WHITE CAP INDUSTRIES INC, 10-Q, 1999-11-09

WHITE CAP INDUSTRIES INC
10-Q, 1999-11-09
CONSTRUCTION & MINING (NO PETRO) MACHINERY & EQUIP

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1999

COMMISSION FILE NO. 0-22989

WHITE CAP INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 84-1380403
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>

3120 AIRWAY AVENUE
COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(714) 850-0900
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 of each of the issuer's classes
of common stock, as of the latest practicable date.

<TABLE>
<CAPTION>
CLASS OUTSTANDING AT 10/13/99
- ---------------------------- -----------------------
<S> <C>
Common Stock, $.01 Par Value 10,746,776
</TABLE>

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WHITE CAP INDUSTRIES, INC.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months and Six Months Ended September 26, 1998
and September 25, 1999...................................... 3
Condensed Consolidated Balance Sheets (Unaudited) at March
27, 1999 and September 25, 1999............................. 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended September 26, 1998 and September
25, 1999.................................................... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................. 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9

PART II OTHER INFORMATION
ITEM 1 Legal Proceedings........................................... 15
ITEM 2 Changes in Securities....................................... 15
ITEM 3 Defaults upon Senior Securities............................. 15
ITEM 4 Submission of Matters to a Vote of Security Holders......... 15
ITEM 5 Other Information........................................... 15
ITEM 6 Exhibits and Reports on Form 8-K............................ 15
............................................................
SIGNATURES 16
</TABLE>

2
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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

WHITE CAP INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales..................................... $79,401 $85,253 $148,038 $165,768
Cost of sales................................. 53,475 57,429 100,037 111,559
------- ------- -------- --------
Gross profit.................................. 25,926 27,824 48,001 54,209
Selling, general and administrative........... 19,331 20,207 36,213 40,612
------- ------- -------- --------
Income from operations........................ 6,595 7,617 11,788 13,597
Interest expense, net......................... 963 1,033 1,844 2,052
------- ------- -------- --------
Income before income taxes.................... 5,632 6,584 9,944 11,545
Income tax provision.......................... 2,231 2,601 3,938 4,561
------- ------- -------- --------
Net income............................... $ 3,401 $ 3,983 $ 6,006 $ 6,984
======= ======= ======== ========

Basic income per share:
Income per share............................ $ 0.32 $ 0.37 $ 0.57 $ 0.65
Basic weighted average shares outstanding... 10,652 10,730 10,627 10,727

Diluted income per share:
Income per share............................ $ 0.31 $ 0.36 $ 0.54 $ 0.62
Diluted weighted average shares
outstanding.............................. 11,140 11,207 11,132 11,191
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

3
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WHITE CAP INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
MARCH 27, SEPTEMBER 25,
1999 1999
--------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,994 $ 2,333
Accounts receivable, net of allowance for doubtful
accounts of $1,346 and $1,478, respectively............ 42,434 52,452
Inventories............................................... 48,940 50,890
Prepaid expenses and other................................ 1,200 1,198
Deferred income taxes..................................... 2,553 2,553
-------- --------
97,121 109,426
-------- --------
PROPERTY AND EQUIPMENT, net................................. 12,806 13,898
RENTAL EQUIPMENT, net....................................... 6,071 6,075
INTANGIBLE ASSETS, net...................................... 56,868 56,725
OTHER ASSETS................................................ 326 356
-------- --------
$173,192 $186,480
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 707 $ 797
Accounts payable.......................................... 31,117 33,581
Accrued liabilities....................................... 7,328 9,200
-------- --------
39,152 43,578
-------- --------
LONG-TERM DEBT, net of current portion...................... 52,965 54,816
-------- --------
DEFERRED INCOME TAXES....................................... 2,329 2,329
-------- --------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Series B Convertible Preferred Stock, $.10 par value:
Designated -- 1,000 shares; issued and
outstanding -- 60..................................... 6 6
Common Stock, $.01 par value:
Authorized -- 20,000 shares; issued and
outstanding -- 10,720 at March 27, 1999 and 10,731 at
September 25, 1999..................................... 104 105
Additional paid-in capital.................................. 77,298 77,324
Retained earnings........................................... 1,338 8,322
-------- --------
78,746 85,757
-------- --------
$173,192 $186,480
======== ========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

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WHITE CAP INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
SEPTEMBER 26, SEPTEMBER 25,
1998 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 6,006 $ 6,984
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 1,339 1,710
Amortization........................................... 764 1,029
Gain on disposition of property and equipment.......... (6) (15)
Changes in assets and liabilities, net of effects from
acquisitions:
Increase in accounts receivable........................ (11,841) (10,018)
Increase in inventories................................ (6,419) (1,950)
Increase in prepaid expenses and other................. (229) (915)
Decrease in deferred tax asset......................... 178 --
Increase in accounts payable........................... 8,471 2,464
Increase in accrued expenses........................... 3,104 1,872
Increase in deferred tax liability..................... 40 --
-------- --------
Net cash provided by operating activities................. 1,407 1,161
-------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Capital expenditures...................................... (2,404) (2,527)
Proceeds from sale of property and equipment.............. 14 139
Acquisitions of businesses, net of $875 in cash
acquired............................................... (27,596) --
-------- --------
Net cash used in investment activities.................... (29,986) (2,388)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement............. 30,300 2,000
Principal payments on notes payable....................... (347) (461)
Proceeds from the exercise of stock options............... -- 27
Common stock issued....................................... 90 --
-------- --------
Net cash provided by financing activities................. 30,043 1,566
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 1,464 339
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,720 1,994
-------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,184 $ 2,333
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 1,310 $ 1,704
======== ========
Income taxes, net of refunds........................... $ (40) $ 2,935
======== ========
DETAILS OF ACQUISITIONS:
Fair value of assets...................................... $ 34,892 $ --
Liabilities assumed....................................... (4,093) --
-------- --------
Acquisitions price........................................ 30,799 --
Less cash acquired........................................ (875) --
Less common stock issued for acquisition.................. (2,328)
-------- --------
Net cash paid for acquisitions............................ $ 27,596 $ --
======== ========
NON CASH FINANCING ACTIVITIES:
Common stock issued for acquisition....................... $ 2,328 $ --
======== ========
Equipment acquired under capital lease obligations........ $ 384 $ 405
======== ========
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

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WHITE CAP INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (UNAUDITED)
SEPTEMBER 25, 1999

1. BASIS OF PRESENTATION

The condensed consolidated financial statements presented herein are
unaudited. Accordingly, information and footnote disclosures normally prepared
in accordance with generally accepted accounting principles have been either
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the registrant believes that all adjustments
necessary for a fair presentation (consisting of only normal recurring
adjustments) have been made, interim period results are not necessarily
indicative of the results of operations for a full year. As such, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the most recent Form 10-K which was filed for the
year ended March 27, 1999.

2. RECENT ACQUISITIONS

During 1998, the Company acquired the following businesses:

<TABLE>
<CAPTION>
BUSINESS ACQUIRED DATE ACQUIRED
----------------- -------------
<S> <C>
JEF Supply............................................... February 1, 1998
Sierra Supply............................................ April 1, 1998
CCS...................................................... April 1, 1998
Charles R. Watts Co...................................... May 1, 1998
Nyco..................................................... May 1, 1998
Sun City................................................. December 14, 1998
</TABLE>

The acquisitions described above were accounted for as purchases and the
purchase prices were allocated based on management's estimate of the fair value
of the assets acquired and liabilities assumed with respect to each acquisition
at the dates of acquisition. The Company has made a preliminary purchase price
allocation pending additional market information related to the closure of
certain acquired locations and the related facility's future lease obligations.
Costs in excess of net assets acquired were allocated to goodwill.

Had the acquisitions occurred at the beginning of the fiscal year of
acquisition and prior fiscal years, the unaudited and pro forma net sales, net
income, diluted net income per share and diluted weighted average number of
common shares outstanding would be as follows (in thousands, except net income
per share data):

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WHITE CAP INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (unaudited) (Continued)
September 25, 1999

3. EARNINGS PER SHARE

The following is a reconciliation of the Company's weighted average shares
outstanding for the purpose of calculating basic and diluted earnings per share
for all periods presented (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25,
1998 1999 1998 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Basic weighted average shares... 10,652 10,730 10,627 10,727
Effect of dilutive securities:
Options....................... 488 477 505 464
------ ------ ------ ------
Diluted weighted average
shares........................ 11,140 11,207 11,132 11,191
====== ====== ====== ======
</TABLE>

4. INCOME TAXES

The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109. The statement
requires an asset and liability approach for financial accounting and reporting
of income taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial and tax basis of assets and
liabilities given the provisions of the enacted tax laws.

5. RECAPITALIZATION AND COMMITMENTS AND CONTINGENCIES

On July 21, 1999, the Company entered into a Transaction Agreement
("Transaction Agreement") with WC Recapitalization Corp. ("WCRC"), an affiliate
of Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement provides
for WCRC to purchase all of the Company's outstanding stock for $16.50 per
share, except that, certain members of management ("Management") will sell all
but approximately 25 to 30 percent of their stockholdings in the surviving
corporation. Approximately 70 to 75 percent of Management's shares will be
acquired at the same price as all other shares acquired by WCRC. Subsequent to
the purchase of the above referenced shares and WCRC's merger into White Cap
Industries, Inc. ("WCI"), LGP will own a controlling interest in WCI and
Management will retain a portion of their stockholdings in the surviving
corporation equal to approximately 14% of the total outstanding capital stock of
WCI. The transaction is valued at $240 million. The debt and equity financing
necessary for the transaction has been fully committed by LGP, through Green
Equity Investors III, L.L.P. and affiliates of Donaldson, Lufkin & Jenrette
Securities Corporation. Certain members of management will also enter into
employment and stockholder agreements with WCI. The transaction and its impact
on the Company is more fully described in the Company's amended proxy filing.

Completion of the transaction is subject to customary conditions including
stockholder approval and receipt of regulatory approvals. Stockholder approval
will be solicited by means of a proxy statement, to be mailed to stockholders
upon the completion of the required Securities and Exchange Commission filing
and review process. Pursuant to a voting agreement executed on July 22, 1999,
certain members of management, KRG Capital Partners, and Apex Investment
Partners who collectively own 45% of the outstanding stock of the Company,
agreed to vote their shares in favor of the merger transaction. The Company
anticipates completing the transaction no later than January 31, 2000. There can
be no assurance that the Transaction Agreement will be consummated. If the
Transaction Agreement is terminated, the Company could be required under certain
circumstances to pay WCRC a $12 million termination fee and expenses associated
with the transaction. The Company has incurred approximately $595,000 in fees
related to the transaction

7
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WHITE CAP INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (unaudited) (Continued)
September 25, 1999

during the quarter ended September 25, 1999. The costs were capitalized and
included in intangible assets, net in the accompanying balance sheet, pending
completion of the transaction.

In connection with the Transaction Agreement, three complaints (Anthony
Casey v. White Cap Industries, Inc., et al case number 17329-NC, Ruth Grenning
v. White Cap Industries, Inc., et al, case number 17331-NC and Tammy Newman v.
White Cap Industries, Inc., et al case number 17335-NC) were filed against the
Company, members of its Board of Directors and, in two cases, against Leonard
Green and Partners in the Delaware Court of Chancery, Newcastle County. The
complaints, filed on behalf of a purported class of the Company's stockholders,
generally allege that the Transaction Agreement is unfair and inadequate to the
Company's stockholders and charge the defendants with breach of fiduciary
duties. The complaints generally request injunctive relief to prevent the
consummation of the transactions contemplated in the Transaction Agreement and
seek other remedies in the event the contemplated transactions are completed.
The Company has not yet responded to the complaints.

There can be no assurance that the Company will successfully defend the
allegations included in the complaints. Regardless of whether the transactions
are consummated or of the outcome of these lawsuits, the Company will likely
incur significant related expenses and costs that could have an adverse effect
on the Company's business and operations. Furthermore, these proceedings could
involve a substantial diversion of the time of some members of management.
Accordingly, the Company is unable to estimate the impact of the outcome of any
potential liabilities associated with the complaints.

8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion and analysis of the Company's results of operations and
financial condition should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and the notes thereto.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 25, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 26, 1998

Net Sales. Net sales for the three months ended September 25, 1999 ("second
quarter 1999") increased $5.9 million, or 7%, to $85.3 million compared to $79.4
million for the three months ended September 26, 1998 ("second quarter 1998").
The growth in net sales compared to the prior year was the result of a 4%
increase in same store sales, the expansion of product lines, and the
acquisition of Sun City.

Gross Profit. Gross profit for the second quarter 1999 increased $1.9
million, or 7%, to $27.8 million compared to $25.9 million for the second
quarter 1998. The increase in gross profit was the result of increased net
sales, offset in part by lower gross profit margins. The gross profit margin for
the second quarter of 1999 was 32.6% compared to 32.7% for the second quarter of
1998. The lower gross profit margin over the prior year is primarily due to a
decrease in rental business.

Selling, General and Administrative Expense. Selling, general and
administrative expense ("SG&A") increased $.9 million or 5%, to $20.2 million
for the second quarter 1999 compared to $19.3 million for the second quarter
1998. As a percent of sales, SG&A was 23.7% for the second quarter 1999 and
24.3% for the second quarter of 1998.

Selling expenses increased $.7 million, or 4%, to $17.0 million for the
second quarter 1999 from $16.3 million for the second quarter 1998. The increase
is due to the consolidation of two branches into one new branch, the expansion
of one branch, the remodeling of one branch, increased commissions to the
outside sales force due to the sales growth, and increased costs of customer
service, principally the addition of transportation, communication, and branch
personnel costs. Selling expenses as a percent of net sales for the second
quarter 1999 were 20.0% compared to 20.5% for the second quarter 1998.

General and administrative expenses increased $.2 million, or 7%, to $3.2
million for the second quarter 1999 from $3.0 million for the second quarter
1998. The increase in general and administrative expenses is primarily due to
increased labor and administration costs to process and support the increased
sales volume and increased goodwill amortization related to the Sun City
acquisition. General and administrative expenses as a percentage of net sales
for the second quarter 1999 were 3.7%, as compared to 3.8% for the second
quarter 1998. Exclusive of the effects of goodwill and covenant not to compete
amortization of $0.5 million in the second quarter 1999 and $0.4 million in the
second quarter 1998, general and administrative expenses increased 2%.

Income from Operations. Income from operations for the second quarter 1999
increased $1.0 million, or 15%, to $7.6 million compared to $6.6 million for the
second quarter 1998. The increase in operating income for the second quarter
1999 compared to the second quarter 1998 was primarily the result of the
increase in sales and the decrease in SG&A expenses as a percent of sales,
offset, in part, by the decrease in gross profit margin.

Interest Expense, net. Interest expense, net of interest income was $1.0
million in the second quarter 1999 and 1998. Interest expense is the result of
borrowings to fund acquisitions and obtain early payment discounts from vendors.

Net Income. Net income for the second quarter 1999 was $4.0 million
compared to net income of $3.4 million for the second quarter 1998. This
increase reflects the cumulative effects of the increase in sales and the
decrease in SG&A as a percent of sales, offset, in part, by the decrease in
gross margin, and increases in income taxes.

9
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SIX MONTHS ENDED SEPTEMBER 25, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER
26, 1998

Net Sales. Net sales for the six months ended September 25, 1999 ("first
half 1999") increased $17.8 million, or 12%, to $165.8 million compared to
$148.0 million for the six months ended September 26, 1998 ("first half 1998").
The growth in net sales compared to the prior year was the result of a 6%
increase in same store sales, the expansion of product lines, three new branch
openings, and the acquisitions of Watts, Nyco, and Sun City.

Gross Profit. Gross profit for the first half 1999 increased $6.2 million,
or 13%, to $54.2 million compared to $48.0 million for the first half 1998. The
increase in gross profit was the result of increased net sales and higher gross
profit margins. The gross profit margin for the first half of 1999 was 32.7%
compared to 32.4% for the first half of 1998. The higher gross profit margin
compared to the prior year is primarily due to a change in product mix and early
payment discounts, partially offset by a decrease in rental business.

Selling, General and Administrative Expense. Selling, general and
administrative expense ("SG&A") increased $4.4 million or 12%, to $40.6 million
for the first half 1999 compared to $36.2 million for the first half 1998. As a
percent of sales, SG&A was 24.5% for the first half 1999 and 1998.

Selling expenses increased $3.7 million, or 12%, to $33.6 million for the
first half 1999 from $29.9 million for the first half 1998. The increase is due
to the opening of two new branches, the expansion of two branches, the
remodeling of one branch, increased commissions to the outside sales force due
to the sales growth, and increased costs of customer service, principally the
addition of transportation, communication, and branch personnel costs. Selling
expenses as a percent of net sales for the first half 1999 were 20.3% compared
to 20.2% for the first half 1998.

General and administrative expenses increased $.7 million, or 11%, to $7.0
million for the first half 1999 from $6.3 million for the first half 1998. The
increase in general and administrative expenses is primarily due to increased
labor and administration costs in the first half 1999 to process and support the
increased sales volume during that time period. General and administrative
expenses as a percentage of net sales for the first half 1999 were 4.2% compared
to 4.3% for the first half of 1998. Exclusive of the effects of goodwill and
covenant not to compete amortization of $0.9 million in the first half 1999 and
$0.8 million in the first half 1998, general and administrative expenses
increased 11%.

Income from Operations. Income from operations for the first half 1999
increased $1.8 million, or 15%, to $13.6 million compared to $11.8 million for
the first half 1998. The increase in operating income for the first half 1999
compared to the first half 1998 was primarily the result of the increase in
sales and gross profit margins, offset in part by the increase in SG&A expenses.

Interest Expense, net. Interest expense, net of interest income, increased
$0.2 million, or 11%, to $2.1 million in the first half 1999 from $1.9 million
in the first half 1998. The increase in interest expense is primarily the result
of increased borrowings to fund acquisitions and obtain early payment discounts
from vendors.

Net Income. Net income for the first half 1999 was $7.0 million compared to
net income of $6.0 million for the first half 1998. This increase reflects the
cumulative effects of the increase in sales and gross profit margin, offset in
part by the increases in SG&A expenses, interest and income taxes.

FINANCIAL CONDITION

Working Capital. From March 27, 1999 to September 25, 1999, operating
working capital increased $7.6 million. The change in operating working capital
was primarily the result of increases in accounts receivable of $10.0 million,
inventories of $2.0 million, accounts payable of $2.5 million and accrued
liabilities of $1.9 million. The change in operating working capital excludes
changes in cash and cash equivalents and current maturities of long-term debt.

Cash Flow. From March 27, 1999 to September 25, 1999, the Company generated
approximately $1.2 million of net cash from operating activities. Net cash used
in investing activities was approximately

10
<PAGE> 11

$2.5 million for additions to property and equipment. Financing activities
during the first half 1999 provided net cash of $1.6 million, including $2.0
million borrowed under the Credit Facility.

Liquidity and Capital Resources. At September 25, 1999, the Company had
cash of $2.3 million and working capital of $65.9 million. The Company's
capitalization, defined as the sum of long-term debt and stockholders' equity,
at September 25, 1999, was approximately $140.6 million.

The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth, acquisitions, facility and
product line expansions. The Company's primary sources of financing have been
cash from operations and bank borrowings under the Company's revolving and term
credit facility (the "Credit Facility"). In prior years, in addition to the
above sources, the Company accessed financing through senior and subordinated
debt and the sale of common and preferred equity.

The Company anticipates that its current cash on hand, cash flow from
operations and additional financing available under the Credit Facility will be
sufficient to meet the Company's liquidity requirements for its operations
through the remainder of the fiscal year ended March 25, 2000. However, the
Company is currently, and intends to continue, pursuing additional acquisitions,
which are expected to be funded through a combination of cash and common stock.
There can be no assurances that additional sources of financing will not be
required during the next twelve months or thereafter to fund the Company's
acquisition program. Accordingly, the Company continuously evaluates its
financing capabilities based on changing market conditions and opportunities.

The Company's business is subject to seasonal influences. The Company's
historical revenues and profitability have been lower in the last two quarters
of its fiscal year. As the Company's mix of businesses evolves through future
acquisitions, those seasonal fluctuations may change. In addition, quarterly
results also may be materially affected by the timing of acquisitions, the
timing and magnitude of costs related to such acquisitions, variations in the
prices paid by the Company for the products it sells, the mix of products sold,
and general or regional economic conditions. Therefore, results for any quarter
are not necessarily indicative of the results that the Company may achieve for
any subsequent fiscal quarter or for a full fiscal year.

In October, 1997 the Company entered into a Credit Facility with available
borrowings of up to $100 million (including a $75 million delayed draw term
facility for acquisitions and a $25 million revolving credit facility). The
Credit Facility expires October 29, 2001, and has a one year option to extend
through October 2002. Interest on the amounts borrowed may be paid at the option
of the Company at a rate per annum equal to the lead bank's prime or reference
rate or LIBOR rate plus margins, in each case based upon the Company's ratio of
total debt to operating cash flow. The Credit Facility contains certain
restrictive covenants limiting mergers, use of proceeds, indebtedness, liens,
investments, sale of assets and acquisitions. The Credit Facility also contains
financial covenants which require the Company to maintain a minimum net worth,
leverage ratio, fixed charge coverage ratio and asset coverage ratio. At
September 25, 1999, the Company had approximately $47.6 million available under
the Credit Facility.

On July 21, 1999, the Company entered into a Transaction Agreement
(the"Transaction Agreement") with WC Recapitalization Corp. ("WCRC"), an
affiliate of Leonard Green & Partners, L.P. ("LGP"). The Transaction Agreement
provides for WCRC to purchase all of the Company's outstanding stock for $16.50
per share, except that, certain members of management ("Management") will sell
all but approximately 25 to 30 percent of their stockholdings in the surviving
corporation. Approximately 70 to 75 percent of Management's shares will be
acquired at the same price as all other shares acquired by WCRC. Subsequent to
the purchase of the above referenced shares and WCRC's merger into White Cap
Industries, Inc. ("WCI"), LGP will own a controlling interest in WCI and
Management will retain a portion of their stockholdings in the surviving
corporation equal to approximately 14% of the total outstanding capital stock of
WCI. The transaction is valued at $240 million. The debt and equity financing
necessary for the transaction has been fully committed by LGP, through Green
Equity Investors III, L.L.P. and affiliates of Donaldson, Lufkin & Jenrette
Securities Corporation. Certain members of management will also enter into
employment and stockholder agreements with WCI. The transaction and its impact
on the Company is more fully described in the Company's amended proxy filing.

11
<PAGE> 12

Completion of the transaction is subject to customary conditions including
stockholder approval and receipt of regulatory approvals. Stockholder approval
will be solicited by means of a proxy statement, to be mailed to stockholders
upon the completion of the required Securities and Exchange Commission filing
and review process. Pursuant to a voting agreement executed on July 22, 1999,
certain members of management, KRG Capital Partners, and Apex Investment
Partners who collectively own 45% of the outstanding stock of the Company,
agreed to vote their shares in favor of the merger transaction. The Company
anticipates completing the transaction no later than January 31, 2000. There can
be no assurance that the Transaction Agreement will be consummated. If the
Transaction Agreement is terminated, the Company could be required under certain
circumstances to pay WCRC a $12 million termination fee or expenses associated
with the transaction. The Company has incurred approximately $595,000 in fees
related to the transaction during the quarter ended September 25, 1999. The
costs were capitalized and included in intangible assets, net in the
accompanying balance sheet, pending completion of the transaction.

YEAR 2000

Many existing computer programs use only two digits to identify a year in
the date field. As the century date change occurs, these programs may recognize
the year 2000 as 1900, or not at all. If not corrected, computer systems and
applications could fail or create erroneous results by or at the year 2000 (the
"Year 2000 Issue").

The Company has developed plans to address its possible exposures related
to the impact of the Year 2000 Issue on each of its internal systems and those
of third parties. These plans are expected to be implemented primarily with the
use of internal personnel.

The Company's internal systems consist of its central operating and
accounting systems, that handle the majority of its business transactions, and
one remote operating system, which has resulted from the Company's acquisition
program. Plans to address the Year 2000 Issue with respect to the Company's
internal systems include an assessment phase, a remediation phase and a testing
phase.

The Company has completed an assessment of its central operating and
accounting systems. This assessment resulted in the identification of certain
modifications which were necessary to bring these systems into year 2000
compliance. These modifications have been made and are complete as of September
25, 1999. Based on the results of the testing, with respect to these two
systems, the Company does not anticipate that the Year 2000 Issue, with respect
to its central operating and accounting system, will materially impact its
operations or operating results.

An assessment of the Company's one remote operating system is also
complete. The system is Year 2000 compliant and the Company does not anticipate
that the Year 2000 Issue will materially impact its operations or operating
results.

Management estimates total pretax costs relating to the Year 2000 Issue to
be approximately $400,000. Approximately 90% of these costs were incurred
through September 25, 1999 and the remaining costs are expected to be incurred
through March 2000. The estimate of $400,000 excludes costs of converting remote
operating systems to the Company's central operating and accounting systems,
because such costs are not expected to be material or the conversion is
scheduled to be performed as part of the Company's normal integration
activities.

The Company believes its planning efforts are adequate to address the Year
2000 Issue and that its greatest risks in this area are primarily those that it
cannot directly control, including the readiness of its major suppliers,
customers and service providers. Failure on the part of any of these entities to
timely remediate their Year 2000 Issues could result in disruptions in the
Company's supply of materials, disruptions in its customers' ability to conduct
business and interruptions to the Company's daily operations. Management
believes that its exposure to third party risk may be minimized to some extent
because it does not rely significantly on any one supplier or customer. There
can be no guarantee, however, that the systems of other third parties on which
the Company's systems and operations rely will be corrected on a timely basis
and will not have a material adverse effect on the Company.

12
<PAGE> 13

Over the past year, the Company has been contacting its major suppliers,
customers and service providers regarding their Year 2000 Issues. However, the
Company does not currently have adequate information to assess the risk of these
entities not being able to provide goods and services to the Company. However,
because the Company believes this area is among its greatest risks, as
information is received and evaluated, the Company intends to develop
contingency plans, as deemed necessary, to safeguard its ongoing operations.
Such contingency plans may include identifying alternative suppliers or service
providers, stockpiling certain inventories if alternative sources of supply are
not available, evaluating the impact and credit worthiness of non-compliant
customers and increasing the short-term borrowing capacity of the Company, if
deemed necessary, to finance higher levels of inventory or working capital on an
interim basis.

IMPACT OF INFLATION AND CHANGING PRICES

Although the Company cannot accurately determine the precise effect of
inflation on its operations, it does not believe inflation has had a material
effect on sales or results of operations.

FORWARD-LOOKING STATEMENTS -- UNDER THE PRIVATE SECURITIES LITIGATION ACT OF
1995

Certain statements in this quarterly report are forward-looking statements.
These statements are subject to various risks and uncertainties, many of which
are outside the control of the Company, including the level of market demand for
the Company's products, competitive pressures, the ability to achieve reductions
in operating costs and management's ability to continue to integrate
acquisitions, dependence on systems, environmental matters and other specific
factors discussed in the Company's Form 10-K for the fiscal year ended March 27,
1999, and other Securities and Exchange Commission filings. The information
contained herein represents management's best judgment as of the date hereof
based on information currently available; however, the Company does not intend
to update this information to reflect developments or information obtained after
the date hereof and disclaims any legal obligation to the contrary.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks related to fluctuations in interest
rates on long-term and short-term debt. Currently, the Company does not utilize
interest rate swaps, forward or option contracts on foreign currencies or
commodities, or other types of derivative financial instruments. The purpose of
the following analysis is to provide a framework to understand the Company's
sensitivity to hypothetical changes in interest rates as of September 25, 1999.
You should be aware that many of the statements contained in this section are
forward looking and should be read in conjunction with the Company's disclosures
under the heading "Forward-Looking Statements."

The Company utilizes debt financing primarily for the purpose of strategic
acquisitions. Historically, the Company has borrowed under its revolving credit
and term debt facilities to fund these acquisitions. Borrowings under these
facilities are at variable rates.

The Company also has fixed rate debt in the form of capitalized leases. For
fixed rate debt, changes in interest rates generally affect the fair market
value of the debt, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence the fair market value
of the debt, but do affect future earnings and cash flows. Holding the variable
rate debt balance constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in an increase in interest
expense for the coming year of approximately $524,000.

13
<PAGE> 14

The table below details the principal amount and the average interest rates
for debt for each category based upon the expected maturity dates. The carrying
value of the variable rate senior loan and security agreement approximates fair
value due to the frequency of repricing of this debt. Fixed rate debt consists
of capital leases with interest rates that approximate current market rates with
similar terms and maturities, and as a result, their carrying amounts
approximate fair value.

<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
--------------------------------------------------- FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
----- ----- ----- ------ ----- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate notes payable........... $ 797 $ 625 $ 453 $ 426 $ 457 $ 455 $ 3,213 $ 3,213
Average interest rate.............. 8.05% 7.38% 8.35% 8.25% 8.25% 8.25%
Variable rate senior loan and
security agreement............... -- -- -- 52,400 -- -- 52,400 52,400
Average interest rate(1).........
</TABLE>

- ---------------

(1) Based on LIBOR contracts purchased and lead bank's prime or reference rate
as of September 25, 1999, which ranged in interest rates from 5.9% to 8.5%.

The Company does not believe that the future market rate risks related to
the above securities will have a material adverse impact on our financial
position, results of operations or liquidity.

14
<PAGE> 15

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In connection with the Transaction Agreement, three complaints (Anthony
Casey v. White Cap Industries, Inc., et al case number 17329-NC, Ruth Grenning
v. White Cap Industries, Inc., et al, case number 17331-NC and Tammy Newman v.
White Cap Industries, Inc., et al case number 17335-NC) were filed against the
Company, members of its Board of Directors and, in two cases, against Leonard
Green and Partners in the Delaware Court of Chancery, Newcastle County. The
complaints, filed on behalf of a purported class of the Company's stockholders,
generally allege that the Transaction Agreement is unfair and inadequate to the
Company's stockholders and charge the defendants with breach of fiduciary
duties. The complaints generally request injunctive relief to prevent the
consummation of the transactions contemplated in the Transaction Agreement, and
seek other remedies in the event the contemplated transactions are completed.
The Company has not yet responded to the complaints.

ITEM 2. CHANGES IN SECURITIES

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<C> <S>
10.1 Agreement and Plan of Merger dated July 21, 1999 by and
between White Cap Industries, Inc. and WC Recapitalization
Corp. (incorporated by reference to Appendix A to Amendment
No. 1 to the Preliminary Proxy Statement on Schedule 14A
filed by the Company on October 13, 1999).
27.0 Financial Data Schedule.
</TABLE>

15
<PAGE> 16

SIGNATURES

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.

WHITE CAP INDUSTRIES, INC.

November 9, 1999 By: /s/ GREG GROSCH

Greg Grosch
President/Chief Executive Officer

November 9, 1999 By: /s/ CHRIS LANE

Chris Lane
Chief Financial Officer

16
<PAGE> 17

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
<C> <S> <C>
10.1 Agreement and Plan of Merger dated July 21, 1999 by and
between White Cap Industries, Inc. and WC Recapitalization
Corp. (incorporated by reference to Appendix A to Amendment
No. 1 to the Preliminary Proxy Statement on Schedule 14A
filed by the Company on October 13, 1999).
27.0 Financial Data Schedule
</TABLE>

<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> MAR-25-2000 MAR-25-2000
<PERIOD-START> MAR-28-1999 JUN-27-1999
<PERIOD-END> SEP-25-1999 SEP-25-1999
<CASH> 2,333 2,333
<SECURITIES> 0 0
<RECEIVABLES> 53,930 53,930
<ALLOWANCES> 1,478 1,478
<INVENTORY> 50,890 50,890
<CURRENT-ASSETS> 109,426 109,426
<PP&E> 32,990 32,990
<DEPRECIATION> 13,017 13,017
<TOTAL-ASSETS> 186,480 186,480
<CURRENT-LIABILITIES> 43,578 43,578
<BONDS> 0 0
0 0
6 6
<COMMON> 105 105
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 186,480 186,480
<SALES> 165,768 85,253
<TOTAL-REVENUES> 165,768 85,253
<CGS> 111,559 57,429
<TOTAL-COSTS> 40,612 20,207
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,052 1,033
<INCOME-PRETAX> 11,545 6,584
<INCOME-TAX> 4,561 2,601
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,984 3,983
<EPS-BASIC> 0.65 0.37
<EPS-DILUTED> 0.62 0.36

</TABLE>