<PAGE> 1
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _____To _____
Commission File Number: 000-21621
KEVCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2666013
--------------------------- ---------------------
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
University Centre I
1300 S. University Drive
Suite 200
Fort Worth, Texas 76107-5734
------------------------ --------------
(Address of principal (Zip Code)
executive offices)
(817) 885-0000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ---
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Common Stock, par value $0.01 per share 9,563,487 shares
--------------------------------------- ----------------
<S> <C>
(Class) (Outstanding as of July 25, 2000)
</TABLE>
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KEVCO, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999........................................................ 3
Consolidated Statements of Operations for the three-month and six-month
periods ended June 30, 2000 and 1999 (Unaudited)............................. 4
Consolidated Statements of Cash Flows for the three-month and six-month
periods ended June 30, 2000 and 1999 (Unaudited)............................. 5
Notes to Consolidated Financial Statements (Unaudited).......................... 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 8
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk............. 13
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders.................... 14
ITEM 6 - Exhibits and Reports on Form 8-K....................................... 14
Signatures...................................................................... 15
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS.
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,399 $ 18,098
Trade accounts receivable, less allowance for doubtful
accounts of $484 and $711 in 2000 and 1999, respectively 41,561 38,150
Inventories 62,532 67,070
Other current assets 2,555 6,486
--------- ---------
Total current assets 125,047 129,804
Property and equipment, net 43,841 43,756
Goodwill and other intangible assets, net 111,526 113,127
Other assets 5,423 5,685
--------- ---------
Total assets $ 285,837 $ 292,372
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,683 $ 5,273
Trade accounts payable 49,896 43,926
Accrued interest 1,202 1,429
Other accrued liabilities 12,001 17,424
--------- ---------
Total current liabilities 70,782 68,052
Long-term debt, less current portion 195,589 199,553
Other long-term liabilities 3,551 2,054
--------- ---------
Total liabilities 269,922 269,659
Stockholders' equity:
Preferred stock, $.01 par value; 30,000 shares authorized; no
shares issued or outstanding -- --
Common stock, $.01 par value; 100,000 shares authorized; 9,563
shares issued and outstanding 96 96
Non-voting common stock, $.01 par value; 20,000 shares authorized;
no shares issued or outstanding -- --
Additional paid-in capital 49,270 49,270
Accumulated deficit (33,451) (26,653)
--------- ---------
Total stockholders' equity 15,915 22,713
--------- ---------
Total liabilities and stockholders' equity $ 285,837 $ 292,372
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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KEVCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30,
--------- --------- --------- ---------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 166,537 $ 231,777 $ 333,652 $ 454,562
Cost of sales 144,612 203,156 290,733 398,240
--------- --------- --------- ---------
Gross profit 21,925 28,621 42,919 56,322
Commission income 1,208 1,812 2,421 3,500
--------- --------- --------- ---------
Gross margin 23,133 30,433 45,340 59,822
Selling, general and administrative expenses 19,860 25,287 41,122 51,844
--------- --------- --------- ---------
Operating income 3,273 5,146 4,218 7,978
Other income (expense) (28) 748 105 875
Interest expense 5,615 6,117 11,122 11,609
--------- --------- --------- ---------
Loss before income taxes (2,370) (223) (6,799) (2,756)
Income tax expense (benefit) -- 531 -- (786)
--------- --------- --------- ---------
Net loss $ (2,370) $ (754) $ (6,799) $ (1,970)
========= ========= ========= =========
Loss per share - basic and diluted $ (0.25) $ (0.11) $ (0.71) $ (0.29)
========= ========= ========= =========
Weighted average shares outstanding - basic and diluted 9,563 6,856 9,563 6,856
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
JUNE 30,
-----------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,799) $ (1,970)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,970 4,330
Amortization of other debt issue costs 558 1,004
Gain on sale of assets (54) (787)
Changes in assets and liabilities:
Trade receivables (6,872) (14,401)
Inventories 4,538 2,685
Other current assets 3,931 1,547
Trade accounts payable 5,970 2,108
Accrued liabilities & other long term liabilities (4,152) 1,099
-------- --------
Net cash provided by (used in) operating activities 1,090 (4,385)
Cash flows from investing activities:
Purchase of equipment (2,265) (1,722)
Proceeds from sale of assets 114 3,180
Insurance proceeds 3,461 2,538
(Increase) decrease in other assets (444) 124
-------- --------
Net cash provided by investing activities 866 4,120
Cash flows from financing activities:
Proceeds from line of credit, net -- 11,000
Payments of long-term debt (1,655) (5,322)
Payments for debt issue costs -- (657)
Exercise of stock options -- 20
-------- --------
Net cash provided by (used in) financing activities (1,655) 5,041
-------- --------
Net increase in cash and cash equivalents 301 4,776
Beginning cash and cash equivalents 18,098 799
-------- --------
Ending cash and cash equivalents $ 18,399 $ 5,575
======== ========
</TABLE>
5
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KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The Annual Report to Shareholders filed with the Securities and Exchange
Commission ("Commission") on March 30, 2000 ("Annual Report"), for Kevco, Inc.
includes a summary of significant accounting policies and should be read in
conjunction with this Form 10-Q. The accompanying consolidated financial
statements of Kevco, Inc. and its wholly owned subsidiaries ("Kevco" or the
"Company") have been prepared pursuant to the rules and regulations of the
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles ("GAAP") for
complete financial statements. All significant intercompany transactions and
accounts have been eliminated.
In the opinion of management, the consolidated financial statements contain
all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation of the balance sheet as of June 30, 2000, the
statements of operations for the three-month and six-month periods ended June
30, 2000 and 1999, and the statements of cash flows for the six-month periods
ended June 30, 2000 and 1999. The results of operations for the three and six
month periods ended June 30, 2000 are not necessarily indicative of the results
of operations that may be expected for the entire fiscal year ending December
31, 2000. Certain amounts included in the consolidated financial statements for
the three-month and six-month periods ended June 30, 1999 have been reclassified
to conform with the comparable June 30, 2000 presentation.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133),
which, as amended, is required to be adopted in years beginning after June 15,
2000. Management does not anticipate that the adoption of SFAS 133 will have a
material effect on the Company's financial position or results of operations.
2. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials $ 14,456 $ 19,312
Work in process 839 760
Finished goods 7,356 6,903
Goods held for resale 39,881 40,095
-------- --------
$ 62,532 $ 67,070
======== ========
</TABLE>
3. CREDIT AGREEMENT AMENDMENT
In May 2000, the Company and its lenders entered into a second amendment to
the third amended and restated credit agreement, which restructured certain
conditions in regard to applicable covenants to make them less restrictive. At
June 30, 2000, the Company is in compliance with the amended covenants.
Management will monitor debt covenant compliance very closely and, if necessary,
pursue additional amendments to the credit agreement or pursue refinancing
alternatives. However, there can be no assurance that the Company will be able
to maintain compliance in the future, or that it would be able to further amend
or refinance its credit facilities, if required to do so.
4. EARNINGS PER SHARE
Basic earnings per share excludes dilution, and diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue voting common stock were exercised and converted into voting
common stock. For the three-month
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and six-month periods ended June 30, 2000 and June 30 1999, options,
warrants and convertible securities are not included in the computation of
diluted loss per share as the effects would be antidilutive.
5. INCOME TAXES
As the general slowdown in the manufactured housing industry continues and
in light of the Company's near term outlook for future earnings, the Company did
not recognize any income tax benefit in the first six months of 2000. Beginning
in the last half of 1999 and continuing into 2000, the Company has provided a
valuation allowance for net deferred tax assets because it cannot be assured
that realization is more likely than not, given the losses in 1999 and 2000.
6. SEGMENT REPORTING
The Company identifies reportable segments based upon management
responsibility within the United States. The Company has identified three
reportable 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 (prior to the sale of Plastic Solutions,
Inc., in December 1999) 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.
Shepherd Products, previously included in the Manufacturing segment in
1999, has been classified with the Distribution segment effective January 1,
2000. All material transactions, including intercompany eliminations, related to
Shepherd Products have been restated for the periods ended June 30, 1999, to
conform with the June 30, 2000 segment presentation.
The Company measures segment performance based upon revenue and operating
income results. The information in the Corporate/Other category consists
primarily of corporate operating expenses and intercompany eliminations of
Manufacturing sales to Distribution, and is utilized to reconcile to the
Company's consolidated results. The decrease in Corporate/Other operating loss
of $5.0 million and $8.6 million is primarily due to non-recurring consulting
and information technology costs incurred in the three-month and six-month
periods ended June 30, 1999. Information regarding operations by segment is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Net sales:
Distribution $ 112,685 $ 152,976 $ 222,540 $ 299,299
Manufacturing 27,481 34,904 55,924 67,803
Wood Products 26,453 44,130 55,343 87,858
Corporate/Other (82) (233) (155) (398)
--------- --------- --------- ---------
$ 166,537 $ 231,777 $ 333,652 $ 454,562
========= ========= ========= =========
Operating income:
Distribution $ 3,561 $ 8,481 $ 6,697 $ 15,296
Manufacturing 1,465 1,830 2,614 3,565
Wood Products (410) 1,139 (147) 2,650
Corporate/Other (1,343) (6,304) (4,946) (13,533)
--------- --------- --------- ---------
3,273 5,146 4,218 7,978
Other income (expense) (28) 748 105 875
Interest expense 5,615 6,117 11,122 11,609
--------- --------- --------- ---------
Loss before income taxes $ (2,370) $ (223) $ (6,799) $ (2,756)
========= ========= ========= =========
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion includes the operations of the Company for each of
the periods discussed. This discussion and analysis should be read in
conjunction with the Annual Report.
The Company recognizes revenues from product sales at the time of shipment
(or the time of product receipt, in the case of direct shipments from suppliers
to customers). In some cases the Company sells on a commission basis.
Commissions are recognized when earned and represent amounts earned in selling,
warehousing and delivering products for certain manufacturers of building
products with whom the Company has distribution agreements. Commission
arrangements do not require inventory investments or receivables financing and,
therefore, are significantly less expensive to the Company than traditional
sales. To the extent the volume of items warehoused and shipped under commission
arrangements increases faster or slower than the volume of items related to
traditional sales, changes in net sales may not be representative of actual
increases or decreases in shipment volume.
The Company's sales in both the second quarter and the first half of 2000
were adversely impacted by the pronounced downturn in the manufactured housing
industry that has resulted from, among other things, an industry-wide build-up
in retail inventories that occurred during 1999. That situation has been
aggravated in 2000 by the strategic decision of a few major lenders to exit this
line of business or restrict their activity in financing purchases of
manufactured homes, especially for marginal borrowers. Combined with a higher
incidence of repossessions, the industry has faced higher relative interest
rates and very restrictive lending standards. As a result, consumer demand has
declined more than the industry had expected, leaving the overall retail
inventory position relatively unchanged. The excess retail inventory situation
combined with the tighter lending availability and diminished retail sales
contributed to an indicated 27% and 24% decline in industry-wide production of
manufactured homes during the second quarter, and first half of 2000,
respectively. Management expects this trend of lower manufacturing activity to
persist into 2001, thereby continuing to adversely impact sales trends of the
company.
The Company continues to integrate Shelter Components Corporation (acquired
December 1997) into Kevco by, among other things, consolidating certain
corporate functions, consolidating overlapping distribution warehouses and
integrating multiple computer systems into one. A key initiative this year has
been a major upgrade in the information system used to operate and link our
distribution centers, and we expect to complete implementation during the third
quarter of 2000. The integration efforts are expected to be substantially
complete over the next 12 to 18 months. Higher than normal costs will continue
to be incurred, reducing operating income during the transition period.
RESULTS OF OPERATIONS
The following table sets forth certain Consolidated Statements of Operations
data as a percentage of the Company's net sales, for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.8 87.7 87.1 87.6
------ ------ ------ ------
Gross profit 13.2 12.3 12.9 12.4
Commission income 0.7 0.8 0.7 0.8
------ ------ ------ ------
Gross margin 13.9 13.1 13.6 13.2
Selling, general & administrative expenses 11.9 10.9 12.3 11.4
------ ------ ------ ------
Operating income 2.0 2.2 1.3 1.8
Other income (expense) -- 0.3 -- 0.2
Interest expense, net 3.4 2.6 3.3 2.6
------ ------ ------ ------
Loss before income taxes (1.4)% (0.1)% (2.0)% (0.6)%
====== ====== ====== ======
</TABLE>
8
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The Company is organized into three segments; Distribution, Manufacturing
and Wood Products. However, they serve the same market and are impacted by the
same economic trends as the business taken as a whole. See note 6 to the
consolidated financial statements for segment data.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net sales decreased by $65.2 million, or 28.1%, to $166.5 million for the
three months ended June 30, 2000 from $231.8 million for the comparable 1999
period. The net sales decrease was primarily caused by the general slowdown in
the manufactured housing industry brought on by, among other things, an
excessive amount of retail inventory and various conditions affecting credit
availability for the home buyer, resulting in diminished retail demand. For the
first two months of the 2nd quarter, industry statistics indicate a 26% decline
in production over the same period in 1999, which, consequently, reduced the
demand for the Company's products. Management believes that the full second
quarter decline in production will approximate 27% or higher, as many
manufacturers initiated plant shut downs in late June and early July in response
to the softer demand, and a further effort to address the retail inventory
situation. The decline is distinctly regionalized with the highest decreases
occurring in the Southeastern parts of the country, which significantly affects
the Wood Products segment, while the North Central states have experienced the
smallest declines in production. Additionally, $15.0 million of the Company's
net sales decrease was the result of two major product lines changing to a
commission-based arrangement. Plastic Solutions accounted for $2.1 million of
net sales in the three-month period ended June 30, 1999, with no sales in the
comparable 2000 period due to the sale of this operation in December 1999.
Gross margins decreased by $7.3 million, or 24.0%, during the second quarter
of 2000, to $23.1 million, from $30.4 million for the comparable 1999 period.
This decrease was due primarily to the reduced sales levels in 2000 versus the
same period in 1999. Gross margin as a percent of sales was 13.9%, an
improvement over 1999's second quarter level of 13.1%. The improvement in gross
margin as a percent of sales has been the result of cost reduction initiatives
and focused attention by the Company's Product Management Department to isolate
and correct low margin business.
Commission income decreased by $0.6 million, or 33.3%, to $1.2 million for
the three months ended June 30, 2000, from $1.8 million for the same period in
1999. This decline is primarily the result of the same conditions that caused
the sales volume decrease.
Selling, general and administrative expenses decreased by $5.4 million, or
21.5%, to $19.9 million for the three months ended June 30, 2000, from $25.3
million for the comparable 1999 period. The decrease was due primarily to
reduced activity associated with the lower sales volume, which has resulted in a
23% headcount reduction from June 30, 1999 to June 30, 2000, and management
efforts to reduce costs and increase operating efficiency. Additionally,
significant consulting and information technology costs incurred in the second
quarter of 1999 were non-recurring in the current year. Selling, general and
administrative expenses, as a percentage of net sales, increased to 11.9% for
the three months ended June 30, 2000, from 10.9% for the comparable 1999 period.
This percentage of net sales increase is primarily attributable to fixed costs
in a declining sales market.
Other income decreased by $0.8 million from $0.7 million in 1999. Other
income in the three-month period ended June 30, 1999 is comprised primarily of
gains recognized from the sale of a distribution facility and the Shelter
Components corporate facility.
Interest expense is comparable for the quarter ended June 30, 2000, to the
same period in 1999. The Company is paying slightly higher interest rates that
are partially offset by paying interest on a lower principal amount because
working capital reductions have decreased the need for bank line of credit
facility borrowings.
For the three months ended June 30, 2000, the Company reported a net loss of
$2.4 million compared to a net loss of $0.8 million in the comparable 1999
period. The increase in net loss is primarily attributed to the decline in sales
volume.
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COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net sales decreased by $120.9 million, or 26.6%, to $333.7 million for the
six months ended June 30, 2000 from $454.6 million for the comparable 1999
period. The net sales decrease was primarily caused by the general slowdown in
the manufactured housing industry brought on by, among other things, an
excessive amount of retail inventory and various conditions affecting credit
availability for the home buyer, resulting in diminished retail demand.
Management believes that manufactured housing production fell below 1999 levels
by approximately 24%, which, consequently, reduced the demand for the Company's
products. The decline is distinctly regionalized with the highest decreases
occurring in the Southeastern parts of the country, which significantly effects
the Wood Products segment, while the North Central states have experienced the
smallest declines in production. Additionally, $22.5 million of the net sales
decrease was the result of two major product lines changing to a
commission-based arrangement. Plastic Solutions accounted for $4.3 million of
net sales in the six-month period ended June 30, 1999, with no sales in the
comparable 2000 period due to the sale of this operation in December 1999.
Gross margins decreased by $14.5 million, or 24.2%, during the first half of
2000, to $45.3 million, from $59.8 million for the comparable 1999 period. This
decrease was due primarily to the reduced sales levels in 2000 versus the same
period in 1999. Gross margin as a percent of sales was 13.6%, a 0.4 percentage
point improvement over 1999's first half level of 13.2%. The improvement in
gross margin as a percent of sales has been the result of cost reduction
initiatives and focused attention by the Company's Product Management Department
to isolate and correct low margin business.
Commission income decreased by $1.1 million, or 30.8%, to $2.4 million for
the six months ended June 30, 2000, from $3.5 million for the same period in
1999. This decline is primarily the result of the same conditions that caused
the sales volume decrease.
Selling, general and administrative expenses decreased by $10.7 million, or
20.7%, to $41.1 million for the six months ended June 30, 2000, from $51.8
million for the comparable 1999 period. The decrease was due primarily to
reduced activity associated with the lower sales volume, which has resulted in a
23% headcount reduction from June 30, 1999 to June 30, 2000, and management
efforts to reduce costs and increase operating efficiency. Additionally,
significant consulting and information technology costs incurred in the first
half of 1999 were non-recurring in the current year. Selling, general and
administrative expenses, as a percentage of net sales, increased to 12.3% for
the six months ended June 30, 2000, from 11.4% for the comparable 1999 period.
This percentage of net sales increase is primarily attributable to fixed costs
in a declining sales market.
Other income decreased by $0.8 million, to $0.1 million in 2000, from $0.9
million in 1999. Other income in the six-month period ended June 30, 1999 is
comprised primarily of gains recognized from the sale of a distribution facility
and the Shelter Components corporate facility.
Interest expense is comparable for the six-month period ended June 30, 2000
to the same period in 1999. The Company is paying slightly higher interest rates
that are partially offset by paying interest on a lower principal amount because
working capital reductions have decreased the need for bank line of credit
facility borrowings.
For the six months ended June 30, 2000, the Company reported a net loss of
$6.8 million compared to a net loss of $2.0 million in the comparable 1999
period. The increase in net loss is primarily attributed to the decline in sales
volume.
As the general slowdown in the manufactured housing industry continues and
in light of the Company's near term outlook for future earnings, the Company did
not recognize any income tax benefit in the first two quarters of this year.
Beginning in the last half of 1999 and continuing into 2000, the Company has
provided a valuation allowance for net deferred tax assets because it cannot be
assured that realization is more likely than not, given the losses in 1999 and
2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities have been financed through cash flow from
operations, borrowings under its bank credit facilities, proceeds from the
Transaction (as defined below), and proceeds from the issuance in December 1997
of $105.0 million of 10 3/8% senior subordinated notes due 2007.
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<PAGE> 11
Net cash provided by operating activities was $1.1 million and capital
expenditures were $2.3 million for the six months ended June 30, 2000. Net cash
used in operating activities was $4.4 million and capital expenditures were $1.7
million for the comparable period in 1999. The $5.5 million increase in cash
provided by operating activities is primarily attributable to improved Company
management of working capital. The Company is obligated to make payments on
various capital and operating leases in varying amounts, maturing through 2007
as well as payments under various non-compete and consulting agreements, related
to past acquisitions, in varying amounts, maturing through 2002.
In July 1999, the Company completed a transaction ("Transaction"), pursuant
to which The Kevco Partners Investment Trust (the "KPI Trust"), a Delaware
business trust that is associated with Wingate Partners II, L.P., acquired, for
an approximate purchase price of $37.0 million, the following securities:
o 2,700,000 newly issued shares of the Company's common stock for a purchase
price of $5.00 per share;
o Three warrants ("Warrants") to purchase 675,000 shares, 772,727 shares, and
295,455 shares, respectively, of a new class of nonvoting common stock of
the Company ("Nonvoting Stock");
o Tranche A Senior Subordinated Exchangeable Notes ("Tranche A Notes") in the
principal amount of $17.0 million; and
o Tranche B Senior Subordinated Exchangeable Notes ("Tranche B Notes" and,
together with the Tranche A Notes, the "Notes") in the principal amount of
$6.5 million.
The Tranche A Notes are exchangeable at the holders' option for 3,090,909
shares of a newly-created series of preferred stock of the Company designated as
Series A Cumulative 10-3/8% Convertible Pay-in-Kind Voting Preferred Stock
("Voting Preferred Stock") or directly into 3,090,909 shares of common stock, in
each case at an initial exchange ratio of $5.50 per share. Shares of Voting
Preferred Stock, when and if issued in exchange for Tranche A Notes, will be
entitled to vote together with the common stock on an as converted basis. The
Voting Preferred Stock will be convertible on a share-for-share basis into
common stock, subject to certain standard anti-dilution provisions. The Tranche
B Notes are exchangeable at the holders' option for 1,181,818 shares of a second
newly-created series of preferred stock of the Company designated as Series B
10-3/8% Convertible Pay-in-Kind Non-Voting Preferred Stock ("Nonvoting Preferred
Stock" and with the Voting Preferred Stock, the "Preferred Stock") or directly
into 1,181,818 shares of Nonvoting Stock, in each case at an initial exchange
ratio of $5.50 per share. The Nonvoting Preferred Stock will have limited voting
rights in connection with certain extraordinary corporate events affecting the
holders of Nonvoting Stock. The Nonvoting Preferred Stock will itself be
convertible into an equal number of shares of Nonvoting Stock, subject to
certain standard antidilution provisions.
Interest on the Notes may be paid in cash or, at the option of the Company,
continue to accrue unpaid, in which case a note holder may elect to have all
accrued interest paid in the equivalent value of shares of Nonvoting Preferred
Stock. Dividends on the Nonvoting Preferred Stock and the Voting Preferred Stock
may, at the option of the Company, be paid in cash or in additional shares of
Nonvoting Preferred Stock. The Company can redeem the Notes and any Preferred
Stock issued in exchange for Notes beginning on July 26, 2002. The Warrants,
Notes, and Preferred Stock contain standard antidilution provisions.
The KPI Trust currently owns 2,700,000 shares, or approximately 28.3%, of
the outstanding common stock. Assuming the exchange of the Tranche A Notes into
common stock, the KPI Trust would own an aggregate of 5,790,909 shares, or
approximately 45.8%, of the outstanding common stock. Assuming the exercise of
the Warrants into Nonvoting Stock and the exchange of the Tranche A Notes and
Tranche B Notes into common stock and Nonvoting Stock, respectively, the KPI
Trust would own 5,790,909 shares, or approximately 45.8%, of the outstanding
Common Stock and 2,925,000 shares of Nonvoting Stock, representing in the
aggregate approximately 55.9% of the Company's total common equity (excluding
shares potentially issuable as a result of interest accruing under the Notes or
as dividends on the Voting Preferred Stock and the Nonvoting Preferred Stock).
Concurrently with the closing of the Transaction, the Company and its
lenders entered into the third amended and restated credit agreement which
restructured the terms and conditions in regard to applicable rates, covenants
and maturity. The amended credit facility includes a $45.0 million revolving
credit facility, which matures in December 2003, a Term A Facility for $35.7
million, which matures in December 2003 and a Term B Facility for $38.5 million,
which matures in December 2004. The Company may also be required to repay
amounts earlier than scheduled as a result of asset sales, excess cash flow from
operations, issuance of new debt or issuance of new equity. The term loans
require quarterly payments, which increase over the life of each respective
term. The term loans and revolving credit facility are collateralized by
substantially all of the assets of the
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Company and its subsidiaries, including the capital stock of such subsidiaries.
At June 30, 2000, the Company had $38.4 million available for borrowings under
its revolving credit facility. Management believes that cash reserves are
adequate for the next twelve months.
The Company's various debt agreements contain restrictions and conditions
that include cash flow and various financial ratio requirements and limitations
on the incurrence of additional debt or liens, payment of dividends,
acquisitions and dispositions of certain assets, the ability to consolidate or
merge with another entity, certain transactions with affiliates, and the
engagement in certain lines of business. In addition, the third amended and
restated credit agreement imposes limitations on amounts available for
borrowings under the revolving credit facility based on amounts of eligible
accounts receivable, inventory and fixed assets.
In May 2000, the Company and its lenders entered into a second amendment to
the third amended and restated credit agreement, which restructured certain
conditions in regard to applicable covenants to make them less restrictive. At
June 30, 2000, the Company is in compliance with the amended covenants.
Management will monitor debt covenant compliance very closely and, if necessary,
pursue additional amendments to the credit agreement or pursue refinancing
alternatives. However, there can be no assurance that the Company will be able
to maintain compliance in the future, or that it would be able to further amend
or refinance its credit facilities, if required to do so.
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 Board has authorized the Management of the Company
to repurchase, from time to time, senior subordinated notes due in 2007.
For the six-month period ended June 30, 2000, average days sales in
receivables were 23 days, average days inventory on hand were 41 days and
average days of payables were 29 days. For the six-month period ended June 30,
1999, average days sales in receivables were approximately 26 days, average days
inventory on hand were approximately 43 days and average days in payables were
approximately 29 days. The decreases in average days sales in receivables of 3
days and average days inventory on hand of 2 days, period over period, is the
result of the Company's improved management of working capital.
YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 compliant. The Company completed its efforts in this regard
during the fourth quarter of 1999. Due to the thoroughness in addressing
potential issues, to date, the Company has experienced no significant
disruptions in any of its systems and believes those systems have adapted well
to the Year 2000 date change. Company personnel are not aware of any material
problems resulting from Year 2000 issues, with respect to its products, internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year to ensure that any latent Year 2000
matters that may arise are addressed promptly.
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements 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 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 include, but are not limited
to, the Company's substantial leverage and its effects on the Company's ability
to obtain additional capital as needed, the adequacy of existing funds to meet
liquidity needs, the Company's ability to integrate its operations and
successfully implement new management information systems, customer demand for
manufactured housing and recreational vehicles, the effect of economic
conditions including inflation and sensitivity to interest rates, the
availability of consumer loans for manufactured housing, the impact of raw
materials prices, volatility within the manufactured housing industry, the
Company's
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ability to maintain profitability in the event of the loss of a
significant customer and other risks detailed from time to time in the reports
filed by the Company with the Commission, including the Company's Annual Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to interest rate risk on its term loans and revolving
credit facility. Interest rates are fixed on the Senior Notes, Subordinated
Notes and Capitalized Lease Obligations. At June 30, 2000, the Company's
exposure to these risk factors was not significant and had not materially
changed from December 31, 1999.
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 16, 2000, the Company held its annual meeting of shareholders.
At the meeting, the Company's shareholders elected Frederick B. Hegi, Jr. and
Jerry E. Kimmel as directors of the Company, each to serve as such for a
three-year term ending in 2003. Mr. Hegi received 9,122,127 votes cast "for"
his elections with 5,378 votes being withheld. Mr. Kimmel received 9,101,487
votes cast (for) his election with 26,018 votes being withheld. In addition to
Messrs. Hegi and Kimmel, the current slate of directors of the Company consists
of James A. Johnson, Richard Nevins, William L. Estes, and Peter B. McKee.
At the meeting, the Company's shareholders also adopted a proposal to
ratify the selection of Ernst & Young LLP as the independent auditors of the
Company for the fiscal year ending December 31, 2000. The proposal received
7,559,173 votes cast "for," 450 votes cast "against," and 1,567,882 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
*27.1 Financial Data Schedule.
</TABLE>
* Filed herewith.
(b) REPORTS ON FORM 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KEVCO, INC.
Date: August 14, 2000
By: /s/ JOSEPH P. TOMCZAK
-----------------------------
Joseph P. Tomczak
Executive Vice President and
Chief Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
