equity ............................. 42,887 40,647 34,193 9,556 6,094
</TABLE>
21
<PAGE> 22
(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 Systems, Inc. ("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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
From 1994 through 1998, the Company experienced significant growth in
sales. 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. Through the acquisition of Service
Supply in June 1995, for approximately $17.7 million in cash, 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. During 1998, the Company has been integrating Shelter into
Kevco by, among other things, consolidating certain corporate functions,
consolidating overlapping distribution warehouses from 47 to 27 and integrating
multiple Shelter and Kevco computer systems. Also in 1998, the Company opened
two new wood products manufacturing facilities.
The integration of the Shelter distribution operations (including
integration of information systems), while maintaining high levels of customer
service, has resulted in increased costs which has negatively impacted gross
margins and selling, general and administrative expenses. The length and cost of
the integration process has exceeded anticipated amounts in part because of
unanticipated difficulties relating to the merging of Shelter's information and
accounting systems with those of the Company. Although management believes these
costs will diminish as the integration process is completed, they have prevented
the Company from thus far realizing the savings and other synergies originally
anticipated. The Company has also encountered longer start-up periods than
planned for the two new wood products facilities that were opened earlier in the
year.
22
<PAGE> 23
Management expects the consolidation of the operations of the companies
acquired in 1997 to result in substantial cost savings to the combined company
in the future. The Company intends to continue to seek to capitalize on the
significant common geographic presence of Kevco, Shelter and Bowen and shared
customer relationships to obtain market share and sales cost reductions. In
addition, the Company intends to continue to seek to obtain greater utilization
of its existing corporate administrative resources to reduce the combined
overhead expense. The Company also intends to continue to pursue opportunities
to achieve greater benefits over time through the combination of multiple
warehouse facilities into 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 investment 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 February 1997, the Company continued its expansion in the wood
manufacturing industry through the acquisition of substantially all of the
assets, and assumption of certain liabilities, of Consolidated Forest (a
manufacturer of wood products for the manufactured housing industry) and
consummated the acquisition of all of the outstanding stock of Bowen (a
wholesale distributor of building products to the manufactured housing and RV
industries). 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.
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. 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.
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.
The acquisitions 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.
23
<PAGE> 24
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.
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,
---------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales ....................................... 100.0% 100.0% 100.0%
Cost of sales ................................... 87.1 86.5 84.6
----- ----- -----
Gross profit ............................... 12.9 13.5 15.4
Commission income ............................... 0.9 1.5 2.1
----- ----- -----
13.8 15.0 17.5
Selling, general and administrative expenses .... 11.1 11.0 11.3
----- ----- -----
Operating income ........................... 2.7 4.0 6.2
Other income .................................... 0.3 -- --
Interest expense ................................ (2.4) (1.2) (0.8)
----- ----- -----
Income before income taxes ................. 0.6% 2.8% 5.4%
===== ===== =====
</TABLE>
See note 13 to the consolidated financial statements for segment data.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Net sales increased by $506.8 million, or 129.7%, to $897.5 million in
1998 from $390.7 million in 1997 due primarily to the acquisition of Shelter in
December 1997. Management believes that net sales, without the effect of the
Shelter acquisition, increased approximately the same as the manufactured
housing shipment increase of 5.5% for 1998 compared to 1997 (approximately
373,000 homes reported shipped in 1998 compared to approximately 353,400 homes
reported shipped in 1997).
Gross profit increased by $63.5 million, or 120.7%, to $116.1 million
in 1998 from $52.6 million in 1997 due primarily to the acquisition of Shelter
in December 1997. Gross profit, as a percent of net sales, decreased to 12.9% in
1998 from 13.5% in 1997. The decrease in gross profit, as a percent of sales,
was primarily a result of wood products margins which, affected by lower than
historical lumber prices, continued to be lower than historical levels, to
start-up costs related to the opening of two wood products manufacturing
facilities (such wood products represent approximately 19% of net sales) and to
increased costs as a result of the consolidation and integration of Shelter
distribution operations (including integration of information systems), as well
as an otherwise general decline in margins.
Commission income increased by $1.5 million, or 25.4%, to $7.4 million
in 1998 from $5.9 million in 1997. The increase was primarily attributable to
the acquisition of Shelter in December 1997.
24
<PAGE> 25
Selling, general and administrative expenses increased by $57.0
million, or 132.9%, to $99.9 million in 1998 from $42.9 million in 1997. The
increase was due primarily to the acquisition of Shelter in December 1997 and
the related integration. Although selling, general and administrative expenses,
as a percent of net sales, remained consistent with the prior year, in order to
maintain high levels of customer service in a period of considerable
consolidation and integration of Shelter distribution operations (including
integration of information systems), the Company has incurred costs
significantly in excess of anticipated amounts which have negatively impacted
earnings and cash flow relating to, among other things, contract labor, overtime
and freight charges. The Company has also encountered longer than anticipated
start-up periods for two new wood products facilities that were opened earlier
in the year.
Net income decreased by $4.4 million, or 70.3%, to $1.9 million in 1998
from $6.3 million in 1997. The decrease in net income was primarily attributable
to lower gross margins, as discussed above, increased interest expense and a
higher effective tax rate. Interest expense increased to $21.1 million in 1998
from $4.8 million in 1997 as a result of debt incurred in connection with the
acquisition of Shelter. Net income was favorably impacted by a $2.5 million gain
included in other income that was the result of an insurance settlement. The
effective tax rate increased to 62.7% in 1998 from 42.0% in 1997 as a result of
non-deductible goodwill resulting primarily from the acquisition of Shelter.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales increased by $126.5 million, or 47.9%, to $390.7 million in
1997 from $264.2 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 $264.2 million to $250.7 million, or 5.1%.
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 $11.9 million, or 29.2%, to $52.6 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 13.5% in 1997 from 15.4% in
1996. The decrease in gross profit, as a percent of net sales, was 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 $13.2
million, or 44.5%, to $42.9 million in 1997 from $29.7 million in 1996. The
increase was primarily due to increased sales volume related to the 1997
Acquisitions. Selling, general and administrative expenses, as a percent of net
sales, decreased to 11.0% for 1997 from 11.3% for 1996. The decrease reflected
Kevco's continued efforts in increasing efficiency.
25
<PAGE> 26
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
was 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.
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 due 2007 and the expansion of trade
credit. Net cash used by operating activities was approximately $9.1 million in
1998 and net cash provided by operating activities, $16.4 million and $12.2
million in 1997 and 1996, 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 acquisition of Shelter, the Company entered into
a second amended and restated credit agreement, which increased the aggregate
borrowings available under the amended credit agreement to $125.0 million
consisting of an $80.0 million term loan facility, requiring quarterly
installments, and a $45.0 million revolving credit facility. The revolving
credit facility and a portion of the term loan were (prior to the fourth amended
agreement described below) to mature in 2003 with the remaining term loan to
mature 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 agreement,
the Company issued $105 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 into another person, the entering into certain
transactions with affiliates and the engagement in certain lines of business.
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 repay indebtedness.
26
<PAGE> 27
Primarily as a result of lower than anticipated net sales to customers and
higher than anticipated SG&A levels relating to the integration of Shelter
during 1998 (as well as the decrease in gross margins described above), the
Company did not generate sufficient cash flow from operations to fund its
working capital needs. As a result, the Company supplemented the funding of
operations through borrowings under its credit facility. At December 31, 1998,
the Company was in violation of its leverage ratio covenant and fixed charge
ratio covenant contained in Sections 7.10 and 7.11, respectively, of the
Company's second amended and restated credit agreement.
On December 23, 1998, the Company and Jerry E. Kimmel, the Company's
President, Chief Executive Officer, Chairman of the Board and principal
stockholder, entered into separate stock purchase agreements with Wingate
Partners, II, L.P. ("Wingate") pursuant to which Wingate agreed to purchase a
total of $40 million of common stock and warrants. Of that amount, $32 million
of common stock and a warrant would have been purchased from the Company and $8
million of common stock and a warrant would have been purchased from Mr. Kimmel.
The total purchase was to include both voting common shares and a new class of
non-voting common shares.
The agreement between the Company and Wingate provided for the purchase of
4,413,793 newly issued shares of Kevco common stock from the Company at $7.25
per share and a warrant to purchase 882,759 additional newly issued shares of
common stock at $10.25 per share. The agreement between Mr. Kimmel and Wingate
provided for the purchase of 1,103,448 shares of Kevco common stock from Mr.
Kimmel, at $7.25 per share and a warrant to purchase 220,690 additional shares
of common stock from Mr. Kimmel at $10.25 per share. Following these
transactions, Wingate would have owned approximately 40% of the outstanding
shares of voting common stock, would own shares of a new class of non-voting
common stock and would own warrants to acquire additional shares of voting and
non-voting common stock.
As a part of such transaction, Fred Hegi of Wingate would have become
Chairman of the Board, President and Chief Executive Officer of Kevco and Jerry
E. Kimmel would have assumed a new position of Vice Chairman of the Board and
would continue to own approximately 28% of Kevco's voting common stock. On
February 15, 1999, Wingate delivered a notice to the Company and Mr. Kimmel
stating that it was terminating such agreements. The Company is currently
discussing with Wingate the possibility of investing in the Company on other
terms. There can be no assurance that an agreement to invest can be reached on
terms acceptable to the Company and as a result, approximately $783,000 of fees
related to the Wingate transaction were included in SG&A in 1998.
In February 1999, the Company entered into a third amendment and waiver to
its credit agreement, which provided for an incremental commitment of $5.0
million due March 31, 1999 and waived any event of default due to the Company's
violation of the leverage ratio covenant and the fixed charge coverage ratio
covenant of such credit agreement through March 31, 1999. In March 1999, the
Company requested and obtained an additional $5.0 million incremental commitment
and an extension of the maturity date on the aggregate $10 million incremental
commitment (the "Incremental Commitment") and waiver of any events of default to
April 15, 1999.
In April 1999, the Company entered into a fourth amendment and waiver to
its credit agreement. This amendment contains revised financial covenants
effective for the quarter ended March 31, 1999 through June 30, 2000 and waived
certain events of default. Under this amendment, the Incremental Commitment
matures on June 30, 1999 and the revolving credit facility and term loan
facility mature on June 30, 2000. As of March 23, 1999, the Company had
approximately $31.0 million available under its credit facility and the
Incremental Commitment. The Company is also exploring strategic alternatives to
improve its liquidity, including equity or debt financing and selected
divestitures. Based on, among other things, its internal budgets and cash flow
projections, the Company believes it has sufficient cash to fund the Company's
planned obligations and debt service through 1999. No assurance can be made that
the Company would be able to access additional capital or that additional
capital would be available on terms acceptable to the Company.
YEAR 2000
BACKGROUND. Many computer systems and equipment with embedded computer
chips in use today were designed and developed using two digits, rather than
four, to specify the year. As a result, such systems and equipment may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruptions of operations.
STATE OF READINESS. During 1998, the Company began its assessment of
Year 2000 issues and established a Year 2000 project plan with the Chief
Information Officer as the project leader and engaged third party consultants to
assist in the evaluation of systems and issues. The plan can be described in the
following phases:
Phase I -- identification and assessment of the Year 2000 issues
for the Company's various internal systems and
equipment;
Phase II -- remediation, including modification, upgrading and
replacement of hardware and software; and
Phase III -- testing to ensure Year 2000 compliance.
27
<PAGE> 28
The Company is applying all aspects of this plan, with the assistance
of third party consultants, to both its information technology ("IT") systems
and non-IT systems. The Company's computer equipment and software that is
considered an IT or business system includes systems used to manage customer
orders, inventory, manufacturing, accounting functions, and telecommunications.
Non-IT systems include manufacturing equipment, alarm systems, security devices,
HVAC units, fax machines, and other miscellaneous systems.
The Company believes that it has identified and assessed the internal
business systems that are susceptible to system failures or processing errors as
a result of the Year 2000 issue. Those systems considered most critical to
continuing operations have received the highest priority. The Company has six
primary business systems that support operations. A majority of the remediation
efforts for these systems will consist of the Company performing an upgrade. Two
of these systems have been upgraded to Year 2000 compliant versions, thoroughly
tested using appropriate Year 2000 scenarios, and successfully placed into
production. The four remaining business systems are in the process of
remediation, and the scheduled date for completion of testing is August 1999.
In addition to the remediation of the information systems, the Company
is currently addressing its non-IT systems. During 1998, an assessment of the
Company's manufacturing equipment was performed. The results of the assessment
revealed no date sensitive manufacturing equipment, thus decreasing the risk of
any Year 2000 related manufacturing problems. Currently, an assessment of other
miscellaneous non-IT equipment is being performed which is expected to be
completed, and, if necessary, remediated in July 1999.
The following chart is for summary purposes only and is qualified in
its entirety by reference to the discussion above.
<TABLE>
<CAPTION>
================================================================================
PROGRAM AREA STATE OF READINESS STATUS
================================================================================
<S> <C> <C>
INTERNAL IT 2 systems Phase III Complete
-----------------------------------------------------------------
4 systems Phase II and
Phase III estimated to be completed August 1999
-----------------------------------------------------------------
NON-IT Manufacturing Not Applicable -- Phase I revealed no date
sensitive equipment
-----------------------------------------------------------------
Other Phase I and
Phase II estimated to be completed July 1999
================================================================================
</TABLE>
28
<PAGE> 29
THIRD PARTIES. The Company is reviewing, and has initiated formal
communications with critical third parties that provide or purchase services or
goods that are essential to Kevco's operations. This is being done in order to
determine the extent to which the Company is vulnerable to any failure by such
third parties to remediate their respective Year 2000 problems, and to resolve
such problems to the extent practicable. In connection with this assessment, the
Company is reviewing all significant contractual and other obligations with
third parties to ensure compliance in the event of a Year 2000 problem. The
assessment of these business partners will be ongoing, but all significant third
party communications and the related risk assessments are expected to be
completed by July 1999. The uncertainty associated with third party readiness,
however, cannot be eliminated as the accuracy and availability of third party
representations is not within the Company's control. In the event that the
Company is unable to obtain satisfactory assurance that a critical third party
provider/customer has successfully and timely achieved Year 2000 compliance, and
the Company is unable to replace such a provider/customer with an alternative
provider/customer, the Company's operations could be materially adversely
impacted. Currently, there is no known contractual liability to any third party
if all or a portion of the Company's IT or non-IT systems are not Year 2000
compliant.
COSTS. The Company currently estimates that its total Year 2000 project
cost will be approximately $0.6 million. Through December 31, 1998, the Company
has expended approximately $0.2 million. The Company has funded, and expects to
continue to fund, the expenditures related to its Year 2000 initiatives either
through cash generated from operations and current working capital, or if
required, its existing revolving credit facilities.
RISKS. Based on the progress it has made in addressing its Year 2000
issues and its plan and timetable to complete its compliance program, the
Company does not currently foresee significant risks associated with its Year
2000 issues. However, management believes that it is not possible to determine
with complete certainty that all Year 2000 problems affecting the Company have
been identified or will be corrected. Likewise, because of its constant progress
in addressing the various Year 2000 issues, the Company has not yet determined
the most likely worst case scenario relating to Year 2000 problems.
Nevertheless, management expects that the Company could likely suffer the
following consequences: (1) a significant number of operational inconveniences
and inefficiencies for the Company and its customers that could divert
management's time and attention and financial and human resources from its
ordinary business activities; and (2) a lesser number of serious system and/or
operational failures that may require significant efforts by the Company to
prevent or alleviate material business disruptions.
CONTINGENCY PLANNING. The Company has not yet completed a comprehensive
contingency plan with respect to the Year 2000 issue, but intends to have a plan
developed by August 1999. The contingency planning process is an ongoing one
which will require further modifications as the Company obtains additional
information regarding the Company's progress on the remediation phases of its IT
and non-IT systems, and on the status of third party Year 2000 readiness. The
Company's core business processes, as currently managed by the IT systems, can,
if necessary, operate for a limited time period on a manual, non-computerized
basis. If the Company is required to implement any of these contingency plans,
the implementation could have an adverse effect on the Company's financial
condition and results of operations.
ASSET MANAGEMENT
The Company actively manages its assets and liabilities. For the year
ended December 31, 1998, days sales in average receivables was approximately 21
days, days sales in average inventory was approximately 44 days and days sales
in average payables was approximately 27 days.
29
<PAGE> 30
QUARTERLY RESULTS
The following table represents certain unaudited financial information for the
quarters indicated restated for the reclassification of customer rebates from
cost of sales to sales in the first quarter of 1998.
<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, 1998
Net sales ....................... $ 212,051 $ 231,967 $ 234,625 $ 218,807
Gross margin .................... 28,943 31,951 30,144 25,073
Income before income taxes ...... 3,861 5,691 1,044 (5,597)
Net income ...................... 2,128 3,187 513 (3,961)
Earnings per share - basic ...... 0.31 0.47 0.07 (0.58)
Earnings per share - diluted .... 0.31 0.46 0.07 (0.58)
Year ended December 31, 1997 (1)
Net sales ....................... $ 71,461 $ 100,384 $ 97,667 $ 121,150
Gross margin .................... 10,123 13,871 12,825 15,798
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 0.39 0.22 0.03
</TABLE>
(1) The Company acquired Shepherd Products Company on December 12, 1997,
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."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by this item
are included herein on pages F-1 through F-21.
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, 1998 and
1997.
30
<PAGE> 31
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 1999 (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.
31
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. INDEX TO FINANCIAL STATEMENTS.
The following Financial Statements are included herein:
Report of Independent Accountants ................................ F-1
Consolidated Balance Sheets of December 31, 1998 and 1997 ........ F-2
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996 ................................. F-3
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996 ............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 ................................. F-5
Notes to Consolidated Statements ................................. F-7
2. INDEX TO FINANCIAL SCHEDULES.
No schedules are included because of the absence of conditions under
which they are required or because information is disclosed in the
financial statements or notes thereto.
3. EXHIBITS
The exhibits filed as a part of this report are listed under "Exhibits"
at subsection (c) of this Item.
(b) REPORTS OF FORM 8-K:
The Company filed a Current Report on Form 8-K dated December 23, 1998,
announcing the entering of a stock purchase agreement with Wingate
Partners II, L.P. ("Wingate") and the entering of a stock purchase
agreement between Wingate and Jerry E. Kimmel.
32
<PAGE> 33
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)
2.8 Stock Purchase Agreement dated as of December 23, 1998 between Wingate
Partners II, L.P. and the Company.(11)(8)
2.9 Stock Purchase Agreement dated as of December 23, 1998 among Wingate
Partners II, L.P., Jerry E. Kimmel, and the Company.(11)(8)
2.10 Letter, dated February 15, 1999, to Kevco, Inc. from Wingate Partners
II, L.P.(13)
2.11 Letter, dated February 15, 1999, to Jerry E. Kimmel from Wingate
Partners II, L.P.(13)
3.1 Articles of Incorporation of Kevco, Inc., as amended.(1)
3.2 Bylaws of Kevco, Inc.(1)
33
<PAGE> 34
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)
---
34
<PAGE> 35
10.7 Amendment No. 2 to Lease, by and between K & E Land & Leasing and
Kevco, Inc. dated May 30, 1983.(1)
10.8 Amendment No. 3 to Lease, by and between K & E Land & Leasing and
Kevco, Inc. dated February 1, 1993.(1)
10.9 Lease dated April 1, 1980 between City of Newton, Kansas and K & E Land
& Leasing.(1)
10.10 Sublease and Lease Guarantee Agreement dated April 1, 1980 between K &
E Land & Leasing and Kevco, Inc.(1)
10.11 Amendment No. 1 to Sublease and Lease Guaranty Agreement by and between
K & E Land & Leasing and Kevco, Inc. dated May 30, 1983.(1)
10.12 Lease Agreement dated October 12, 1987 between 1741 Conant Partnership
& Kevco Inc.(1)
10.13 Equipment Lease Agreement dated January 1, 1991 between K & E Land &
Leasing and Kevco, Inc.(1)
10.14 Amendment No. 1 to Equipment Lease Agreement between K & E Land &
Leasing and Kevco, Inc. dated February 12, 1993.(1)
10.15 Amendment No. 2 to Equipment Lease Agreement between K & E Land &
Leasing and Kevco, Inc. dated October 26, 1993.(1)
10.16 Amendment No. 3 to Equipment Lease Agreement between K & E Land &
Leasing and Kevco, Inc. dated May 23, 1994.(1)
10.17 Deferred Compensation Agreement between Kevco, Inc. and Clyde A. Reed,
Jr. dated May 24, 1977.(1)*
10.18 Amendment No. 1 to Deferred Compensation Agreement dated May ,
1980.(1)*
10.19 Amendment No. 2 to Deferred Compensation Agreement dated March 10,
1992.(1)*
10.20 Amended and Restated Health and Accident Plan of Kevco, Inc.(1)*
10.21 Investment and Tax Advice Plan of Kevco, Inc.(1)*
10.22 Credit Agreement among Kevco, Inc., certain Lenders and NationsBank of
Texas, N.A., as Administrative Lender dated June 30, 1995.(1)
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)
35
<PAGE> 36
10.26 Term Loan Note of Kevco, Inc. to NationsBank of Texas, N.A. dated
September 1, 1995 in the amount of $10,714,285.72.(1)
10.27 Revolving Credit Note of Kevco, Inc. to The Sumitomo Bank, Ltd. dated
February 2, 1996 in the amount of $5,714,285.72.(1)
10.28 Term Loan Note of Kevco, Inc. to The Sumitomo Bank, Ltd. dated February
2, 1996 in the amount of $4,285,714.28.(1)
10.29 PaineWebber Standardized 401(K) Profit-Sharing Adoption Agreement (No.
005) (To be used with Basic Plan Document No. 03 Only) for Kevco, Inc.
dated May 24, 1996 and PaineWebber Defined Contribution Plan.(1)
10.30 Promissory Note of Gerald E. Kimmel to Kevco, Inc. dated October 26,
1993 in the amount of $5,000,000.(1)
10.31 Amendment No. 4 to Lease dated December 1, 1977 by and between K&E Land
& Leasing and Kevco, Inc. dated October 26, 1993.(1)
10.32 Assignment and Acceptance dated February 2, 1996 between The Daiwa
Bank, Limited and The Sumitomo Bank, Ltd., Chicago Branch.(1)
10.33 Form of Tax Indemnification and Distribution Agreement.(1)
10.34 Form of Promissory Note made by Kevco Texas, Inc. in the amount of
$3,733,000 (the Prior S Corporation Earnings Note).(1)
10.35 Form of Promissory Note made by Kevco Texas, Inc. (the Future S
Corporation Earnings Note).(1)
10.36 Form of Assignment of $5,000,000 Note made by Kevco, Inc. (n/k/a Kevco
Delaware, Inc.).(1)
10.37 Form of Adoption Agreement by Kevco, Inc. and Kevco Texas, Inc. (re:
1995 Stock Option Plan and 1996 Stock Option Plan).(1)
10.38 Amendment No. 1 dated September 21, 1988, to Lease Agreement by 1741
Conant Partnership as lessor and Kevco, Inc. (n/k/a Kevco Delaware,
Inc.).(1)
10.39 Letter Agreement dated June 22, 1982, between Kevco, Inc. (n/k/a Kevco
Delaware, Inc.) and K&E Land & Leasing. (re: lease rentals).(1)
10.40 Letter Agreement dated October 1, 1996 by Kevco, Inc., K&E Land &
Leasing, and 1741 Conant Partnership (re: lease rental).(1)
10.41 Form of Parent Pledge Agreement.(1)
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)
36
<PAGE> 37
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)
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)
37
<PAGE> 38
10.60 Supplemental Indenture between Shelter Components Corporation, a
Subsidiary of Kevco, Inc., and United States Trust Company of New York,
as Trustee.(9)
10.61 Supplemental Indenture dated as of December 1, 1997 between Shelter
Distribution, L.P., a Subsidiary of Kevco, Inc., and United States
Trust Company of New York, as Trustee.(9)
10.62 Supplemental Indenture dated as of December 1, 1997 between DCM, Inc.,
a Subsidiary of Kevco, Inc., and United States Trust Company of New
York, as Trustee.(9)
10.63 Supplemental Indenture dated as of December 1, 1997 between Duo-Form of
Michigan, Inc., a Subsidiary of Kevco, Inc., and United States Trust
Company of New York, as Trustee.(9)
10.64 Supplemental Indenture dated as of December 1, 1997 between Design
Components, Inc., a Subsidiary of Kevco, Inc., and United States Trust
Company of New York, as Trustee.(9)
10.65 Supplemental Indenture dated as of December 1, 1997 between Shelter
Components of Indiana, Inc., a Subsidiary of Kevco, Inc., and United
States Trust Company of New York, as Trustee.(9)
10.66 Supplemental Indenture dated as of December 1, 1997 between BPR
Holdings, Inc., a Subsidiary of Kevco, Inc., and United States Trust
Company of New York, as Trustee.(9)
10.67 First Amendment to Credit Agreement dated February 12, 1998 between
Kevco, Inc., certain lenders and NationsBank of Texas, N.A.(10)
10.68 Registered Global Note dated March 5, 1998 among Kevco, Inc., Kevco
Delaware, Inc., Sunbelt Wood Components, Inc., Bowen Supply, Inc.,
Encore Industries, Inc., Shelter Components Corporation, BPR Holdings,
Inc., Shelter Components of Indiana, Inc., Design Components, Inc.,
Duo-Form of Michigan, Inc., DCM, Inc. and Shelter Distribution, L.P.,
as Subsidiary Guarantors and United States Trust Company of New York,
as Trustee.(12)
10.69 Second Amendment to Credit Agreement, dated as of October 27, 1998 (but
effective as of September 30, 1998), entered into and among Kevco,
Inc., a Texas corporation, the banks listed on the signature pages
(collectively, the "Lenders"), and NationsBank, N.A. (successor by
merger to NationsBank of Texas, N.A.), as the Administrative Agent.(13)
10.70 Waiver entered into as of the 30th day of December 1998, by and among
the banks listed on the signature pages (the "Lenders"), Kevco, Inc., a
Texas corporation (the "Borrower"), and NationsBank, N.A. (successor by
merger to NationsBank of Texas, N.A.), as Administrative Agent for the
Lenders to the extent and in the manner provided for in the Credit
Agreement.(13)
10.71 Second Waiver entered into as of the 15th day of February, 1999, by and
among the banks listed on the signature pages (the "Lenders"), Kevco,
Inc.,a Texas corporation (the "Borrower"), and NationsBank, N.A.
(successor by merger to NationsBank of Texas, N.A.), as Administrative
Agent for the Lenders to the extent and in the manner provided for in
the Credit Agreement. (13)
10.72 Third Amendment and Waiver entered into as of the 25th day of February,
1999, by and among the banks listed on the signature pages (the
"Lenders"), Kevco, Inc., a Texas corporation, and NationsBank, N.A.
(successor by merger to NationsBank of Texas, N.A.), as Administrative
Agent for the Lenders to the extent and in the manner provided for in
the Credit Agreement.(13)
10.73 Letter agreement waiver extension, dated March 22, 1999, between
Kevco, Inc., NationsBank, N.A., as Administrative Agent and Lender,
and the other parties thereto.(13)
21.1 Subsidiaries.(13)
23.1 Consent of PricewaterhouseCoopers LLP.(13)
24.1 Power of Attorney.(contained on the signature page of this Annual
Report on Form 10-K)
38
<PAGE> 39
27.1 Financial Data Schedule.(13)
- -------------------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 333-11173) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated February 27, 1997, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's registration statement
on Form S-8 (No. 333-19959), and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1997 and incorporated herein
by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, for the quarter ended June 30, 1997 and incorporated herein
by reference.
(6) Previously filed as an exhibit to the Company's Tender Offer Statement
on Schedule 14D-1, filed October 28, 1997, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Tender Offer Statement
on Schedule 14D-1/A, filed December 12, 1997, and incorporated herein
by reference.
(8) Schedules and similar attachments to this exhibit have not been
previously file herewith, but the nature of their contents is described
in the body of this exhibit. The Company agrees to furnish a copy of
any such omitted schedules and attachments to the Securities and
Exchange Commission upon request.
(9) Previously filed as an exhibit to the Company's registration statement
on Form S-4 (No. 333-43691), and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, for the year ended December 31, 1998 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated December 23, 1998, and incorporated herein by reference.
(12) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1998, and incorporated
herein by reference.
(13) Filed herewith.
* Management contract or compensatory plan or arrangement.
39
<PAGE> 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Kevco, Inc. at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
April 12, 1999
F-1
<PAGE> 41
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 799 $ 271
Trade accounts receivable, less allowance for
doubtful accounts of $740 and $641 in
1998 and 1997, respectively .............................. 51,367 41,006
Inventories, less reserve for obsolete inventory of $2,781
and $2,692 in 1998 and 1997, respectively ................ 95,999 83,540
Assets held for sale ........................................... 1,065 3,032
Other current assets ........................................... 8,458 4,981
-------- --------
Total current assets ...................................... 157,688 132,830
Property and equipment, net ...................................... 44,994 42,442
Intangible assets, net ........................................... 119,590 120,190
Deferred income taxes ............................................ 2,778 4,339
Other assets ..................................................... 6,785 8,393
-------- --------
Total assets ............................................. $331,835 $308,194
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................. $ 7,209 $ 2,932
Trade accounts payable ......................................... 61,569 47,007
Accrued liabilities ............................................ 15,533 24,496
Other current liabilities ...................................... 243 950
-------- --------
Total current liabilities ................................. 84,554 75,385
Long-term debt, less current portion ............................. 203,370 191,288
Deferred compensation obligation ................................. 1,024 874
-------- --------
Total liabilities ......................................... 288,948 267,547
-------- --------
Commitments and contingencies (Note 9)
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized;
6,853 and 6,828 shares issued and outstanding in
1998 and 1997, respectively .............................. 69 68
Additional paid-in capital ..................................... 33,392 33,020
Retained earnings .............................................. 9,426 7,559
-------- --------
Total stockholders' equity ................................ 42,887 40,647
-------- --------
Total liabilities and stockholders' equity ................ $331,835 $308,194
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
<PAGE> 42
KEVCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales .......................................... $897,450 $390,662 $264,210
Cost of sales ...................................... 781,339 338,045 223,519
-------- -------- --------
Gross profit .................................. 116,111 52,617 40,691
Commission income .................................. 7,397 5,914 5,497
-------- -------- --------
123,508 58,531 46,188
Selling, general and administrative expenses ....... 99,943 42,922 29,723
-------- -------- --------
Operating income .............................. 23,565 15,609 16,465
Other income ....................................... 2,577 -- --
Interest expense, net .............................. 21,143 4,767 2,058
-------- -------- --------
Income before income taxes .................... 4,999 10,842 14,407
Income taxes ....................................... 3,132 4,554 1,695
-------- -------- --------
Net income .................................... $ 1,867 $ 6,288 $ 12,712
======== ======== ========
Earnings per share - basic ......................... $ 0.27 $ 0.92
======== ========
Earnings per share - diluted ....................... $ 0.27 $ 0.90
======== ========
Weighted average shares outstanding - basic ........ 6,845 6,815
======== ========
Weighted average shares outstanding - diluted ...... 6,865 6,959
======== ========
PRO FORMA INFORMATION (UNAUDITED)
Historical income before income taxes ............ $ 14,407
Income tax expense adjustments ................... 5,475
--------
Pro forma net income ............................. $ 8,932
========
Pro forma earnings per share - basic ............. $ 1.64
========
Pro forma earnings per share - diluted ........... $ 1.61
========
Weighted average shares outstanding - basic ...... 5,430
========
Weighted average shares outstanding - diluted .... 5,531
========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE> 43
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, 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
Net income ....................... -- -- -- -- -- -- 1,867 1,867
Stock options exercised .......... 25 1 -- -- 372 -- -- 373
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 ..... 6,853 $ 69 -- -- $ 33,392 -- $ 9,426 $ 42,887
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE> 44
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 1,867 $ 6,288 $ 12,712
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Depreciation and amortization ......................... 8,928 3,315 1,792
Loss (gain) on sale of assets ......................... 9 (9) (10)
Deferred compensation obligation ...................... 150 60 22
Deferred income taxes ................................. 2,980 452 797
Changes in assets and liabilities, net of effects from
acquisitions
Trade receivables, net ................................ (9,452) 8,998 5,311
Inventories, net ...................................... (13,193) (7,464) (4,521)
Other current assets .................................. (3,445) (2,881) 767
Trade accounts payable ................................ 14,562 9,635 (4,592)
Accrued liabilities ................................... (11,524) (2,023) (124)
--------- --------- ---------
Net cash (used) provided by operating activities ...... ( 9,118) 16,371 12,154
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired ........... -- (161,000) --
Purchase of equipment, proceeds of assets held for sale..... (10,973) (3,577) (1,586)
Insurance proceeds ......................................... 500 -- --
Proceeds from assets held for sale ......................... 3,000 -- --
Proceeds from sale of assets ............................... 759 832 21
(Increase) decrease in other assets ........................ (236) 32 19
--------- --------- ---------
Net cash used by investing activities ................. (6,950) (163,713) (1,546)
Cash flows from financing activities:
Net proceeds from initial public offering .................. -- -- 25,871
Proceeds (payments) on line of credit, net ................. 9,725 2,675 (6,500)
Payments of long-term debt ................................. (3,366) (1,062) (14,932)
Proceeds from long-term debt ............................... 10,000 175,000 --
Payment of acquired debt ................................... -- (24,592) --
Payment for loan origination fees .......................... (44) (6,637) --
Exercise of stock options .................................. 281 151 --
Distributions paid ......................................... -- -- (14,407)
Capital contributions ...................................... -- -- 86
Collections on loan to stockholder ......................... -- -- 375
--------- --------- ---------
Net cash provided (used) by financing activities ...... 16,596 145,535 (9,507)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ 528 (1,807) 1,101
Beginning cash and cash equivalents ............................. 271 2,078 977
--------- --------- ---------
Ending cash and cash equivalents ................................ $ 799 $ 271 $ 2,078
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE> 45
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DATA:
Cash paid for interest (none capitalized) ................... $ 19,920 $ 2,727 $ 2,162
Cash paid for income taxes .................................. $ 3,786 $ 6,262 $ 456
NONCASH INVESTING AND FINANCING ACTIVITIES:
Distribution of loan to stockholder ......................... -- -- $ 3,062
Noncompete obligations ...................................... -- $ 492 --
Assets destroyed in fire .................................... $ 1,409 -- --
Changes in estimated fair value of assets acquired and
liabilities assumed ........................................ $ 2,633 -- --
Transfer of buildings to assets held for sale ............... $ 1,065 -- --
Acquisitions:
Fair value of assets acquired .......................... -- $255,600 --
Cash paid .............................................. -- 168,700 --
-------- -------- --------
Liabilities assumed .............................. -- $ 86,900 --
======== ======== ========
</TABLE>
The accompanying notes are in integral part
of the consolidated financial statements.
F-6
<PAGE> 46
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,
1998 and 1997.
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 net carrying value of
inventories approximates fair value as of December 31, 1998 and 1997.
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, 1998
and 1997.
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.
F-7
<PAGE> 47
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.
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 Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards 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.
F-8
<PAGE> 48
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 15% and 12%
respectively in 1998 and 14% each in 1997.
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.
The Company maintains their cash in bank deposit accounts, which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes they are not
exposed to any significant credit risk on cash and cash equivalents.
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 for all periods shown in accordance
with FASB Statement of Financial Accounting Standards No. 128 Earnings
per Share, which 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.
F-9
<PAGE> 49
The reconciliation between basic and diluted weighted average shares
outstanding, follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Weighted average shares - basic ........ 6,845 6,815 5,430
Plus shares applicable to stock
option plans ......................... 20 144 101
----- ----- -----
Weighted average shares - diluted ...... 6,865 6,959 5,531
===== ===== =====
</TABLE>
Historical earnings per share for 1996 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 has been presented to reflect the effect
of the assumed issuance of that number of shares of common stock that
would generate sufficient cash to pay an S corporation distribution in
an amount equal to previously taxed but undistributed earnings at
December 31, 1996.
Software Development Costs
Internal and external costs incurred for the development of computer
applications, as well as for upgrades and enhancements that result in
additional functionality of the applications, are capitalized. Internal
and external training and maintenance costs are charged to expense as
incurred. When an application is placed in service, the Company begins
amortizing the related capitalized software costs using the
straight-line method and an estimated useful life varying from three to
five years. The costs of identifying, correcting, reprogramming and
testing of computer systems for Year 2000 compliance are expensed as
incurred.
Start-Up Costs
Start-up costs consist of salaries, personnel training cost and other
expenses of opening new facilities and are expensed as incurred.
Recent Accounting Pronouncements
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits - an amendment of FASB Statements Number 87,
88, and 106" ("FAS 132") that is effective for reporting periods
beginning after December 15, 1997. The required disclosures have been
made and adoption of FAS 132 had no effect on the Company's
consolidated financial position or results of operations in 1998.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued
Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1") that is
effective for reporting periods beginning after December 15, 1998, but
provides for earlier application if certain conditions are met. The
Company has applied the provisions of SOP 98-1 in its financial
statements for the year ended December 31, 1998 and its adoption had no
material effect on the Company's consolidated financial position or
results of operations.
In April 1998, the AcSEC issued Statement of Position 98-5 "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5") that is effective for
reporting periods beginning after December 15, 1998. The Company has
applied the provisions of SOP 98-5 in its financial statements for the
year ended December 31, 1998 and its adoption had no material effect on
the Company's financial position or results of operations.
F-10
<PAGE> 50
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") that is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company will implement
the provisions of FAS 133 as required. The future adoption of FAS 133
is not expected to have a material effect on the Company's consolidated
financial position or results of operations.
Reclassifications
Certain amounts in the consolidated financial statements for 1997 and
1996 have been reclassified to conform to the 1998 presentation. These
reclassifications have no effect on stockholders' equity or net income
as previously reported.
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 $115.1 million of
goodwill was recorded by the Company, which reflects the adjustments
necessary to allocate the individual purchase prices to the fair value
of assets acquired, liabilities assumed and additional purchase
liabilities recorded. Additional purchase liabilities included
approximately $1.8 million ($0.2 million at December 31, 1998) for
severance and related costs associated primarily with the elimination
of certain administrative and corporate positions was recorded in
connection with the Shelter Acquisition.
F-11
<PAGE> 51
3. INVENTORIES
Inventories are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Raw materials ............ $23,535 $17,006
Work-in process .......... 1,055 1,317
Finished goods ........... 6,961 3,760
Goods held for resale .... 64,448 61,457
------- -------
$95,999 $83,540
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
December 31, useful
1998 1997 lives
--------- -------- -------------
(in thousands)
<S> <C> <C> <C>
Land .............................. $ 2,614 $ 2,631
Buildings ......................... 22,296 23,736 31 to 40 years
Machinery and equipment ........... 15,776 13,711 5 to 15 years
Furniture and fixtures ............ 5,161 3,285 3 to 10 years
Transportation equipment .......... 5,312 5,354 3 to 10 years
Leasehold improvements ............ 1,169 682 7 to 15 years
Construction in process ........... 3,773 --
-------- --------
56,101 49,399
Less accumulated depreciation ..... (11,107) (6,957)
-------- --------
Property and equipment, net ....... $ 44,994 $ 42,442
======== ========
</TABLE>
Property and equipment under capital leases consists of buildings of
approximately $2,721,000 and $2,761,000 for the years ended December 31, 1998
and 1997, respectively and machinery and equipment of approximately $70,000 and
furniture and fixtures of approximately $570,000 for the years ended December
31, 1998 and 1997. Accumulated depreciation was approximately $2,381,000 and
$2,166,000 for the years ended December 31, 1998 and 1997, respectively.
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Goodwill .......................... $ 124,233 $ 121,151
Noncompete agreements ............. 1,036 1,036
--------- ---------
125,269 122,187
Less accumulated amortization ..... (5,679) (1,997)
--------- ---------
Intangible assets, net ....... $ 119,590 $ 120,190
========= =========
</TABLE>
F-12
<PAGE> 52
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
10 3/8% senior subordinated notes due 2007;
interest payable semi-annually ........................................ $ 105,000 $ 105,000
Term loan facility payable to banks, due 2000
payable in quarterly installments, with interest
payable monthly at a bank's prime rate plus a margin
determined by operating statistics of the Company (8.80% and
8.42% at December 31, 1998 and 1997, respectively) .................... 79,600 70,000
Revolving credit facility payable to a bank, due 2000, interest
payable monthly at the bank's prime rate plus a margin
determined by operating statistics of the Company (9.00% and
8.50% at December 31, 1998 and 1997, respectively), $ 23,457
net of outstanding letters of credit of $1,143, was available
under the credit facility at December 31, 1998 ........................ 20,400 10,675
Unsecured notes payable, payable in quarterly or annual
installments, with interest from 7.0% to 10.0%, due from
2000 to 2002 .......................................................... 3,617 6,095
Capital lease obligations, collateralized by equipment,
maturing through 2007, payable monthly with interest rates from
7.66% to 26.8% ........................................................ 1,521 1,792
Obligations payable under noncompete and consulting agreements,
maturing through 2002, payable monthly with interest rates from
7.00% to 8.50% ........................................................ 441 658
--------- ---------
210,579 194,220
Less current portion ........................................................... (7,209) (2,932)
--------- ---------
$ 203,370 $ 191,288
========= =========
</TABLE>
In December 1997, Kevco and its lenders 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 requiring quarterly installments. The revolving credit
facility and $40 million of the term loan facility were (prior to the
fourth amended agreement and waiver described below) to mature in 2003
with the remaining term loan facility to mature 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 February 1999, the Company entered into a third amendment and
waiver, which allowed for an incremental commitment of $5.0 million due
March 31, 1999 and waived any event of default due to the Company's
violation of certain financial covenants contained in the credit
agreement through March 31, 1999. In March 1999, the Company requested
and obtained an additional $5.0 million incremental commitment and an
extension of the maturity date on the aggregate $10 million incremental
commitment (the "Incremental Commitment") and waiver of any events of
default to April 15, 1999.
F-13
<PAGE> 53
In April 1999, the Company entered into a fourth amendment and waiver
to its credit agreement. This amendment contains revised financial
covenants effective for the quarter ended March 31, 1999 through June
30, 2000 and waived certain events of default. Under this amendment,
the Incremental Commitment matures on June 30, 1999 and the revolving
credit facility and term loan mature on June 30, 2000. No assurance can
be made that the Company would be able to access additional capital or
that additional capital would be available on terms acceptable to the
Company.
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):
<TABLE>
<CAPTION>
Year Ending
December 31,
-----------------------------
<S> <C> <C>
1999 .......... $ 7,209
2000 .......... 95,981
2001 .......... 1,125
2002 .......... 414
2003 .......... 157
Thereafter ........ 105,693
--------
$210,579
========
</TABLE>
In addition, in order to reduce interest rate risk on the credit
facility, the Company has entered into an interest rate hedge agreement
in the notional amount of $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, 1998. The fair value of the
interest rate hedge agreement is approximately $329,000 at December 31,
1998.
The fair value of long-term debt was $202.8 and $194.8 million as of
December 31, 1998 and 1997, 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.
F-14
<PAGE> 54
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
$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, 1998,
1997 and 1996 consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
Federal:
<S> <C> <C> <C>
Current ..... $ 535 $3,489 $ 559
Deferred .... 1,895 512 692
State:
Current ..... 318 490 339
Deferred .... 384 63 105
------ ------ ------
$3,132 $4,554 $1,695
====== ====== ======
</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.
F-15
<PAGE> 55
Components of the Company's deferred tax assets and liabilities at
December 31, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
------- -------
<S> <C> <C>
Accrued liabilities ......................... $ 1,393 $ 1,318
Reserves and allowances ..................... 500 985
Inventory adjustments ....................... 1,586 755
Intangibles ................................. 4,224 4,802
Other ....................................... -- 129
------- -------
Total gross deferred tax assets .......... 7,703 7,989
------- -------
Deferred tax liabilities:
Property and equipment ...................... (1,841) (1,491)
Other ....................................... (512) (235)
------- -------
Total gross deferred tax liabilities ..... (2,353) (1,726)
------- -------
Net deferred tax asset .............. $ 5,350 $ 6,263
======= =======
Current deferred tax asset ...................... $ 2,572 $ 1,924
Noncurrent deferred tax asset ................... 2,778 4,339
------- -------
Net deferred tax asset ............... $ 5,350 $ 6,263
======= =======
</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, 1998, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Amount computed using statutory rate ..................... 34.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal tax benefit ...... 9.3 3.3 1.6
Deferred tax liability related to
S corp termination ............................... -- -- 2.5
Change in method of valuing inventory ............... -- -- 2.7
S corp income not subject to federal tax ............ -- -- (30.1)
Non-deductible expenses ............................. 21.4 3.1 --
Other, net .......................................... (2.0) 0.6 0.1
---- ---- ----
62.7% 42.0% 11.8%
==== ==== ====
</TABLE>
F-16
<PAGE> 56
8. OTHER INCOME
In August 1998, the Company sustained a fire at its Duo-Form plant in
Edwardsburg, Michigan, which destroyed the facility and contents. The
Company has filed a claim with its insurance carrier and as of December
31, 1998, had received $500,000 in insurance proceeds. A gain from
insurance proceeds of approximately $2,541,000 was recorded at December
31, 1998 related to the insurance claim.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various equipment and buildings under capital and
noncancellable operating leases with an initial term in excess of one
year. As of December 31, 1998, 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>
1999 ............................................ $ 485 $ 7,250
2000 ............................................ 431 6,033
2001 ............................................ 315 4,811
2002 ............................................ 304 4,287
2003 ............................................ 304 3,361
Thereafter ...................................... 966 6,453
------- -------
Total ...................................... $ 2,805 $32,195
======= =======
Less amount representing interest ............... (1,284)
-------
Present value of minimum lease payments .... $ 1,521
=======
</TABLE>
Rental expense for operating leases was approximately $11,776,000,
$5,060,000 and $3,839,000 for the years ended December 31, 1998, 1997
and 1996, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with its majority
stockholder for a five-year term renewable annually.
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.
10. RETIREMENT PLAN
The Company has a defined contribution retirement plan which covers
substantially all full-time employees and is qualified under Section
401(k) of the Internal Revenue Code. Under the plan, employees may
voluntarily contribute a percentage of their compensation to the plan
and the Company may make discretionary contributions. The Company's
contributions to the plan for the years ended December 31, 1998, 1997
and 1996 were $0, $135,000 and $100,000, respectively.
F-17
<PAGE> 57
Effective April 30, 1998, the Company terminated the Health Benefit
Plan for Shelter Components Corporation and eligible employees were
offered enrollment in Kevco Inc.'s health and welfare benefits
effective May 1, 1998. Any remaining benefits were paid by November
30, 1998.
In July 1998, the Company announced its intent to merge the assets and
liabilities of the Shelter Components Savings Incentive Plan with and
into the Kevco, Inc. 401(k) Profit Sharing Plan on or about September
1, 1998. The Shelter Components Savings Incentive Plan was terminated
in October 1998.
11. 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. Lease
payments for the facilities and equipment were approximately $576,000
for the year ended 1998 and $672,000 for each of the years ended 1997
and 1996. Debt related to the capital leases was approximately
$1,299,000 and $1,398,000 at December 31, 1998 and 1997, respectively.
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.
12. STOCK-BASED COMPENSATION PLANS
The Company sponsors the Kevco, Inc. 1995 Stock Option Plan and the
Kevco, Inc. 1996 Stock Option Plan (the "Plans"), which are stock-based
incentive compensation plans. The Company applies APB Opinion 25 and
related standards in accounting for the Plans.
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 1998, 1997 and 1996, the Company granted only
nonqualified stock options under the Plans.
NONQUALIFIED STOCK OPTIONS
The Plans provide that the exercise price of any stock option will be
determined by the board of directors on the date of grant. The stock
options granted 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 1998, 1997 and 1996.
F-18
<PAGE> 58
A summary of the status of the Company's stock options as of December
31, 1998, 1997 and 1996, and the changes during the year ended on those
dates is presented below:
<TABLE>
<CAPTION>
NONQUALIFIED STOCK OPTIONS
----------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- -----------------------
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
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year .................. 421,472 $ 10.76 415,196 $ 10.58 47,854 $ 5.64
Granted ............................ 15,000 $ 19.17 24,500 $ 13.62 393,450 $ 11.17
Exercised .......................... (25,020) $ 11.18 (14,464) $ 10.49 -- N/A
Forfeited .......................... (17,050) $ 14.30 (3,760) $ 11.17 (26,108) $ 10.42
Expired ............................ -- N/A -- N/A -- N/A
Outstanding at end of year ......... 394,402 $ 10.90 421,472 $ 10.76 415,196 $ 10.58
Exercisable at end of year ......... 374,802 $ 10.62 405,072 $ 10.65 415,196 $ 10.58
Weighted-average fair value of
options granted during the year .... -- $ 13.29 -- $ 8.06 -- $ 1.84
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the minimum value method of option pricing with the
following weighted-average assumptions for grants in 1998, 1997 and
1996, respectively: dividend yield of zero percent for all years;
risk-free interest rates are different for each grant and range from
4.65% to 6.19%; the expected lives of 6.3 and 9.5 years, respectively,
for the options under the Plans; and expected volatility of
approximately 56.0% and 48.0% for options granted in 1998 and 1997,
respectively. In determining the "minimum value," FASB Statement of
Financial Standards No. 123, "Accounting for Stock-Based Compensation,"
("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 because the Company was not publicly-traded when the
options were granted.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------- -----------------------
Range Weighted Weighted Weighted
Of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 5.64 42,532 6.0 $ 5.64 42,532 $ 5.64
$ 11.17 321,470 3.9 $ 11.17 321,470 $ 11.17
$ 13.50 25,400 8.0 $ 13.63 10,800 $ 13.77
to
$ 13.88
$ 24.50 5,000 9.3 $ 24.50 -- --
-------- ---------
394,402 4.5 $ 10.90 374,802 $ 10.62
======== =========
</TABLE>
F-19
<PAGE> 59
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 1998, 1997 and 1996 would approximate the
pro forma amounts below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C> <C>
Net income ....................... As reported $1,867 $6,288 $8,932
Pro forma 1,793 6,237 8,491
Earnings per share - basic ....... As reported $ 0.27 $ 0.92 $ 1.64
Pro forma 0.26 0.92 1.56
Earnings per share - diluted ..... As reported $ 0.27 $ 0.90 $ 1.61
Pro forma 0.26 0.90 1.54
</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.
13. SEGMENT REPORTING
In June 1997, the FASB issued Statement of Financial Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which the Company has adopted in the current year.
The Company identifies such segments based upon management
responsibility within the United States. The Company operates in three
business segments: Distribution, Manufacturing and Wood Products. The
Distribution segment primarily distributes plumbing products, building
products, electrical components and hardware supplies to the
manufactured housing and recreational vehicle industries; the
Manufacturing segment primarily manufactures and distributes
thermoformed products, laminated wallboard products and plastic
injection molded products primarily to the manufactured housing and
recreational vehicle industries; and the Wood Products segment
primarily manufactures roof trusses and lumber cut to customer
specifications for use in manufactured homes. As a result of the
Company's acquisition strategy, which has impacted all three segments,
year-to-year comparisons may not be indicative of future results.
F-20
<PAGE> 60
The Company measures segment performance based upon revenue and
operating income results. The information in the Corporate/Other
category consists primarily of intercompany eliminations of
Manufacturing sales to Distribution and corporate operating expenses,
and is utilized to reconcile to the consolidated results. Amounts are
presented in thousands for each respective year.
<TABLE>
<CAPTION>
Total
Distribution Manufacturing Wood Products Corporate/Other Company
------------ ------------- ------------- --------------- --------
<S> <C> <C> <C> <C> <C>
1998
Net Sales ....... $604,497 $140,930 $169,869 $(17,846)(a) $897,450
Operating
Income ........ $ 28,449 $ 9,177 $ 5,388 $(19,449)(b) $ 23,565
1997
Net Sales ....... $248,396 $ 7,518 $134,819 $ (71)(a) $390,662
Operating
Income ........ $ 16,709 $ 310 $ 6,631 $ (8,041)(b) $ 15,609
1996
Net Sales ....... $205,812 -- $ 58,398 -- $264,210
Operating
Income ........ $ 16,119 -- $ 6,743 $ (6,397)(b) $ 16,465
</TABLE>
(a) Consists primarily of intercompany eliminations of Manufacturing sales to
Distribution.
(b) Consists primarily of corporate operating expenses.
F-21
<PAGE> 61
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: April 13, 1999 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 APRIL 13, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Jerry E. Kimmel Chairman of the Board, Chief Executive Offer,
- ----------------------------------- President and Director (Principal Executive
JERRY E. KIMMEL Officer)
/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/ Richard Nevins Director
- -----------------------------------
RICHARD NEVINS
</TABLE>
<PAGE> 62
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
<S> <C>
2.10 Letter, dated February 15, 1999, to Kevco, Inc. from Wingate Partners
II, L.P.(13)
2.11 Letter, dated February 15, 1999, to Jerry E. Kimmel from Wingate
Partners II, L.P.(13)
10.69 Second Amendment to Credit Agreement, dated as of October 27, 1998 (but
effective as of September 30, 1998), entered into and among Kevco,
Inc., a Texas corporation, the banks listed on the signature pages
(collectively, the "Lenders"), and NationsBank, N.A. (successor by
merger to NationsBank of Texas, N.A.), as the Administrative Agent.(13)
10.70 Waiver entered into as of the 30th day of December 1998, by and among
the banks listed on the signature pages (the "Lenders"), Kevco, Inc., a
Texas corporation (the "Borrower"), and NationsBank, N.A. (successor by
merger to NationsBank of Texas, N.A.), as Administrative Agent for the
Lenders to the extent and in the manner provided for in the Credit
Agreement.(13)
10.71 Second Waiver entered into as of the 15th day of February, 1999, by and
among the banks listed on the signature pages (the "Lenders"), Kevco,
Inc.,a Texas corporation (the "Borrower"), and NationsBank, N.A.
(successor by merger to NationsBank of Texas, N.A.), as Administrative
Agent for the Lenders to the extent and in the manner provided for in
the Credit Agreement. (13)
10.72 Third Amendment and Waiver entered into as of the 25th day of February,
1999, by and among the banks listed on the signature pages (the
"Lenders"), Kevco, Inc., a Texas corporation, and NationsBank, N.A.
(successor by merger to NationsBank of Texas, N.A.), as Administrative
Agent for the Lenders to the extent and in the manner provided for in
the Credit Agreement.(13)
10.73 Letter agreement waiver extension, dated March 22, 1999, between
Kevco, Inc., NationsBank, N.A., as Administrative Agent and Lender,
and the other parties thereto.(13)
21.1 Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 2.10
February 15, 1999
Mr. Jerry E. Kimmel
6400 Cleburne Highway
Granbury, Texas 76107
Dear Mr. Kimmel:
Reference is made to the Stock Purchase Agreement (the "Agreement"), dated
as of December 23, 1998, between you, Wingate Partners II, L.P. ("Wingate") and
Kevco, Inc. (the "Company"). Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to them in the Agreement.
As of the date hereof the Closing has not occurred and the conditions to
the obligations of Wingate set forth in Article IX of the Agreement have not
been fulfilled. In accordance with Section 13.1(b) of the Agreement, Wingate
hereby terminates the Agreement and the transactions contemplated thereby.
Very Truly Yours,
WINGATE PARTNERS II, L.P.
By: Wingate Management Company II, L.P.
its general partner
By: Wingate Management Limited, L.L.C.
its general partner
By: /s/ JAMES JOHNSON
--------------------------------------
James Johnson
Principal
<PAGE> 1
EXHIBIT 2.11
February 15, 1999
Kevco, Inc.
1300 South University
Suite 200
Fort Worth, Texas 76107
Attention: Jerry E. Kimmel
Dear Mr. Kimmel:
Reference is made to the Stock Purchase Agreement (the "Agreement"), dated
as of December 23, 1998, between Kevco, Inc. (the "Company") and Wingate
Partners II, L.P. ("Wingate"). Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to them in the Agreement.
As of the date hereof the Closing has not occurred and the conditions to
the obligations of Wingate set forth in Article VIII of the Agreement have not
been fulfilled. In accordance with Section 12.1(b) of the Agreement, Wingate
hereby terminates the Agreement and the transactions contemplated thereby.
Very Truly Yours,
WINGATE PARTNERS II, L.P.
By: Wingate Management Company II, L.P.
its general partner
By: Wingate Management Limited, L.L.C.
its general partner
By: /s/ JAMES JOHNSON
-------------------------------------
James Johnson
Principal
<PAGE> 1
EXHIBIT 10.69
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment"),
dated as of October 27, 1998 (but effective as of September 30, 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, N.A. (successor by merger to NationsBank of Texas, N.A.), as the
Administrative Agent (in said capacity, the "Administrative Agent").
A. The Borrower, the Lenders and the Administrative Agent are parties
to that certain Second Amended and Restated Credit Agreement, dated as of
December 1, 1997, as amended by that certain First Amendment to Credit
Agreement, dated as of February 12, 1998 (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
(i) amend the Credit Agreement and (ii) waive an Event of Default under 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 "Applicable Base Rate Margin" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read as follows:
"'Applicable Base Rate Margin'" means the following per annum
percentages, applicable in the following situations:
<TABLE>
<CAPTION>
Facility A Term
Loan Advances Facility B
and Revolving Term Loan
Applicability Advances Advances
------------- -------- --------
<S> <C> <C>
(a) The Leverage Ratio is greater than or equal to 1.500 2.000
5.00 to 1
(b) The Leverage Ratio is greater than or equal to 1.250 1.750
4.50 to 1 but less than 5.00 to 1
(c) The Leverage Ratio is greater than or equal to 1.000 1.500
3.75 to 1 but less than 4.50 to 1
than 4.50 to 1
(d) The Leverage Ratio is less than 3.75 to 1 0. 750 1.250
</TABLE>
<PAGE> 2
The Applicable Base Rate-Margin payable by the Borrower on the Base Rate
Advances outstanding hereunder shall be adjusted on each Adjustment Date as
tested by using the Leverage Ratio for the most recent four fiscal quarters. If
the financial statements required pursuant to Section 6.1 or 6.2 hereof, as
applicable, and the related Compliance Certificate are not received by the
Administrative Agent by the date required, the Applicable Base Rate Margin
shall be determined as if the Leverage Ratio is greater than or equal to 5.00
to 1 until such time as such financial statements and Compliance Certificate
are received. Notwithstanding the foregoing, the Applicable Base Rate Margin
from and after the Agreement Date until and including two Business Days
following the date of receipt of the financial statements for the fiscal
quarter ending June 30, 1998 and related Compliance Certificate shall be
determined as if the Leverage Ratio is greater than or equal to 5.00 to 1."
(b) The definition of "Applicable LIBOR Rate Margin" set forth in
Section 1.1 of the Credit Agreement is hereby amended to read as follows:
"'Applicable LIBOR Rate Margin'" means the following per
annum percentages, applicable in the following situations:
<TABLE>
<CAPTION>
Facility A Term
Loan Advances Facility B
and Revolving Term Loan
Applicability Advances Advances
------------- -------- --------
<S> <C> <C>
(a) The Leverage Ratio is greater than or equal 3.000 3.500
to 5.00 to 1
(b) The Leverage Ratio is greater than or equal 2.750 3.250
to 4.50 to 1 but less than 5.00 to 1
(c) The Leverage Ratio is greater than or equal 2.500 3.000
to 3.75 to 1 but less than 4.50 to 1
(d) The Leverage Ratio is greater than or equal 2.250 2.750
to 3.00 to 1 but less than 3.75 to 1
(e) The Leverage Ratio is less than 3.00 to 1 2.000 2.500
</TABLE>
The Applicable LIBOR Rate Margin payable by the Borrower on the LIBOR Advances
outstanding hereunder shall be adjusted on each Adjustment Date as tested by
using the Leverage Ratio for the most recent four fiscal quarters. If the
financial statements required pursuant to Section 6.1 or 6.2 hereof, as
applicable, and the related Compliance Certificate are not received by the
Administrative Agent by the date required, the Applicable LIBOR
-2-
<PAGE> 3
Rate Margin shall be determined as if the Leverage Ratio is greater than or
equal to 5.00 to 1 until such time as such financial statements and Compliance
Certificate are received. Notwithstanding the foregoing, the Applicable LIBOR
Rate Margin from and after the Agreement Date until and including two Business
Days following the date of receipt of the audited financial statements for the
fiscal quarter ending June 30, 1998 and the related Compliance Certificates
shall be determined as if the Leverage Ratio is greater than or equal to 5.00
to 1."
(c) Article 6 of the Credit Agreement is hereby amended by adding a
new Section 6.7 thereto to read as follows:
"Section 6.7 Monthly Financial Statements and Information.
Within 30 days after the end of each month, a consolidated balance
sheet of the Borrower and its Subsidiaries as at the end of such month
and the related consolidated statement of income for such month and
for the elapsed portion of the year ended with the last day of such
month; all of which shall be certified by the president or chief
financial officer or other officer of the Borrower acceptable to the
Administrative Agent, to be, in his or her opinion acting solely in
his or her capacity as an officer of the Borrower, complete and
correct in all material respects and to present fairly, in accordance
with GAAP, the financial position and results of operations of the
Borrower and its Subsidiaries as at the end of and for such month, and
for the elapsed portion of the year ended with the last day of such
month, subject only to normal year-end adjustments."
2. WAIVER. The Lenders hereby waive the Event of Default that occurred
under the Credit Agreement as a result of the failure of the Borrower to comply
with Section 7.10(a) of the Credit Agreement at the fiscal quarter ending
September 30, 1998. The waiver provided herein does not (a) affect any other
covenant or provision of the Credit Agreement and (b) relate to any fiscal
quarter-end other than September 30, 1998.
3. 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 and the waiver contemplated by the foregoing Section 2.
(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;
(c) the Borrower has full power and authority to execute and deliver
this Second Amendment, and this Second Amendment and the Credit Agreement, as
amended hereby, constitute the legal, valid and binding obligations of the
Borrower, enforceable against the Borrower in
-3-
<PAGE> 4
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 (including the
Board of Directors of the Borrower), is required for the execution, delivery or
performance by the Borrower of this Second Amendment or the acknowledgment of
this Second Amendment by any Subsidiary that executed a Subsidiary Guaranty.
4. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall be
effective as of September 30, 1998, subject to the following:
(a) the Administrative Agent shall have received a counterpart of this
Second Amendment executed by Lenders comprising the Determining Lenders;
(b) the Administrative Agent shall have received counterparts of this
Second Amendment executed by the Borrower and acknowledged by each Subsidiary
that executed a Subsidiary Guaranty;
(c) the representations and warranties set forth in Section 3 of this
Second Amendment shall be true and correct; and
(d) 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.
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 Second Amendment, (ii) acknowledges and agrees that its obligations in
respect of its Subsidiary Guaranty are not released, diminished, waived,
modified, impaired or affected in any manner by this Second Amendment or any of
the provisions contemplated herein, (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 Second 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 Second Amendment.
-4-
<PAGE> 5
(b) The Credit Agreement, as amended by this Second 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 Second Amendment, 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 Second Amendment).
8. EXECUTION IN COUNTERPARTS. This Second 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.
9. GOVERNING LAW; BINDING EFFECT. This Second 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.
10. HEADINGS. Section headings in this Second Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Second Amendment for any other purpose.
11. ENTIRE AGREEMENT. THE CREDIT AGREEMENT, AS AMENDED BY THIS SECOND
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
===============================================================================
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the date first above written.
BORROWER: KEVCO, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
ADMINISTRATIVE AGENT: NATIONSBANK, N.A. as the Administrative Agent
By: /s/ SUZANNE B. SMITH
------------------------------------------
Name: Suzanne B. Smith
-------------------------------------
Title: Vice President
------------------------------------
LENDERS: NATIONSBANK, N.A., as a Lender
By: /s/ SUZANNE B. SMITH
------------------------------------------
Name: Suzanne B. Smith
-------------------------------------
Title: Vice President
------------------------------------
NATIONAL CITY BANK KENTUCKY
By: /s/ TOM GURBACH
------------------------------------------
Name: TOM GURBACH
-------------------------------------
Title: VICE PRESIDENT
------------------------------------
-6-
<PAGE> 7
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 D. CAGLE
------------------------------------------
Name: Dana D. Cagle
-------------------------------------
Title: Vice President
------------------------------------
PILGRIM AMERICA PRIME RATE TRUST
By: Pilgrim America Investments, Inc.
as its Investment Manager
By: /s/ MICHEL PRINCE
------------------------------------------
Name: MICHEL PRINCE, CFA
-------------------------------------
Title: VICE PRESIDENT
------------------------------------
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as Collateral
Manager
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
-7-
<PAGE> 8
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 C A P I T A L MANAGEMENT
CORPORATION, General Partner of Alliance
Capital Management, L.P.
By: /s/ JOEL SEREBRANSKY
------------------------------------------
Name: Joel Serebransky
-------------------------------------
Title: Vice President
------------------------------------
MERRILL LYNCH DEBT STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By: /s/ R. DOUGLAS HENDERSON
------------------------------------------
Name: R. DOUGLAS HENDERSON
-------------------------------------
Title: AUTHORIZED SIGNATORY
------------------------------------
Merrill Lynch Debt Global Investment Series:
INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By: /s/ R. DOUGLAS HENDERSON
------------------------------------------
Name: R. DOUGLAS HENDERSON
-------------------------------------
Title: AUTHORIZED SIGNATORY
------------------------------------
-8-
<PAGE> 9
BANK ONE, TEXAS, N.A.
By: /s/ J. MICHAEL WILSON
------------------------------------------
Name: J. Michael Wilson
-------------------------------------
Title: Vice President
------------------------------------
PAM Capital Funding LP
By: Highland Capital Management, L.P., as
Collateral Manager
By:
------------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
ACKNOWLEDGED AND AGREED:
KEVCO MANAGEMENT, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
KEVCO HOLDING, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
-9-
<PAGE> 10
KEVCO GP, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
KEVCO COMPONENTS, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
DCM DELAWARE, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
KEVCO MANUFACTURING, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
-10-
<PAGE> 11
KEVCO DISTRIBUTION, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
-11-
<PAGE> 1
EXHIBIT 10.70
WAIVER
THIS WAIVER (this "Waiver") is entered into as of the 30th day of
December, 1998, by and among the banks listed on the signature pages hereof (the
"Lenders"), KEVCO, INC., a Texas corporation (the "Borrower"), and NATIONSBANK,
N.A. (successor by merger to NationsBank of Texas, N.A.), as Administrative
Agent for the Lenders (the "Administrative Agent") to the extent and in the
manner provided for in the Credit Agreement (defined below and herein so
called).
BACKGROUND
A. The Lenders, the Borrower, and the Administrative Agent are parties
to that certain Second Amended and Restated Credit Agreement dated as of
December 1, 1997, as amended by that certain First Amendment to Credit
Agreement, dated as of February 12, 1998, and that certain Second Amendment to
Credit Agreement, dated as of October 27, 1998 (but effective as of September
30, 1998) (said Credit Agreement, as amended, the "Credit Agreement"; terms
defined in the Credit Agreement and not otherwise defined herein shall be used
herein as defined in the Credit Agreement).
B. The Borrower has requested a waiver of a potential Event of Default
under 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 parties
hereto covenant and agree as follows:
1. WAIVER. Subject to (a) the satisfaction of the conditions of
effectiveness set forth in Section 4 of this Waiver and (b) termination of this
Waiver set forth in Section 2 of this Waiver, the Lenders hereby waive any Event
of Default with respect to Sections 7.10 and 7.11 of the Credit Agreement which
may occur as a result of the failure of the Borrower to comply with said
Sections for the fiscal quarter ending December 31, 1998. The waiver provided
herein does not affect any other covenant or provision of the Credit Agreement.
2. TERMINATION. This Waiver shall automatically terminate and be of no
further force or effect without action by any Person on the earlier to occur of
(a) February 15, 1999 or (b) an amendment to the Credit Agreement, the effect of
which is to cause the Borrower to be in compliance with Sections 7.10 and 7.11
of the Credit Agreement.
3. 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 waiver set forth in the foregoing
Section 1:
<PAGE> 2
(a) the representations and warranties contained in the Credit
Agreement are true and correct on and as of the date hereof as made on and as of
such date; and
(b) no event has occurred and is continuing which constitutes a Default
or an Event of Default.
4. CONDITIONS OF EFFECTIVENESS. This Waiver shall be effective as of
December 30, 1998, subject to the following:
(a) the Administrative Agent shall have received counterparts of this
Waiver executed by the Borrower and the Determining Lenders; and
(b) the Administrative Agent shall have received, in form and substance
satisfactory to the Administrative Agent and its counsel, such other documents,
certificates and instruments as the Administrative Agent shall require.
5. 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 Waiver and the other
instruments and documents to be delivered hereunder.
6. EXECUTION IN COUNTERPARTS. This Waiver may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
7. GOVERNING LAW: BINDING EFFECT. This Waiver shall be governed by and
construed in accordance with the laws of the State of Texas and shall be binding
upon the Borrower, the Administrative Agent, each Lender and their respective
successors and assigns.
8. HEADINGS. Section headings in this Waiver are included herein for
convenience of reference only and shall not constitute a part of this Waiver for
any other purpose.
================================================================================
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
================================================================================
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Waiver as the
date first above written.
KEVCO, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
------------------------------------
Title: CFO
-----------------------------------
NATIONSBANK, N.A., as Administrative Agent and
as a Lender
By: /s/ SUSAN B. SMITH
------------------------------------------
Name: Susan B. Smith
------------------------------------
Title: Vice President
-----------------------------------
NATIONAL CITY BANK KENTUCKY
By: /s/ TOM GRUBACH
------------------------------------------
Name: Tom Grubach
------------------------------------
Title: Vice President
-----------------------------------
GUARANTY FEDERAL BANK, F.S.B.
By: /s/ JOSEPH PETET
------------------------------------------
Name: Joseph N. Petet
------------------------------------
Title: Senior Vice President
-----------------------------------
-3-
<PAGE> 4
WELLS FARGO BANK, N.A.
By:
------------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
PILGRIM PRIME RATE TRUST
By: /s/ MICHEL PRINCE
-----------------------------------------
Name: Michel Prince, CFA
-----------------------------------
Title: Vice President
----------------------------------
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as Collateral
Manager
By: /s/ MICHAEL J. CAMPBELL
-----------------------------------------
Name: Michael J. Campbell
-----------------------------------
Title: Senior Vice President and
Portfolio Manager
----------------------------------
-4-
<PAGE> 5
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:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
MERRILL LYNCH DEBT STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By:
-------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
Merrill Lynch Debt Global Investment Series:
INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By:
-------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-5-
<PAGE> 6
BANK ONE, TEXAS, N.A.
By: /s/ J. MICHAEL WILSON
-------------------------------------------
Name: J. Michael Wilson
--------------------------------------
Title: Vice President
-------------------------------------
PAM Capital Funding LP
By: Highland Capital Management, L.P., as
Collateral Manager
By: /s/ MARK K. OKADA
-------------------------------------------
Name: Mark K. Okada, CFA
--------------------------------------
Title: Executive Vice President
-------------------------------------
ACKNOWLEDGED AND AGREED:
KEVCO MANAGEMENT, INC.
By: /s/ ELLIS L. McKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
KEVCO HOLDING, INC.
By: /s/ ELLIS L. McKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
-6-
<PAGE> 7
KEVCO GP, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
KEVCO COMPONENTS, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
DCM DELAWARE, INC.
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
KEVCO MANUFACTURING, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
KEVCO DISTRIBUTION, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ ELLIS L. MCKINLEY, JR.
------------------------------------------
Name: Ellis L. McKinley, Jr.
-------------------------------------
Title: CFO
------------------------------------
-7-
<PAGE> 1
EXHIBIT 10.71
SECOND WAIVER
THIS SECOND WAIVER (this "Second Waiver") is entered into as of the
15th day of February, 1999, by and among the banks listed on the signature pages
hereof (the "Lenders"), KEVCO, INC., a Texas corporation (the "Borrower"), and
NATIONSBANK, N.A. (successor by merger to NationsBank of Texas, N.A.), as
Administrative Agent for the Lenders (the "Administrative Agent") to the extent
and in the manner provided for in the Credit Agreement (defined below and herein
so called).
BACKGROUND
(a) The Lenders, the Borrower, and the Administrative Agent
are parties to that certain Second Amended and Restated Credit
Agreement dated as of December 1, 1997, as amended by that certain
First Amendment to Credit Agreement, dated as of February 12, 1998, and
that certain Second Amendment to Credit Agreement, dated as of October
27, 1998 (but effective as of September 30, 1998) (said Credit
Agreement, as amended, the "Credit Agreement"; terms defined in the
Credit Agreement and not otherwise defined herein shall be used herein
as defined in the Credit Agreement).
(b) The Lenders (other than Wells Fargo Bank, N.A.), the
Borrower and the Administrative Agent entered into a Waiver, dated
December 30, 1998 (the "First Waiver"), waiving any Event of Default
with respect to Sections 7.10 and 7.11 of the Credit Agreement which
may have occurred as a result of the failure of the Borrower to comply
with said Sections for the fiscal quarter ending December 31, 1998 (the
"Existing Events of Default").
(c) The First Waiver will expire by its terms on February 15,
1999, whereupon the Lenders will have the option to exercise all rights
and remedies that they have under the Credit Agreement with respect to
the Existing Events of Default, including but not limited to, refusing
to make any additional Advances under the Credit Agreement.
(d) The Borrower has requested an extension of the waiver with
respect to the Existing Events of Default, thereby allowing the
Borrower to obtain additional Advances under the Credit Agreement which
would not otherwise be permitted under the terms of the Credit
Agreement and the First Waiver.
(e) As an accommodation to the Borrower in order to permit the
Borrower to obtain additional Advances under the Credit Agreement, the
Lenders, but conditioned upon the Borrower's compliance with the terms
and conditions set forth herein, hereby agree to extend the termination
of the waiver with respect to the Existing Events of Default as
provided herein.
<PAGE> 2
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 parties
hereto covenant and agree as follows:
1. SECOND WAIVER. Subject to the satisfaction of the conditions of
effectiveness set forth in Section 8 of this Second Waiver and the other
conditions contained herein, the Lenders hereby waive the Existing Events of
Default.
2. TERMINATION. This Second Waiver shall automatically terminate and be
of no further force or effect on the earlier to occur of (a) February 25, 1999
or (b) breach of or default by the Borrower under any agreement or covenant
contained in this Second Waiver (the "Waiver Termination"). The Waiver
Termination shall be automatic and will take place without any action by the
Administrative Agent or any Lender.
3. NO WAIVER. This Second Waiver shall not be and shall not be deemed
to be a waiver of any Defaults or Events of Default under the Credit Agreement
other than the Existing Events of Default.
4. COOPERATION BY BORROWER. The Borrower shall fully cooperate with all
reasonable requests made by the Administrative Agent or any Lender with respect
to (a) the granting and perfection of security interests in Collateral and (b)
information regarding all books, records and assets of the Borrower and its
Subsidiaries and will permit and cooperate with any collateral audit undertaken
by or on behalf of the Lenders, with all such costs to be borne by the Borrower.
5. ACKNOWLEDGMENT OF THE BORROWER. The Borrower acknowledges and agrees
that the Lenders executing this Second Waiver have done so in their sole
discretion and without any obligation. The Borrower further acknowledges and
agrees that any action taken or not taken by the Lenders or the Administrative
Agent prior to, on or after the date hereof shall not (a) create any obligation
of the Lenders after termination of this Waiver, (b) constitute a waiver or
modification of any term, covenant or provision of any Loan Document other than
with respect to the Existing Events of Default or (c) prejudice any rights or
remedies other than with respect to the Existing Events of Default which the
Administrative Agent or any Lender now has or may have in the future under any
Loan Document, Applicable Law or otherwise, all of which rights and remedies are
expressly reserved by the Administrative Agent and the Lenders.
6. RELEASE.
(a) The Borrower and each Guarantor hereby unconditionally and
irrevocably remises, acquits, and fully and forever releases and
discharges the Administrative Agent and the Lenders and all respective
affiliates and subsidiaries of the Administrative Agent and the
Lenders, their respective officers, servants, employees, agents,
attorneys, principals, directors and shareholders, and their respective
heirs, legal representatives, successors and assigns (collectively, the
"Released Lender Parties") from any and all
<PAGE> 3
claims, demands, causes of action, obligations, remedies, suits,
damages and liabilities (collectively, the "Borrower Claims") of any
nature whatsoever, whether now known, suspected or claimed, whether
arising under common law, in equity or under statute, which the
Borrower or any Guarantor ever had or now has against the Released
Lender Parties which may have arisen at any time on or prior to the
date of this Second Waiver and which were in any manner related to any
of the Loan Documents or the enforcement or attempted enforcement by
the Administrative Agent or the Lenders of rights, remedies or
recourses related thereto.
(b) The Borrower and each Guarantor covenants and agrees never
to commence, voluntarily aid in any way, prosecute or cause to be
commenced or prosecuted against any of the Released Lender Parties any
action or other proceeding based upon any of the Borrower Claims which
may have arisen at any time on or prior to the date of this Second
Waiver and were in any manner related to any of the Loan Documents.
(c) The agreements of the Borrower and each Guarantor set
forth in this Section 6 shall survive termination of this Second
Waiver.
7. 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 Second Waiver set forth in
the foregoing Section 1:
(a) the representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct on and as
of the date hereof as made on and as of such date; and
(b) no event has occurred and is continuing which constitutes
a Default or an Event of Default.
8. CONDITIONS OF EFFECTIVENESS. This Second Waiver shall be effective
(and the obligation of the Lenders to make future Advances under the Credit
Agreement) as of February 15, 1999, subject to the following:
(a) the Administrative Agent shall have received counterparts
of this Second Waiver executed by the Borrower and the Determining
Lenders;
(b) the representations and warranties set forth in Section 7
shall be true and correct;
(c) all actions required by the Lenders or the Administrative
Agent to complete the taking and perfection of Liens in the Collateral
the Borrower has agreed to provide to the Lenders shall be taken and
completed, including without limitation recordation of appropriate
deeds and mortgages in the title records; and
<PAGE> 4
(d) the Administrative Agent shall have received, in form and
substance satisfactory to the Administrative Agent and its counsel,
such other documents, certificates and instruments as the
Administrative Agent shall require.
9. 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 Second Waiver and the
other instruments and documents to be delivered hereunder.
10. EXECUTION IN COUNTERPARTS. This Second Waiver may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each which when so executed and delivered shall be deemed to be an
original and all of which taken together shall constitute but one and the same
instrument.
11. GOVERNING LAW: BINDING EFFECT. This Second Waiver shall be governed
by and construed in accordance with the laws of the State of Texas and shall be
binding upon the Borrower, the Administrative Agent, each Lender and their
respective successors and assigns.
12. HEADINGS. Section headings in this Second Waiver are included
herein for convenience of reference only and shall not constitute a part of this
Second Waiver for any other purpose.
================================================================================
REMAINDER OF PAGE LEFT INTENTIONALLY BLANK
================================================================================
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Second Waiver
as the date first above written.
KEVCO, INC.
By: /s/ Jerry E. Kimmel
---------------------------------------------
Name: Jerry E. Kimmel
----------------------------------
Title: Chairman, President, CEO
---------------------------------
NATIONSBANK, N.A., as Administrative Agent and
as a Lender
By: /s/ William E. Livingstone, IV
---------------------------------------------
Name: William E. Livingstone, IV
----------------------------------
Title: Senior Vice President
---------------------------------
NATIONAL CITY BANK KENTUCKY
By:
---------------------------------------------
Name:
----------------------------------
Title:
---------------------------------
GUARANTY FEDERAL BANK, F.S.B.
By: /s/ Robert S. Hays
---------------------------------------------
Name: Robert S. Hays
----------------------------------
Title: Vice President
---------------------------------
<PAGE> 6
WELLS FARGO BANK, N.A.
By: /s/ Dana D. Cagle
---------------------------------------------
Name: Dana D. Cagle
----------------------------------
Title: Vice President
---------------------------------
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc., as its
Investment Manager
By: /s/ Michel Prince, CFA
---------------------------------------------
Name: Michel Prince, CFA
----------------------------------
Title: Vice President
---------------------------------
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as
Collateral Manager
By: /s/ Michael J. Campbell
---------------------------------------------
Name: Michael J. Campbell
----------------------------------
Title: Senior 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
-------------------------
<PAGE> 7
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By. Merrill Lynch Asset Management, L.P., as
Investment Advisor
By: /s/ Paul Travers
---------------------------------------------
Name: Paul Travers
-----------------------------------
Title: Authorized Signatory
----------------------------------
Merrill Lynch Debt Global Investment Series:
INCOME STRATEGIES PORTFOLIO
By. Merrill Lynch Asset Management, L.P., as
Investment Advisor
By: /s/ Paul Travers
---------------------------------------------
Name: Paul Travers
-----------------------------------
Title: Authorized Signatory
----------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ Bradley C. Peters
---------------------------------------------
Name: Bradley C. Peters
-----------------------------------
Title: Vice President
----------------------------------
PAM Capital Funding LP
By: Highland Capital Management, L.P., as
Collateral Manager
By: /s/ James Dondero, CFA, CPA
---------------------------------------------
Name: James Dondero, CFA, CPA
-----------------------------------
Title: President, Highland Capital
----------------------------------
Management L.P.
----------------------------------
<PAGE> 8
ACKNOWLEDGED AND AGREED:
KEVCO MANAGEMENT, INC.
By: /s/ Jerry E. Kimmel
------------------------------------------
Name: Jerry E. Kimmel
-------------------------------
Title: Chairman, President & CEO
------------------------------
KEVCO HOLDING, INC.
By: /s/ Jerry E. Kimmel
------------------------------------------
Name: Jerry E. Kimmel
-------------------------------
Title: Chairman, President & CEO
------------------------------
KEVCO GP, INC.
By: /s/ Jerry E. Kimmel
------------------------------------------
Name: Jerry E. Kimmel
-------------------------------
Title: Chairman, President & CEO
------------------------------
KEVCO COMPONENTS, INC.
By: /s/ Jerry E. Kimmel
------------------------------------------
Name: Jerry E. Kimmel
-------------------------------
Title: Chairman, President & CEO
------------------------------
<PAGE> 9
DCM DELAWARE, INC.
By: /s/ Jerry E. Kimmel
------------------------------------------
Name: Jerry E. Kimmel
-------------------------------
Title: Chairman, President & CEO
------------------------------
KEVCO MANUFACTURING, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ Jerry E. Kimmel
------------------------------------------
Name: Jerry E. Kimmel
-------------------------------
Title: Chairman, President & CEO
------------------------------
KEVCO DISTRIBUTION, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ Jerry E. Kimmel
------------------------------------------
Name: Jerry E. Kimmel
-------------------------------
Title: Chairman, President & CEO
------------------------------
<PAGE> 1
EXHIBIT 10.72
THIRD AMENDMENT AND WAIVER
THIS THIRD AMENDMENT AND WAIVER (this "Amendment") is entered into as
of the 25th day of February, 1999, by and among the banks listed on the
signature pages hereof (the "Lenders"), KEVCO, INC., a Texas corporation (the
"Borrower"), and NATIONSBANK, N.A. (successor by merger to NationsBank of Texas,
N.A.), as Administrative Agent for the Lenders (the "Administrative Agent"), to
the extent and in the manner provided for in the Credit Agreement (defined below
and herein so called).
BACKGROUND
(a) The Lenders, the Borrower, and the Administrative Agent
are parties to that certain Second Amended and Restated Credit
Agreement dated as of December 1, 1997 (as amended through the date
hereof and as further amended, extended, renewed, or restated from time
to time, the "Credit Agreement"; terms defined in the Credit Agreement
and not otherwise defined herein shall be used herein as defined in the
Credit Agreement).
(b) The Determining Lenders, the Borrower and the Administrative
Agent entered into a Waiver, dated December 30, 1998 (the "First
Waiver"), waiving any Event of Default with respect to Sections 7.10
and 7.11 of the Credit Agreement which may have occurred as a result of
the failure of the Borrower to comply with said Sections for the fiscal
quarter ending December 31, 1998 (the "Existing Events of Default").
(c) The Determining Lenders, the Borrower and the Administrative
Agent entered into a Second Waiver, dated February 15, 1999 (the
"Second Waiver"), extending the termination of the First Waiver from
February 15, 1999, to February 25, 1999.
(d) The Second Waiver will expire by its terms on February 25,
1999, whereupon the Lenders will have the option to exercise all rights
and remedies that they have under the Credit Agreement with respect to
the Existing Events of Default, including but not limited to, refusing
to make any additional Advances under the Credit Agreement.
(e) The Borrower has requested an extension of the waiver with
respect to the Existing Events of Default, thereby allowing the
Borrower to obtain additional Advances under the Credit Agreement which
would not otherwise be permitted under the terms of the Credit
Agreement and the Second Waiver.
(f) As an accommodation to the Borrower in order to permit the
Borrower to obtain additional Advances under the Credit Agreement, the
Lenders, but conditioned upon the Borrower's compliance with the terms
and conditions set forth herein, hereby agree to extend the termination
of the waiver with respect to the Existing Events of Default as
provided herein.
<PAGE> 2
(g) Additionally, the Borrower, Administrative Agent, and the
Lenders desire to amend the Credit Agreement to provide for, among
other things, an additional short-term credit facility, which will be
made available to the Borrower upon satisfaction of certain conditions
set forth herein.
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 parties
hereto covenant and agree as follows:
1. WAIVER. Subject to the satisfaction of the conditions of
effectiveness set forth in Section 11 of this Amendment and the other conditions
contained herein, the Lenders hereby waive the Existing Events of Default.
2. TERMINATION. The waiver provided in Section 1 of this Amendment
shall automatically terminate and be of no further force or effect on the
earlier to occur of (a) March 31, 1999, or (b) breach of or default by the
Borrower under any agreement or covenant contained in this Amendment (the
"Waiver Termination"). The Waiver Termination shall be automatic and will take
place without any action by the Administrative Agent or any Lender.
3. NO WAIVER. The waiver provided in Section 1 of this Amendment shall
not be and shall not be deemed to be a waiver of any Defaults or Events of
Default under the Credit Agreement other than the Existing Events of Default.
4. AMENDMENTS TO THE CREDIT AGREEMENT. The Credit Agreement is hereby
amended as follows:
(a) Section 1.1 is amended by adding or entirely amending the
following terms:
"Applicable Specified Percentages" means the Revolving Credit
Specified Percentage, the Liquidity Specified Percentage, the Facility
A Term Loan Specified Percentage, the Facility B Term Loan Specified
Percentage, or the Total Specified Percentage, as applicable in the
context used.
"Commitments" means, collectively, the Revolving Credit
Commitment, the Liquidity Commitment, the Facility A Term Loan
Commitment and the Facility B Term Loan Commitment.
"Incremental Commitment" means that portion of the Liquidity
Commitment not available to be borrowed until the Liquidity Commitment
Step-Up Date (subject to Section 3.4 hereof), which Incremental
Commitment is equal to $5,000,000.00.
"Liquidity Advance" means an Advance made pursuant to Section
2.1(e) hereof.
-2-
<PAGE> 3
"Liquidity Commitment Step-Up Date" means the later of (a) March
22, 1999, or (b) five Business Days after Borrower delivers to Lenders
a comprehensive business plan prepared in consultation with
PricewaterhouseCoopers.
"Liquidity Commitment" means $10,000,000.00, as reduced or
terminated pursuant to the Loan Documents, provided that, for all
purposes under the Loan Documents, such amount shall be reduced by the
Incremental Commitment until the Liquidity Commitment Step-Up Date (or
until the Liquidity Commitment Maturity Date if the conditions set
forth in Section 3.4 hereof are not satisfied).
"Liquidity Commitment Maturity Date" means March 31, 1999, or
the earlier date of termination in whole of the Liquidity Commitment
pursuant to the Loan Documents.
"Liquidity Note" means the Promissory Note of Borrower
evidencing Liquidity Advances hereunder, substantially in the form of
Exhibit P hereto, together with any extension, renewal, or amendment
thereof, or substitution therefor.
"Liquidity Specified Percentage" means, as to any Lender, the
same percentage as such Lender's Revolving Credit Specified Percentage,
as such percentage may be adjusted or specified in any amendment to
this Agreement or in any Assignment Agreement.
"Notes" means, collectively, the Revolving Credit Notes, the
Liquidity Notes, the Facility A Term Loan Notes and the Facility B Term
Loan Notes.
"Specified Percentage" means, as applicable or as the context
requires, the Revolving Credit Specified Percentage, the Liquidity
Specified Percentage, the Facility A Term Loan Specified Percentage or
the Facility B Term Loan Specified Percentage.
"Total Specified Percentage" means, for any Lender on any date
of determination (and expressed as a percentage), (a) the sum of (i)
the principal amount outstanding under such Lender's Facility A Term
Loan Advances and Facility B Term Loan Advances, (ii) such Lender's
portion of the Liquidity Commitment, or if the Liquidity Commitment has
been terminated, such Lender's portion of the principal amount
outstanding under all Liquidity Advances (according to its Liquidity
Specified Percentage), and (iii) such Lender's portion of the Revolving
Credit Commitment, or if the Revolving Credit Commitment has been
terminated, such Lender's portion of the principal amount outstanding
under all Revolving Credit Advances (according to its Revolving Credit
Specified Percentage), divided by (b) the sum of (i) the principal
amount outstanding under all Facility A Term Loan Advances and all
Facility B Term Loan Advances, (ii) the Revolving Credit Commitment, or
if the Revolving Credit Commitment has been terminated, the
-3-
<PAGE> 4
principal amount outstanding under all Revolving Credit Advances, and
(iii) the Liquidity Commitment, or if the Liquidity Commitment has
been terminated, the principal amount outstanding under all Liquidity
Advances.
(b) The definition of "Applicable Base Rate Margin" in Section 1.1 is
amended by amending the second column heading in the table found in such
definition so that such heading reads,"Facility A Term Loan Advances,
Liquidity Advances, and Revolving Advances."
(c) The definition of "Eligible Assignee" is amended by (i) adding the
text, "or a Liquidity Specified Percentage," immediately following the
text, "Revolving Credit Specified Percentage," found therein, and (ii)
adding the text, "or Liquidity Advances, as the case may be," immediately
following the text, "Revolving Credit Advances," found therein.
(d) Section 2.1(d) is amended by deleting the text, "Any Advance,"
found therein and replacing such text with the following:
"Except for Liquidity Advances, which shall always be Base Rate
Advances, any Advance"
(e) A new Section 2.1(e) is added immediately following Section 2.1(d),
as follows:
(e) Liquidity Advances. Each Lender severally agrees, upon the
terms and subject to the conditions of this Agreement, to make
Liquidity Advances to the Borrower from time to time in an aggregate
amount not to exceed its Liquidity Specified Percentage for the
purposes set forth in Section 5.9 hereof. Subject to Section 2.9
hereof, Liquidity Advances may be repaid and then reborrowed.
Notwithstanding any provision in any Loan Document to the contrary, in
no event shall a Liquidity Advance be made unless a Revolving Credit
Advance cannot be made due to the limitations set forth in
Section 2.1(a), and in no event shall the principal amount of all
outstanding Liquidity Advances exceed the Liquidity Commitment.
(f) Section 2.2(a) is amended by adding the text, "Liquidity Advance,"
immediately following the text, "Revolving Credit Advance," found therein.
(g) Section 2.2(e) is amended by adding the text, "Liquidity Specified
Percentage," immediately following the text, "Revolving Credit Specified
Percentage," found therein.
(h) Section 2.3(a)(ii) and Section 2.3(d) are each amended by adding
the text, "Liquidity Commitment Maturity Date," immediately following the
text, "Revolving Commitment Maturity Date," found therein.
-4-
<PAGE> 5
(i) Section 2.5(c), Section 2.5(e), and Section 2.5(f) are each amended
by adding the following text immediately preceding the text, "Revolving
Credit Advances," found therein:
"Liquidity Advances and to permanently reduce the Liquidity
Commitment by the amount of such prepayment, and if there are no
Liquidity Advances outstanding, any such prepayment shall be applied to
repay outstanding"
(j) A new Section 2.8(d) is added immediately following Section 2.8(c),
as follows:
(d) Liquidity Advances. To the extent not otherwise required to be
paid earlier as provided herein, the principal amount of the Liquidity
Advances shall be due and payable on the Liquidity Commitment Maturity
Date.
(k) Section 2.10(d)(i) is amended by entirely amending clauses (4) and
(5) therein and adding new clauses (6) and (7) immediately following clause
(5), as follows:
(4) fourth, to pay interest then due and payable on the Liquidity
Advances, to be applied in accordance with the Liquidity
Specified Percentages.
(5) fifth, to pay principal then due and payable on the Liquidity
Advances, to be applied in accordance with the Liquidity
Specified Percentages.
(6) sixth, to pay interest then due and payable on the remaining
Advances, to be applied in accordance with the Applicable
Specified Percentages.
(7) seventh, to pay principal then due and payable on the
remaining Advances, to be applied in accordance with the
Applicable Specified Percentages.
(l) Section 2.10(d)(ii) is amended by entirely amending clauses(4) and
(5) therein and adding new clauses (6) and (7) immediately following clause
(5), as follows:
(4) fourth, to pay interest then due and payable on the Liquidity
Advances, to be applied in accordance with the Liquidity
Specified Percentages.
(5) fifth, to pay principal then due and payable on the Liquidity
Advances, to be applied in accordance with the Liquidity
Specified Percentages.
-5-
<PAGE> 6
(6) sixth, to pay interest then due and payable on the remaining
Advances, to be applied pro rata among the Lenders according
to each Lender's pro rata portion of the remaining
Obligations.
(7) seventh, to pay principal then due and payable on the
remaining Advances, to be applied pro rata among the Lenders
according to each Lender's pro rata portion of the remaining
Obligations.
(m) A new Section 3.4 is added immediately following Section 3.3, as
follows:
Section 3.4 Conditions Precedent to Availability of the Incremental
Commitment. In addition to the conditions precedent set forth in
Section 3.2, no Lender shall be obligated to fund any portion of the
Incremental Commitment unless and until (a) any combination of Lenders
whose Total Specified Percentages aggregate at least 75% have approved
such funding, and (b) the Liquidity Commitment Step-Up Date shall have
occurred, and in no event shall any Lender be obligated to fund any
portion of the Incremental Commitment if a Material Adverse Effect
shall have occurred since February 22, 1999.
(n) Section 11.11 is amended by entirely amending clause (a)(i)
therein, as follows:
(i) increase any Specified Percentage or commitment of any Lender
(except increases effected as a result of the availability of the
Incremental Commitment upon satisfaction of the conditions set forth in
Section 3.4 hereof), or
(o) Section 11.11 is further amended by adding the text, "Liquidity
Specified Percentage," immediately following the text, "Revolving Credit
Percentage," found therein.
(p) Exhibit F is amended and restated in the form of, and all
references in the Credit Agreement to Exhibit F are hereby deemed to be
references to, the attached Exhibit F.
(q) A new Exhibit P is added in the form of, and all references in the
Credit Agreement to Exhibit P are hereby deemed to be references to, the
attached Exhibit P.
5. AMENDMENT FEES.
(a) The Borrower shall pay to the Administrative Agent an amendment fee
for the account of each Lender, pro rata according to the sum of such
Lender's Revolving Credit Commitment, Liquidity Commitment (excluding the
Incremental Commitment) and the total outstanding principal amount of all
Term Loan Advances owed to such Lender (the "Phase I Credit Exposure") as
of the date of this Amendment, which fee shall equal 0.25% of the Phase I
Credit Exposure (the "Phase I Fee"). The Phase I Fee shall be earned and
payable as of the date of this Amendment.
-6-
<PAGE> 7
(b) The Borrower shall pay to the Administrative Agent an amendment fee
for the account of each Lender, pro rata according to the sum of such
Lender's Revolving Credit Commitment, Liquidity Commitment (including the
Incremental Commitment) and the total outstanding principal amount of all
Term Loan Advances owed to such Lender (the "Phase II Credit Exposure") as
of the date of this Amendment, which fee shall equal 0.25% of the Phase II
Credit Exposure (the "Phase II Fee"). The Phase II Fee shall be earned and
payable as of the date of this Amendment, but payment shall be deferred
until March 31, 1999. The Phase II Fee shall be waived if (i) either (A)
before March 31, 1999, Borrower shall have received equity contributions of
at least $18,000,000, which are available to be used by the Borrower for
general working capital purposes, or (B) the conditions set forth in
Section 3.4 of the Credit Agreement are not satisfied, or (C) on or before
the Liquidity Commitment Step-Up Date, the Borrower shall have notified the
Administrative Agent that it desires to cancel the Incremental Commitment,
or (ii) before March 31, 1999, the terms and conditions of the Loan
Documents and the Obligations thereunder have been restructured to the
satisfaction of the Lenders.
6. COOPERATION BY BORROWER. The Borrower shall fully cooperate with all
reasonable requests made by the Administrative Agent or any Lender with respect
to (a) the granting and perfection of security interests in Collateral and (b)
information regarding all books, records and assets of the Borrower and its
Subsidiaries and will permit and cooperate with any collateral audit undertaken
by or on behalf of the Lenders, with all such costs to be borne by the Borrower.
7. ACKNOWLEDGMENT OF THE BORROWER. The Borrower acknowledges and agrees
that the Lenders executing this Amendment have done so in their sole discretion
and without any obligation. The Borrower further acknowledges and agrees that
any action taken or not taken by the Lenders or the Administrative Agent prior
to, on or after the date hereof shall not constitute a waiver or modification of
any term, covenant or provision of any Loan Document other than with respect to
the Existing Events of Default or prejudice any rights or remedies other than
with respect to the Existing Events of Default which the Administrative Agent or
any Lender now has or may have in the future under any Loan Document, Applicable
Law or otherwise, all of which rights and remedies are expressly reserved by the
Administrative Agent and the Lenders.
8. SUBSIDIARIES ACKNOWLEDGMENT. By signing below, each of the Subsidiaries
which has executed a Subsidiary Guaranty (a) consents and agrees to this
Amendment's execution and delivery, (b) ratifies and confirms its obligations
under its Subsidiary Guaranty, (c) acknowledges and agrees that its obligations
under its Subsidiary Guaranty are not released, diminished, impaired, reduced,
or otherwise adversely affected by this Amendment, and (d) acknowledges and
agrees that it has no claims or offsets against, or defenses or counterclaims
to, its Subsidiary Guaranty.
9. RELEASE.
(a) The Borrower and each Guarantor hereby unconditionally and
irrevocably remises, acquits, and fully and forever releases and discharges
the Administrative Agent and the Lenders and all respective affiliates and
subsidiaries of the Administrative Agent and
-7-
<PAGE> 8
the Lenders, their respective officers, servants, employees, agents,
attorneys, principals, directors and shareholders, and their respective
heirs, legal representatives, successors and assigns (collectively, the
"Released Lender Parties") from any and all claims, demands, causes of
action, obligations, remedies, suits, damages and liabilities
(collectively, the "Borrower Claims") of any nature whatsoever, whether now
known, suspected or claimed, whether arising under common law, in equity or
under statute, which the Borrower or any Guarantor ever had or now has
against the Released Lender Parties which may have arisen at any time on or
prior to the date of this Amendment and which were in any manner related to
any of the Loan Documents or the enforcement or attempted enforcement by
the Administrative Agent or the Lenders of rights, remedies or recourses
related thereto.
(b) The Borrower and each Guarantor covenants and agrees never to
commence, voluntarily aid in any way, prosecute or cause to be commenced or
prosecuted against any of the Released Lender Parties any action or other
proceeding based upon any of the Borrower Claims which may have arisen at
any time on or prior to the date of this Amendment and were in any manner
related to any of the Loan Documents.
(c) The agreements of the Borrower and each Guarantor set forth in this
Section 9 shall survive termination of this Amendment and the other Loan
Documents.
10. REPRESENTATIONS AND WARRANTIES TRUE, NO EVENT OF DEFAULT. By its
execution and delivery hereof, the Borrower represents and warrants to the
Lenders that, as of the date hereof and after giving effect to the waiver set
forth in Section 1 of this Amendment:
(a) the representations and warranties contained in the Credit
Agreement and the other Loan Documents are true and correct on and as of
the date hereof as made on and as of such date;
(b) no event has occurred and is continuing which constitutes a Default
or an Event of Default; and
(c) the Borrower has (i) initiated a review and assessment of all areas
within its business and operations that could be adversely affected by the
"Year 2000 Problem" (that is, the risk that computer applications used by
the Borrower (or its suppliers and vendors) may be unable to recognize and
perform properly date-sensitive functions involving certain dates prior to
and any date after December 31, 1999), (ii) developed a plan and a timeline
for addressing the Year 2000 Problem on a timely basis, and (iii) to date,
implemented that plan in accordance with that timetable. The Borrower
reasonably believes that all of its computer applications that, based upon
successful implementation of the plan and timeline, are material to its
business and operations will on a timely basis be able to perform properly
date-sensitive functions for all dates before and after January 1, 2000
(that is, be "Year 2000 compliant"), except to the extent that a failure to
do so could not reasonably be expected to have a Material Adverse Effect on
Borrower's business or operations.
-8-
<PAGE> 9
11. CONDITIONS OF EFFECTIVENESS. This Amendment shall not be effective
until all corporate actions of Borrower taken in connection herewith and the
transactions contemplated hereby shall be satisfactory in form and substance to
Administrative Agent and Lenders, and each of the following conditions precedent
shall have been satisfied:
(a) All out-of-pocket fees and expenses in connection with the Loan
Documents, including this Amendment, including legal and other professional
fees and expenses incurred on or prior to the date of this Amendment by
Administrative Agent or any Lender, including, without limitation, the fees
and expenses of Winstead Sechrest & Minick P.C and Arthur Andersen L.L.P.,
shall have been paid.
(b) Administrative Agent and each Lender shall have received each of
the following, in form and substance satisfactory to Administrative Agent,
Lenders and Administrative Agent's counsel:
(i) a certificate of the Borrower certifying (i) as to the accuracy
in all material respects, after giving effect to this Amendment, of the
representations and warranties set forth in the Credit Agreement, the
other Loan Documents and in this Amendment, and (ii) that there exists
no Default or Event of Default, after giving effect to this Amendment,
and the execution, delivery and performance of this Amendment will not
cause a Default or Event of Default;
(ii) fully executed Liquidity Notes;
(iii) certified copies of resolutions of the boards of directors of
the Borrower and each Subsidiary authorizing the transactions
contemplated by this Amendment; and
(iv) such other documents, certificates and instruments as the
Administrative Agent shall require.
(c) The Borrower shall have deposited a retainer of $100,000 with each
of Winstead Sechrest & Minick P.C. and Arthur Andersen L.L.P., to cover
their prospective fees and expenses.
12. CONDITION SUBSEQUENT. As a condition subsequent to the waiver provided
in Section 1 of this Amendment, the events described on Schedule 1 attached
hereto shall have occurred on or before the dates indicated on such Schedule,
and the Borrower's failure to cause such events to occur on or before such dates
shall constitute an Event of Default.
13. REFERENCE TO CREDIT AGREEMENT. Upon the effectiveness of this
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 Amendment.
-9-
<PAGE> 10
14. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
which when so executed and delivered shall be deemed to be an original and all
of which taken together shall constitute but one and the same instrument.
15. GOVERNING LAW: BINDING EFFECT. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and shall be binding
upon the Borrower, the Administrative Agent, each Lender and their respective
successors and assigns.
16. HEADINGS. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK.]
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
the date first above written.
KEVCO, INC.
By: /s/ JERRY E. KIMMEL
-----------------------------------------------
Name: Jerry E. Kimmel
------------------------------------------
Title: Chairman of the Board and President
-----------------------------------------
NATIONSBANK, N.A., as Administrative Agent and
as a Lender
By: /s/ WILLIAM E. LIVINGSTONE, IV
-----------------------------------------------
Name: William E. Livingstone, IV
------------------------------------------
Title: Senior Vice President
-----------------------------------------
NATIONAL CITY BANK KENTUCKY
By: /s/ JERROL Z. MILES
-----------------------------------------------
Name: Jerrol Z. Miles
------------------------------------------
Title: Senior Vice President
-----------------------------------------
GUARANTY FEDERAL BANK, F.S.B.
By: /s/ ROBERT S. HAYS
-----------------------------------------------
Name: Robert S. Hays
------------------------------------------
Title: Vice President
-----------------------------------------
<PAGE> 12
WELLS FARGO BANK, N.A.
By: /s/ ROGER FRUENDT
------------------------------------------------
Name: Roger Fruendt
-------------------------------------------
Title: Vice President
------------------------------------------
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc., as its Investment
Manager
By: /s/ MICHEL PRINCE
-----------------------------------------------
Name: Michel Prince, CFA
------------------------------------------
Title: Vice President
-----------------------------------------
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as Collateral
Manager
By: /s/ MICHAEL J. CAMPBELL
Name: Michael J. Campbell
Title: Senior 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
------------------------------------------
<PAGE> 13
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By: /s/ ANDREW C. LIGGIO
------------------------------------------------
Name: Andrew C. Liggio
-------------------------------------------
Title: Authorized Signatory
------------------------------------------
Merrill Lynch Debt Global Investment Series:
INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By: /s/ ANDREW C. LIGGIO
------------------------------------------------
Name: Andrew C. Liggio
-------------------------------------------
Title: Authorized Signatory
------------------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ BRADLEY C. PETERS
------------------------------------------------
Name: Bradley C. Peters
-------------------------------------------
Title: Vice President
------------------------------------------
PAM CAPITAL FUNDING LP
By: Highland Capital Management, L.P., as
Collateral Manager
By: /s/ JAMES DONDERO
------------------------------------------------
Name: James Dondero, CFA, CPA
-------------------------------------------
Title: President
------------------------------------------
<PAGE> 14
ACKNOWLEDGED AND AGREED:
KEVCO MANAGEMENT, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------------------
Name: Jerry E. Kimmel
---------------------------------------------
Title: Chairman of the Board and President
--------------------------------------------
KEVCO HOLDING, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------------------
Name: Jerry E. Kimmel
---------------------------------------------
Title: Chairman of the Board and President
--------------------------------------------
KEVCO GP, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------------------
Name: Jerry E. Kimmel
---------------------------------------------
Title: Chairman of the Board and President
--------------------------------------------
KEVCO COMPONENTS, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------------------
Name: Jerry E. Kimmel
---------------------------------------------
Title: Chairman of the Board and President
--------------------------------------------
DCM DELAWARE, INC.
By: /s/ JERRY E. KIMMEL
---------------------------------------------------
Name: Jerry E. Kimmel
---------------------------------------------
Title: Chairman of the Board and President
--------------------------------------------
<PAGE> 15
KEVCO MANUFACTURING, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ JERRY E. KIMMEL
---------------------------------------------------
Name: Jerry E. Kimmel
---------------------------------------------
Title: Chairman of the Board and President
--------------------------------------------
KEVCO DISTRIBUTION, L.P.
By: KEVCO GP, INC., its General Partner
By: /s/ JERRY E. KIMMEL
---------------------------------------------------
Name: Jerry E. Kimmel
---------------------------------------------
Title: Chairman of the Board and President
--------------------------------------------
<PAGE> 16
SCHEDULE 1
CONDITIONS SUBSEQUENT
1. On or before March 5, 1999, the Borrower shall deliver to the Lenders a
certificate, in form and substance satisfactory to the Lenders,
certifying as to (a) the jurisdictions in which the Borrower or any
Subsidiary conducts business, (b) the addresses of all locations where
the Borrower or any Subsidiary maintains any Collateral, and (c) the
addresses of all real property owned or leased by the Borrower or any
Subsidiary.
2. On or before March 8, 1999, the Borrower shall cause a first priority
perfected security interest in any aircraft owned, now or in the
future, by the Borrower or any Subsidiary to be granted to
Administrative Agent, for the benefit of the Lenders.
<PAGE> 17
EXHIBIT F
ASSIGNMENT AND ACCEPTANCE
Dated ____________, _____
Reference is made to the Credit Agreement dated as of ____________,
1997 (the "Credit Agreement") among Kevco, Inc., a Texas corporation
("Borrower"), NationsBank, N.A. as Administrative Agent ("Administrative
Agent"), and the lenders parties thereto. Terms defined in the Credit Agreement
are used herein with the same meaning.
__________________ ("Assignor") and __________________ ("Assignee")
agree as follows:
1. Subject to the terms and conditions of this Assignment and
Acceptance, Assignor hereby sells and assigns to Assignee, and Assignee hereby
purchases and assumes from Assignor, the following:
a. $___________ in aggregate amount of the Revolving Credit
Commitment in effect on the Effective Date (as defined below), and the
related pro rata share in the principal amount of Revolving Credit
Advances outstanding on the Effective Date, the Revolving Credit Note
held by Assignor, and Assignor's participation in any Letters of Credit
and Reimbursement Obligations outstanding on the Effective Date;
b. $___________ in aggregate amount of the Liquidity
Commitment in effect on the Effective Date (as defined below), and the
related pro rata share in the principal amount of Liquidity Advances
outstanding on the Effective Date and the Liquidity Note held by
Assignor;
c. $___________ in aggregate principal amount of the Facility
A Term Loan Advances outstanding on the Effective Date and the related
pro rata share in the Facility A Term Loan Note held by Assignor; and
d. $___________ in aggregate principal amount of the Facility
B Term Loan Advances outstanding on the Effective Date and the related
pro rata share in the Facility B Term Loan Note held by Assignor.
2. Assignor (a) represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim; (b) makes no representation or
warranty and assumes no responsibility with respect to (i) any statements,
warranties, or representations made in or in connection with the Credit
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency, or value of the Credit Agreement or any other instrument or
document furnished pursuant thereto or (ii) the financial condition of the
Borrower or the performance or observance by the Borrower of any of its
obligations under the Credit Agreement or any other instrument or document
furnished pursuant
<PAGE> 18
thereto; and (c) attaches the Promissory Notes referred to in Paragraph 1 above
to exchange such Promissory Notes for new Promissory Notes as provided in
Section 11.6(f) of the Credit Agreement.
3. Assignee (a) confirms that it has received a copy of the Credit
Agreement and the other Loan Documents, together with copies of the financial
statements referred to in Sections 4.1(j), 6.1 and 6.2 of the Credit Agreement
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into this Assignment and
Acceptance; (b) agrees that it will, independently and without reliance upon the
Administrative Agent, Assignor, or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under the Credit Agreement
and the other Loan Documents; (c) appoints and authorizes the Administrative
Agent to take such action as agent on its behalf and to exercise such powers
under the Credit Agreement, the other Loan Documents, and this Assignment and
Acceptance as are delegated to the Administrative Agent by the terms thereof and
hereof, together with such powers as are reasonably incidental thereto and
hereto; (d) agrees that it will perform in accordance with its terms all of the
obligations which by the terms of the Credit Agreement, the other Loan
Documents, and this Assignment and Acceptance are required to be performed by it
as a Lender; and (e) specifies the addresses set forth in Schedule I attached
hereto as its address for the receipt of notices and as its initial LIBOR Lender
Office, respectively[; and (f) attaches the forms prescribed by the IRS
certifying as to Assignee's status for purposes of determining exemption from
United States withholding taxes with respect to all payments to be made to
Assignee under the Credit Agreement, the other Loan Documents, and this
Assignment and Acceptance].
4. The effective date for this Assignment and Acceptance shall be
_____________, _____ (the "Effective Date").
5. Upon such acceptance as of the Effective Date and upon the
remittance of a $3,500 processing fee to the Administrative Agent, (a) Assignee
shall be a party to the Credit Agreement and, to the extent provided in this
Assignment and Acceptance, have the rights and obligations of a Lender
thereunder and (b) Assignor shall, to the extent provided in this Assignment and
Acceptance, relinquish its rights and be released from its obligations under the
Credit Agreement.
6. This Assignment and Acceptance shall be governed by and construed in
accordance with the laws of the State of Texas. Without excluding any other
jurisdiction, Assignee agrees that the courts of Texas will have jurisdiction
over proceedings in connection herewith.
7. After giving effect to this Assignment and Acceptance (and all other
assignments by the Assignor to be effective as of the Effective Date):
a. Assignee's Revolving Credit Specified Percentage shall be _____%.
b. Assignee's Liquidity Specified Percentage shall be _____%.
c. Assignee's Facility A Term Loan Specified Percentage shall be
_____%.
d. Assignee's Facility B Term Loan Specified Percentage shall be
_____%.
<PAGE> 19
e. Assignee's Total Specified Percentage shall be _____%.
f. Assignor's Revolving Credit Specified Percentage shall be _____%.
g. Assignor's Liquidity Specified Percentage shall be _____%.
h. Assignor's Facility A Term Loan Specified Percentage shall be
_____%.
i. Assignor's Facility B Term Loan Specified Percentage shall be
_____%.
j. Assignor's Total Specified Percentage shall be _____%.
8. This Assignment and Acceptance may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same instrument.
[NAME OF ASSIGNOR]
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
[NAME OF ASSIGNEE]
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
Accepted this __ day of ___________, _____
NATIONSBANK, N.A.,
as Administrative Agent
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
KEVCO, INC.
By:
------------------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE> 20
Schedule I
ASSIGNEE'S ADDRESS
1. Address for the Advances and Receipt of Notices
2. Initial LIBOR Lending Office
<PAGE> 21
EXHIBIT P
LIQUIDITY NOTE
Dallas, Texas $___________ February 25, 1999
KEVCO, INC., a Texas corporation (the "Borrower"), for value received,
promises to pay to the order of __________________ ("Lender"), or its registered
assigns, at the principal office of NationsBank, N.A., in lawful money of the
United States of America, the principal sum of $__________, or such lesser sum
as shall be due and payable from time to time hereunder, as hereinafter
provided. All terms used but not defined herein shall have the meanings set
forth in the Credit Agreement described below.
Principal of and interest on the unpaid principal balance of Liquidity
Advances under this Liquidity Note (this "Note") from time to time outstanding
shall be due and payable as set forth in the Credit Agreement.
This Note is issued pursuant to and evidences Liquidity Advances under
a Credit Agreement, dated as of December 1, 1997, among the Borrower,
NationsBank, N.A., as Administrative Agent, and the lenders parties thereto (as
amended, restated, supplemented, renewed, extended or otherwise modified from
time to time, "Credit Agreement"), to which reference is made for a statement of
the rights and obligations of the Lender and the duties and obligations of the
Borrower in relation thereto; but neither this reference to the Credit Agreement
nor any provision thereof shall affect or impair the absolute and unconditional
obligation of the Borrower to pay the principal sum of and interest on this Note
when due.
Except as provided in the Credit Agreement, the Borrower and all
endorsers, sureties and guarantors of this Note hereby severally wive demand,
presentment for payment, protest, notice of protest, notice of acceleration,
notice of intention to accelerate the maturity of this Note, and all other
notices of any kind, diligence in collecting, the bringing of any suit against
any party and any notice of or defense on account of any extensions, renewals,
partial payments or changes in any manner of or in this Note or in any of its
terms, provisions and covenants, or any releases or substitutions of any
security, or any delay, indulgence or other act of any trustee or any holder
hereof, whether before or after maturity.
THIS NOTE AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS; PROVIDED, HOWEVER, THAT IT
IS AGREED THAT THE PROVISIONS OF CHAPTER 346 OF THE TEXAS FINANCE CODE, AS
AMENDED, SHALL NOT APPLY TO THE ADVANCES, THIS NOTE AND THE OTHER LOAN
DOCUMENTS. THE BORROWER AGREES THAT THE STATE AND FEDERAL COURTS OF TEXAS
LOCATED IN DALLAS, TEXAS, SHALL HAVE THE EXCLUSIVE JURISDICTION OVER THE
PROCEEDINGS IN CONNECTION WITH THIS NOTE AND THE OTHER LOAN DOCUMENTS.
<PAGE> 22
THIS NOTE, TOGETHER WITH THE OTHER LOAN DOCUMENTS, REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
KEVCO, INC.
By:
--------------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE> 1
EXHIBIT 10.73
March 22, 1999
TO THE ADMINISTRATIVE AGENT AND THE LENDERS DESCRIBED BELOW:
Re: Kevco, Inc. (the "Borrower")
Ladies and Gentlemen:
Reference is made to that certain Second Amended and Restated Credit
Agreement (as amended through the date hereof and as further amended, renewed,
or restated from time to time, the "Credit Agreement") dated as of December 1,
1997, by and among certain lending institutions from time to time party thereto
(the "Lenders"), the Borrower, and NationsBank, N.A., as Administrative Agent
for the Lenders (the "Administrative Agent"). Terms defined in the Credit
Agreement and not otherwise defined herein shall be used herein as defined in
the Credit Agreement.
In connection with the Credit Agreement, the Borrower, the Lenders, and
the Administrative Agent have entered into the Third Amendment and Waiver
(the "Amendment") dated as of February 25, 1999, pursuant to which the Lenders
have made the Liquidity Commitment available to the Borrower. The amount of the
Liquidity Commitment is currently $5,000,000, and the Borrower hereby requests
the Lenders to make the additional $5,000,000 Incremental Commitment available.
Pursuant to the Amendment, no funding of the Incremental Commitment shall be
made unless a combination of Lenders whose Total Specified Percentages aggregate
at least 75% shall have approved such funding.
Additionally, the Liquidity Commitment Maturity Date, as set forth in the
Amendment, is March 31, 1999. The Borrower hereby requests the Lenders to extend
the Liquidity Commitment Maturity Date to April 15, 1999.
Finally, the Amendment provides for a fee (the "Phase II Fee") to be paid to
the Lenders on March 31, 1999, which fee "shall be waived if (i) either (A)
before March 31, 1999, Borrower shall have received equity contributions of at
least $18,000,000, which are available to be used by the Borrower for general
working capital purposes, or (B) the conditions set forth in Section 3.4 of the
Credit Agreement are not satisfied, or (C) on or before the Liquidity Commitment
Step-Up Date, the Borrower shall have notified the Administrative Agent that it
desires to cancel the Incremental Commitment, or (ii) before March 31, 1999, the
terms and conditions of the Loan Documents and the Obligations thereunder have
been restructured to the satisfaction of the Lenders." The Borrower hereby
requests the Lenders to extend to April 15, 1999 (1) the date the Phase II Fee
is to be paid,
<PAGE> 2
and (2) the deadline for satisfying the conditions to waiver of the Phase II Fee
(the "Waiver Deadline").
By executing in the space provided below, you hereby (a) agree, subject to
the provisions of the Credit Agreement, to fund your pro rata portion of the
Incremental Commitment upon the request of Borrower, (b) consent to the
extension of the Liquidity Commitment Maturity Date to April 15, 1999, (c)
consent to the extension of the Phase II Fee payment date to April 15, 1999, and
(d) consent to the extension of the Waiver Deadline to April 15, 1999. Please
make 16 copies of your signature page, sign all copies, send one signed page via
fax to Ira Einsohn at (214) 745-5390, and send all original signature pages to
Ira via priority overnight courier.
This letter agreement 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 taken
together shall constitute but one and the same instrument.
Very truly yours,
KEVCO, INC., as the Borrower
By:
---------------------------------------------
Name:
----------------------------------
Title:
---------------------------------
AGREED TO this 22nd day of March, 1999.
NATIONSBANK, N.A. as Administrative
Agent and as a Lender
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
NATIONAL CITY BANK KENTUCKY
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
<PAGE> 3
GUARANTY FEDERAL BANK, F.S.B.
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
WELLS FARGO BANK, N.A.
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
PILGRIM PRIME RATE TRUST
By: Pilgrim Investments, Inc., as its
Investment Manager
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc., as
Collateral Manager
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
<PAGE> 4
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:
----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
MERRILL LYNCH DEBT STRATEGIES
PORTFOLIO
By: Merrill Lynch Asset Management, L.P., as
Investment Advisor
By:
----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Merrill Lynch Debt Global Investment Series:
INCOME STRATEGIES PORTFOLIO
By: Merrill Lynch Asset Management,
L.P., as Investment Advisor
By:
----------------------------------------
Name:
----------------------------------
Title:
---------------------------------
<PAGE> 5
BANK ONE, TEXAS, N.A.
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
PAM CAPITAL FUNDING LP
By: Highland Capital Management, L.P.,
as Collateral Manager
By:
---------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES
Kevco Management, Inc.,
a Delaware corporation
Kevco Holding, Inc.,
a Delaware corporation
Kevco GP, Inc.,
a Delaware corporation
DCM Delaware, Inc.,
a Delaware corporation
Kevco Components, Inc.,
a Delaware corporation
Kevco Manufacturing, L.P.,
a Delaware limited partnership
Kevco Distribution, L.P.,
a Delaware limited partnership
<PAGE> 1
Exhibit 23.1
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 April 12, 1999,
on our audits of the consolidated financial statements of Kevco, Inc. as of
December 31, 1998, and December 31, 1997 and for each of the three years in the
period ended December 31, 1998, which report is incorporated by reference in
this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Forth Worth, Texas
April 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF KEVCO, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
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0
0
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