<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 JULY 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 NO. 0-23442
CAMERON ASHLEY BUILDING PRODUCTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1984957
------------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number )
11651 PLANO ROAD, DALLAS TX 75243
---------------------------------
(Address of principal executive offices)
(Zip Code)
214-860-5100
------------
(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
--- ---
The number of shares of Registrant's Common Stock outstanding at
September 10, 1998 was 9,370,876.
================================================================================
<PAGE> 2
CAMERON ASHLEY BUILDING PRODUCTS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of July 31, 1998 and
October 31, 1997 3
Consolidated Condensed Statements of Income for the three months
and the nine months ended July 31, 1998 and 1997 4
Consolidated Condensed Statement of Stockholders' Equity for the
nine months ended July 31, 1998 5
Consolidated Condensed Statements of Cash Flows for the nine months
ended July 31, 1998 and 1997 6
Notes to Consolidated Condensed Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CAMERON ASHLEY BUILDING PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
July 31, October 31,
1998 1997
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 10,626 $ 899
Accounts receivable, net 142,762 115,687
Notes receivable held for sale, net 339 16,462
Inventories 123,105 82,298
Prepaid expenses and other assets 2,374 2,257
Deferred income taxes 3,885 4,527
--------- ---------
Total current assets 283,091 222,130
PROPERTY, PLANT AND EQUIPMENT, NET 48,031 38,683
INTANGIBLES, NET 45,637 28,732
OTHER ASSETS 4,624 3,706
--------- ---------
TOTAL $ 381,383 $ 293,251
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 95,305 $ 66,792
Accrued expenses 26,225 21,628
Warehouse line of credit -- 12,189
Current maturities of debt 2,246 973
--------- ---------
Total current liabilities 123,776 101,582
LONG-TERM DEBT, LESS CURRENT MATURITIES 139,065 79,480
DEFERRED INCOME TAXES 1,442 3,262
--------- ---------
Total liabilities 264,283 184,324
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; authorized 100,000 shares, no shares issued
and outstanding
Common stock; no par value; authorized 20,000,000 shares; 9,806,309 shares
issued and 9,365,788 shares outstanding at
July 31, 1998, 9,744,717 shares issued and 9,304,196 shares 63,835 62,947
outstanding at October 31, 1997
Retained earnings 59,218 50,462
Treasury stock, at cost, 440,521 shares (4,296) (4,296)
Cumulative foreign currency translation adjustment (1,657) (186)
--------- ---------
Total stockholders' equity 117,100 108,927
--------- ---------
TOTAL $ 381,383 $ 293,251
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
CAMERON ASHLEY BUILDING PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
July 31, July 31, July 31, July 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE $249,322 $219,118 $613,311 $535,429
COST OF SALES 200,532 176,278 491,053 429,624
-------- -------- -------- --------
GROSS PROFIT 48,790 42,840 122,258 105,805
OPERATING EXPENSES 37,309 32,805 100,857 86,025
RE-ENGINEERING AND SYSTEM
CONVERSION COSTS
300 -- 1,223 --
-------- -------- -------- --------
INCOME FROM OPERATIONS 11,181 10,035 20,178 19,780
INTEREST EXPENSE 2,170 1,618 5,587 4,160
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 9,011 8,417 14,591 15,620
PROVISION FOR INCOME TAXES 3,646 3,359 5,835 6,081
-------- -------- -------- --------
NET INCOME $ 5,365 $ 5,058 $ 8,756 $ 9,539
======== ======== ======== ========
NET INCOME PER SHARE:
BASIC $ 0.57 $ 0.55 $ 0.94 $ 1.04
======== ======== ======== ========
DILUTED $ 0.56 $ 0.54 $ 0.91 $ 1.01
======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 9,363 9,248 9,345 9,183
======== ======== ======== ========
DILUTED 9,648 9,427 9,621 9,404
======== ======== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
CAMERON ASHLEY BUILDING PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
CURRENCY
COMMON STOCK RETAINED TREASURY TRANSLATION
SHARES VALUE EARNINGS STOCK ADJUSTMENT TOTAL
------ ----- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF NOVEMBER 1, 1997 9,745 $62,947 $50,462 $(4,296) $ (186) $ 108,927
Exercise of stock options, 50 608 -- -- -- 608
including tax benefits of $142,000
Stock issued from employee stock purchase plan 11 167 -- -- -- 167
Management and director stock plan
compensation expense -- 113 -- -- -- 113
Net income -- -- 8,756 -- -- 8,756
Foreign currency translation adjustment -- -- -- -- (1,471) (1,471)
------ ------- ------- ------- ------- ---------
BALANCE AS OF JULY 31, 1998 9,806 $63,835 $59,218 $(4,296) $(1,657) $ 117,100
====== ======= ======= ======= ======= =========
</TABLE>
See notes to consolidated condensed financial statements
5
<PAGE> 6
CAMERON ASHLEY BUILDING PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
July 31, July 31,
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,756 $ 9,488
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 7,021 5,471
Management and director stock compensation 113 --
(Gain) on sale of property, plant and equipment 47 (54)
Deferred income taxes (1,178) (587)
Foreign currency translation adjustment (1,471) --
Changes in operating assets and liabilities, net of acquisitions:
Accounts Receivable (7,615) (1,568)
Notes receivable held for resale 16,123 (9,768)
Inventories (24,298) (17,557)
Prepaid and deferred expenses (2,165) (2,705)
Accounts payable and accrued expenses 10,775 3,627
Warehouse line of credit (12,189) 6,993
Other assets/liabilities 3,915 1,533
-------- --------
Net cash used in operating activities (2,166) (5,127)
INVESTING ACTIVITIES:
Payment for acquisitions (37,029) (26,660)
Purchases of property, plant and equipment, net (7,053) (8,758)
Investment in affiliate (293) --
Other 4 (33)
-------- --------
Net cash used in investing activities (44,371) (35,451)
FINANCING ACTIVITIES:
Net borrowings under senior note 80,071 --
Debt issuance costs (876) (182)
Net (repayment) borrowings under revolving lines of credit (21,763) 41,880
Repayments of seller financing of acquired business (1,237) (389)
Proceeds from employee stock purchase plan 167 108
Exercise of stock options 608 1,366
Purchase of treasury stock -- (121)
Other (706) (264)
-------- --------
Net cash provided by financing activities 56,264 42,398
NET INCREASE IN CASH AND CASH
EQUIVALENTS 9,727 1,820
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 899 5,078
-------- --------
END OF PERIOD $ 10,626 $ 6,898
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for interest $ 2,947 $ 2,917
======== ========
Cash paid for income taxes $ 3,113 $ 3,162
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
6
<PAGE> 7
CAMERON ASHLEY BUILDING PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JULY 31, 1998
NOTE 1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated condensed financial statements of Cameron Ashley
Building Products, Inc. and its subsidiaries (the "Company") have not been
audited; however, the balance sheet at October 31, 1997 has been derived from
the Company's audited financial statements. In the opinion of the Company's
management, the financial statements reflect all adjustments necessary to
present fairly the results of operations for the three month and nine month
periods ended July 31, 1998 and 1997, the Company's financial position at July
31, 1998 and October 31, 1997, and the cash flows for the nine month periods
ended July 31, 1998 and 1997. These adjustments are of a normal recurring
nature.
Foreign Currency Translation in stockholders' equity reflects the unrealized
adjustments resulting from translating the financial statements of foreign
subsidiaries. The functional currency of the Company's foreign subsidiaries is
the local currency of the country. Accordingly, assets and liabilities of the
foreign subsidiaries are translated to U.S. dollars at quarter-end exchange
rates. Income and expense items are translated at the average rates prevailing
during the periods. Changes in exchange rates which affect cash flows and the
related receivables or payables are recognized as transaction gains and losses
in the determination of net income.
Certain notes and other information have been condensed in or omitted from the
interim financial statements presented in the Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1997 Annual Report on Form 10-K. The operating results for the third
quarter and for the nine month period ended July 31, 1998 are not necessarily
indicative of the results that may be expected for the entire year.
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
On January 31, 1998, the Company adopted SFAS No. 128, "Earnings Per Share",
which established new standards for computing and presenting earnings per share
("EPS") by replacing the presentation of primary EPS with a presentation of
basic EPS. Primary EPS included common stock equivalents while basic EPS
excludes them. This change simplifies the computation of EPS and requires the
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. Prior year amounts have been
restated to reflect the new method of calculation.
7
<PAGE> 8
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following at July 31, 1998:
<TABLE>
<CAPTION>
(In thousands)
Senior Debt:
<S> <C>
Unsecured Senior Notes with maturities and interest rates as follows:
$10,000 due April 15, 2001 bearing interest at 6.79%
$15,000 due April 15, 2002 bearing interest at 6.79%
(The Company is required to make prepayments of $5.0 million
on April 15, 2000 and April 15, 2001)
$10,000 due April 15, 2003 bearing interest at 7.21%
$15,000 due April 15, 2006 bearing interest at 7.61%
$ 3,000 due April 7, 2004 bearing interest at 6.71%
$63,000 due April 7, 2010 bearing interest at 6.90%
(The Company is required to make annual prepayments of
$12.6 million beginning April 7, 2006)
$10,000 CDN due October 7, 2004 bearing interest at 6.45%
$ 7,000 USD due October 7, 2004 bearing interest at 6.71%
Interest is due semi-annually, with an average interest rate of 6.93% $130,072
NationsBank of Texas, N.A. (as agent):
Revolving credit note due January 15, 2002; unsecured; interest is due
quarterly at the LIBOR rate or Banker's acceptance rate plus 0.50%
to 1.0%, or at a base rate (defined in the agreement as prime)
At July 31, 1998, the interest was 5.70% 6,389
Seller financing of acquired businesses:
Various terms, interest rates ranging from 7% to 9%, collateralized by
certain land and buildings 409
Other, including capital leases 4,441
--------
141,311
Less current maturities (2,246)
--------
Long-term debt $139,065
========
</TABLE>
The seller notes payable are subordinated to the obligations under the
NationsBank agreement.
At July 31, 1998, the Company had $1,586,000 of letters of credit issued under
the NationsBank revolving credit facility.
NOTE 4. ACQUISITIONS - COMPLETED AND PENDING
On June 15, 1998, the Company acquired certain assets and liabilities of APi
Supply Company, headquartered in Minneapolis, Minnesota for a purchase price,
subject to post-closing adjustments, of approximately $34 million in cash and a
warrant to purchase 200,000 shares of Cameron Ashley's common stock at $20 per
share.
Also in the third quarter, the Company completed the acquisitions of Ozark
Construction Supply Co. of Columbia, Missouri, Lafayette WoodWorks, Inc. of
Lafayette, Louisiana and Gerard Demers, Inc. and Demers Express, Inc. of St.
Pierre, Quebec. The acquisition of these four building products-related
companies is expected to add an estimated $46 million in combined annual
revenues.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company entered into a letter of intent dated October 2, 1997, to acquire
Bradco Supply Corporation ("Bradco"), subject to due diligence and negotiation
of a definitive agreement. Prior to the completion of the Company's due
diligence procedures, negotiations were discontinued by Bradco. On November 3,
1997, Bradco filed suit claiming a breach of the letter of intent and claimed
damages of $3 million. Management believes the case is without merit and intends
to vigorously defend the Company against such claim; however, an adverse
resolution could result in an after-tax charge to income of up to $2 million.
In January 1998, a subsidiary of the Company and several of its employees were
subpoenaed to provide information to a grand jury of the United States District
Court, Northern District of Texas, in connection with an investigation of
possible violations of federal antitrust laws in the aluminum building products
industry, including possible violations of Section 1 of the Sherman Act. No
allegations of wrongdoing have been made against the subsidiary, the employees
or the Company. In February 1998, information was provided in response to the
subpoenas, and the Company is not aware of any subsequent activity in the
matter.
From time to time, the Company is also involved in litigation and proceedings in
the ordinary course of its business. Management believes that such ordinary
course litigation will not have a material adverse effect on the Company's
financial condition or results of operations.
8
<PAGE> 9
NOTE 6. SUBSEQUENT EVENTS
In September 1998, the Company's Board of Directors authorized the repurchase of
up to 750,000 shares of Company common stock through purchases effected in the
open market or through privately negotiated transactions. As of September 14,
1998, the Company had repurchased approximately 263,000 shares.
9
<PAGE> 10
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth items from Cameron Ashley Building Products,
Inc.'s Consolidated Condensed Statements of Income as percentages of revenue.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
July 31, 1998 July 31, 1997 July 31, 1998 July 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Sales 80.4 80.4 80.1 80.2
------------- ------------- ------------- -------------
Gross Profit 19.6 19.6 19.9 19.8
Operating Expenses 15.0 15.0 16.4 16.1
Re-engineering and System
Conversion Costs 0.1 0.0 0.2 0.0
------------- ------------- ------------- -------------
Income from Operations 4.5 4.6 3.3 3.7
Interest Expense 0.9 0.8 0.9 0.8
------------- ------------- ------------- -------------
Income Before Income Taxes 3.6 3.8 2.4 2.9
Provision for Income Taxes 1.4 1.5 1.0 1.1
------------- ------------- ------------- -------------
Net Income 2.2% 2.3% 1.4% 1.8%
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
THIRD QUARTER ENDED JULY 31, 1998 COMPARED TO THIRD QUARTER ENDED JULY 31, 1997
Revenue increased 13.8% from $219.1 million in the three months ended July 31,
1997 to $249.3 million in the three months ended July 31, 1998, an increase of
$30.2 million. Revenue growth in the quarter was primarily due to additional
sales from acquisitions, combined with same-branch sales growth of 2.5% compared
to 0.9% in the quarter ended July 31, 1997.
Gross profit for the third quarter increased $6.0 million or 13.9% on higher
sales, and as a percentage of revenue remained stable at 19.6% compared to the
same period in 1997. Cameron Ashley Financial Services (CAFS) negatively
affected gross margin in the quarter 0.3%.
Operating expenses increased 13.7% from $32.8 million in the 1997 period to
$37.3 million in the 1998 period and remained unchanged as a percentage of
revenue at 15.0%. CAFS negatively impacted operating expenses as a percentage of
revenue by 0.3% in the quarter. Operating expenses include both branch
operations expenses as well as corporate overhead costs.
Operating expenses of $0.3 million from re-engineering and system conversion
costs incurred in the third quarter are primarily associated with business
process re-engineering and new data processing systems training related to the
implementation of the Company's new information system in its Cameron division.
These expenses were 0.1% of revenue for the quarter and effectively reduced
income from operations by 2.6% in the quarter ended July 31, 1998. In
recognizing these expenses, the Company applied Emerging Issues Task Force
Consensus 97-13 "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project That Combines Business Processing Re-engineering
and Information Technology Transformation" and the recently issued AICPA
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Total operating expenses, including
costs associated with re-engineering and system conversion, were $37.6 million
in the quarter ended July 31, 1998, compared with $32.8 million in the prior
year quarter.
10
<PAGE> 11
Income from operations increased 11.4% from $10.0 million in the 1997 period to
$11.2 million in the 1998 period, and decreased as a percentage of revenue from
4.6% to 4.5% primarily due to the re-engineering and system conversion costs
described above and losses associated with CAFS.
CAFS contributed a loss from operations of $1.4 million in the current quarter.
These losses stem from a loss on loan sales, operating expenses, and expenses
associated with terminating the U.S. operations. Excluding the impact of CAFS
and the re-engineering and system conversion costs, operating income would have
increased $2.8 million (28.4%) for the quarter. Income from operations as a
percentage of net sales would have increased from 4.6% to 5.2% for the quarter
without the effects of CAFS and the system conversion costs.
As a result of the above factors and an increase in interest expense of $0.6
million, income before income taxes increased 7.1% from $8.4 million in the 1997
period to $9.0 million in the 1998 period. Net income increased 6.1% from $5.1
million in the 1997 period to $5.4 million in the 1998 period. Net income as a
percentage of revenue decreased from 2.3% in the 1997 period to 2.2% in the 1998
period. Diluted earnings per share increased $.02 to $.56 per share on 2.3% more
shares outstanding.
NINE MONTHS ENDED JULY 31, 1998 COMPARED TO NINE MONTHS ENDED JULY 31, 1997
Revenue increased 14.5% from $535.4 million in the nine months ended July 31,
1997, to $613.3 million in the nine months ended July 31, 1998, an increase of
$77.9 million. Revenue growth for the nine month period was primarily due to
additional sales from acquisitions, combined with same-branch sales growth of
2.0% for the nine months ended July 31, 1998 compared to 1.0% in the 1997
period.
Gross profit for the nine months period increased $16.5 million or 15.6%, and as
a percentage of revenue increased from 19.8% in the 1997 period to 19.9% in the
1998 period. Gross profit percentage was affected positively during the nine
month period as a result of improved selling margins and favorable purchasing
economies.
Operating expenses increased 17.2% from $86.0 million in the 1997 period to
$100.9 million in the 1998 period, and increased as a percentage of revenue from
16.1% to 16.4%. CAFS negatively impacted operating expenses as a percentage of
revenue by 0.3% year to date. Operating expenses include both branch operations
expenses as well as corporate overhead costs. The dollar and percentage
increases in operating expenses during the nine month period were due primarily
to higher costs associated with CAFS and new acquisitions.
Operating expenses of $1.2 million from re-engineering and system conversion
costs were incurred as discussed above. These expenses were 0.2% of revenue for
the nine months ended July 31, 1998 and effectively reduced income from
operations by 5.7% in the 1998 period. Total operating expenses, including costs
associated with re-engineering and system conversion, were $102.1 million in the
nine months ended July 31, 1998, compared with $86.0 million in the 1997 period.
Income from operations increased 2.0% from $19.8 million in the 1997 period to
$20.2 million in the 1998 period and decreased as a percentage of revenue from
3.7% to 3.3%. The decrease in income from operations as a percentage of revenue
is primarily due to the re-engineering and system conversion costs of $1.2
million recognized through the third quarter of 1998 and the operating results
of CAFS.
CAFS contributed a loss from operations of $1.9 million year to date. These
losses stem from a loss on loan sales, operating expenses, and expenses
associated with terminating the U.S. operations. Excluding the impact of CAFS
and the re-engineering and system conversion costs, operating income would have
increased $3.5 million (17.8%) year to date. Income from operations as a
percentage of net sales would have increased from 3.7% to 3.8% year to date
without the effects of CAFS and the system conversion costs.
As a result of the above factors and increased interest expense, income before
income taxes decreased 6.6% from $15.6 million in the 1997 period to $14.6
million in the 1998 period. Net income decreased 8.2% from $9.5 million in the
1997 period to $8.8 million in the 1998 period, and net income as a percentage
of revenue decreased from 1.8% in the 1997 period to 1.4% in the 1998 period.
Diluted EPS decreased from $1.01 per share in the 1997 period to $0.91 per share
in the 1998 period.
11
<PAGE> 12
EFFECTS OF INFLATION
Management does not believe that inflation has had a material impact on results
of operations for the periods presented. Substantial increases in costs,
however, could have a significant impact on the Company and the industry.
Management believes that, to the extent inflation affects its costs in the
future, the Company can generally offset inflation by increasing prices if
competitive conditions permit.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for capital resources are to finance acquisitions,
working capital and capital expenditures. Borrowings for working capital
typically increase during periods of sales expansion when higher levels of
inventory and receivables are needed and decrease as inventories and receivables
are converted to cash which is then used to pay down debt. The Company had
$139.1 million of long-term debt, less current maturities, outstanding as of
July 31, 1998, consisting of the facilities described in the 1997 Annual Report,
Form 10-K and in the notes to the accompanying interim financial statements.
Included in the long-term debt at July 31, 1998 was $80 million in senior notes
that the Company issued in a private placement to institutional investors during
April 1998. These notes have an average interest rate of 6.85% and average term
of 9.5 years.
Net cash used in operating activities was $5.1 million and $2.2 million for the
nine months ended July 31, 1997 and 1998, respectively. The cash used in
operating activities is primarily due to increased seasonal inventory purchases
during the second and third quarters.
Capital expenditures were $7.1 million and $8.8 million for the nine months
ended July 31, 1998 and 1997, respectively. The Company intends to spend
approximately $6.0 million for capital expenditures in the fourth quarter of
fiscal 1998. Included in this amount are capital expenditures for property,
plant and equipment additions and replacements and capital costs for the
Company's new information system. Excluded in this estimate are capital
expenditures that may be attributable to future acquisitions.
Management estimates the total project cost of the new enterprise information
system to be approximately $11 million, of which approximately $8.4 million will
be capitalized in fiscal 1998 and 1999.
The Company believes that its current cash position, funds from operations, and
the availability of funds under its credit agreements will be sufficient to meet
anticipated liquidity requirements for the next twelve months.
SEASONALITY
The Company's first and, to a lesser extent, its second quarter, are typically
adversely affected by winter construction cycles and weather patterns as the
level of activity in both the home improvement and new construction markets
decreases. Management closely monitors operating expenses and inventory levels
during seasonal periods and, to the extent possible, controls variable operating
costs to match seasonally adjusted revenues in both the U.S. and Canada.
YEAR 2000 COMPLIANCE
The Company utilizes a significant number of computer software programs
and information systems in its internal operations, including applications used
in financial business systems and various administration functions ("IT
systems"). The Company also makes use of a variety of machinery and equipment in
its business which are operated by or reliant upon non-information technology
systems ("non-IT systems"), for example equipment or mechanical systems which
contain embedded technology such as microcontrollers. To the extent that the
source code of the software applications of these IT systems or the embedded
technologies of these non-IT systems are unable to appropriately interpret and
process the upcoming calendar year 2000 ("Year 2000"), some level of
modification or possible replacement of such applications would be necessary for
proper continuous performance. Without such modification or replacement, the
normal course of the Company's business could be disrupted of otherwise
adversely impacted. This potential problem is commonly referred to as the Year
2000 compliance issue.
STATE OF READINESS. Management of the Company is actively engaged in
the process of evaluating the status of the Company's internal IT and non-IT
systems for compliance with the Year 2000 issue. In addition, the Company is
attempting to
12
<PAGE> 13
verify the readiness for Year 2000 of third party systems with whom the Company
has a material relationship, such as its largest vendors and suppliers. The
first phase, evaluating the Company's internal systems, is substantially
complete. The second phase, evaluating third party systems, was commenced in the
third quarter of 1998 and is expected to be substantially complete by the end of
fiscal 1998.
Non-IT Systems. Management believes that the failure of any internal
non-IT system to become timely compliant for the year 2000 would not have a
material effect on the business, operations or financial condition of the
Company as a whole. Nevertheless, the Company will continue to take steps to
modify or replace all non-IT systems which are not Year 2000 compliant during
the 1999 calendar year. The anticipated expenses for such conversions are not
expected to be material.
Major IT Systems. The Company has determined that its major internal IT
systems, including the primary DMSI system used in its Cameron division, and
certain other systems running independently at a number of recently acquired
operations, would require modification or replacement to become Year 2000
compliant. Fortunately, the Company initiated a major re-engineering project in
late 1997, centered around a new information system for the Cameron division,
which is scheduled to be completed by July 1999 and will replace all existing
major systems with a Year 2000 compliant system.
The Company's business process re-engineering project is aimed at
improving and standardizing Company processes, using a "best practices" approach
to reduce operating costs. This project centers around an IT system using J. D.
Edwards software and IBM hardware to be implemented in the Cameron division,
which business represents approximately 79.2% of the Company's total revenues
for fiscal 1997. The new IT system and re-engineered processes are expected to
enhance the Company's competitive position by reducing operating and
administrative costs and improving customer service, pricing management and
inventory and logistics management. J.D. Edwards has represented the new
software to be fully Year 2000 compliant. The Company will test for such
compliance prior to final implementation.
In the Ashley division, the Company operates a Data General Aviion
system, which has been determined to be Year 2000 compliant and has been tested
on a preliminary basis. The Company will test this system again for Year 2000
compliance at the end of 1998.
Other IT Systems. The Company has assessed its telecommunications
systems with its third party providers and has been assured that they are or
will be made Year 2000 compliant without significant expense to the Company. The
Company is also assessing the requirements and expense to make Year 2000
compliant all third party IT-system application software typically used in
desktop formats, such as financial, accounting, spreadsheet, E-mail and word
processing programs, and management believes that these costs will not be
material to the Company.
Third Party Systems. The Company has not yet completed a review of the
issues related to Year 2000 compliance by its largest suppliers and vendors.
However, due to the nature of the Company's business, management believes that
the loss of any single supplier or vendor as a result of Year 2000 system
problems would not materially impact the Company's business, operations or
financial condition.
COSTS TO ADDRESS YEAR 2000 ISSUES. The Company has budgeted $11 million
for the cost of the system re-engineering project in the Cameron division, as
incurred and to be incurred in the period from fiscal 1998 through 1999. As of
July 1998, approximately $6 million of this budget has been expended and the
Company currently forecasts that final project expenses will come in on budget.
The Company's results of operation for the third quarter and nine-months ended
July 31, 1998 separately reflect the amount of re-engineering and system
conversion costs which have been expensed and not capitalized during such
periods. The Company's source of funds for the system re-engineering project is
cash generated by operations and borrowings under existing bank facilities.
It is important to note that, although Year 2000 compliance is a
necessary byproduct of the system re-engineering project, it is only one portion
of the benefit to be derived by the Company from the new system conversion.
While cost of the re-engineering project constitutes the vast majority of the
Company's IT budget for the relevant periods, such cost is not confined solely
to the Year 2000 issue and is not displacing other critical IT projects. It is
not possible to segregate the total expense to the Company strictly for Year
2000 compliance within the system conversion project budget.
RISKS TO THE COMPANY FOR YEAR 2000 ISSUES. The most reasonable worst
case scenario to the Company associated with its Year 2000 compliance efforts
would be the failure of the re-engineering project in the Cameron division to be
completed on schedule by July 1999. This would require the Company to take
immediate steps towards its contingency plans. It is not feasible at this time
to predict the impact, if any, on the Company's financial condition or results
of operations as a result of this scenario.
13
<PAGE> 14
However, management believes that the implementation of its contingency plan
could be achieved with minimum disruption to the business and operations of the
Company.
CONTINGENCY PLANS. In the unlikely event that the new IT system is not
operational by July 1999 in Cameron Division, the Company would be forced to
move to its contingency plan to meet a deadline of December 31, 1999. The
scenario would require the Company to make the necessary modifications to the
DMSI system and other currently operating systems for Year 2000 compliance.
Management believes the cost of the DMSI upgrade would not be material and could
be completed by the required deadline.
FORWARD-LOOKING INFORMATION
The matters discussed in this Report on Form 10-Q, other than historical
information, and, in particular, information regarding future revenue, earnings
and business plans and goals, consist of forward-looking information under the
Private Securities Litigation Reform Act of 1995, and are subject to and involve
risks and uncertainties which could cause actual results to differ materially
from the forward-looking information. Forward-looking statements may be
indicated by phrases such as "believes", "anticipates", "expects", "intends",
"foresees", "projects", "predicts", "forecasts" or similar words and involve
known and unknown risks and uncertainties which may cause the Company's actual
results in future periods to differ materially from forecasted results. Among
the factors that could cause results to differ materially are the following: (i)
business and economic conditions in North America, (ii) business and economic
conditions in the regional markets in which the Company operates, (iii) adverse
homebuilding conditions including those related to weather and interest rates,
(iv) the ability to make acquisitions at reasonable prices and achieve synergies
upon integration, (v) reliable and cost-effective supply of products from
manufacturers, and (vi) technology risks in integrating information systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material exposure to market risk
associated with activities involving derivative financial instruments, other
financial instruments and derivative commodity instruments.
14
<PAGE> 15
CAMERON ASHLEY BUILDING PRODUCTS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to the description of a lawsuit filed by Bradco
Supply Corporation ("Bradco") against the Company under the heading "Legal
Proceedings" in the Company's 10-Q filings for the quarterly periods ended
January 31 and April 30, 1998. This case is pending in the U.S. District Court,
New Jersey District.
On June 9, 1998, the Company filed a counterclaim against Bradco,
alleging various matters arising out of the same transaction that is the subject
of Bradco's suit. Such claims include, among other matters, fraud, negligent
misrepresentation, bad faith and unfair dealing and anticipatory breach. The
Company continues to aggressively pursue both its defenses and counterclaims as
the lawsuit progresses through discovery.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits required to be filed with this Report on Form 10-Q are listed
on the Exhibit Index following the signature page hereof.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
quarter ended July 31, 1998.
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.
CAMERON ASHLEY BUILDING PRODUCTS, INC.
(Registrant)
Date: September 14, 1998 /s/ J. Andrew Kerner
------------------ --------------------------------------
J. Andrew Kerner
Executive Vice President/Chief
Financial Officer
15
<PAGE> 16
CAMERON ASHLEY BUILDING PRODUCTS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
10.25 Agreement and General Release by and between the Company and F. Dixon McElwee
11 Computation of Earnings per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.25
January 19, 1998
Mr. F. Dixon McElwee
3036 Fondren
Dallas, TX 75205
Re: AGREEMENT AND GENERAL RELEASE
A special Severance Package will be made available to you by Cameron Ashley
Building Products provided you agree to the terms of this Agreement and General
Release.
1. The following Agreement is made between Cameron Ashley Building
Products ("CABP") and F. Dixon McElwee ("EMPLOYEE", "YOU", "ME" OR
"I"). In consideration for you agreeing to these terms, as described
below, CABP will provide you with the following benefits, which you
acknowledge represent greater benefits than you would otherwise be
entitled to receive.
o COMPENSATION
You will continue to be employed as an employee of CABP during your service on
the project outlined in the Addendum hereto, upon terms and conditions stated
in the Addendum. After that time, your employment will cease and you will
receive severance payments as provided below. You will receive twelve (12)
months of severance at your current bi-weekly base rate of pay. Severance
payments will be paid to you in bi-weekly salary continuation payroll checks
commencing after completion of your project as defined in the attached
Addendum, provided you sign this Agreement and General Release and seven (7)
days pass from such date of signing.
EMPLOYEE INITIALS ________
CO. REP. INITIALS ________
<PAGE> 2
AGREEMENT & GENERAL RELEASE
JANUARY 19, 1998
PAGE 2
All applicable deductions will be withheld from your severance checks.
You will be eligible to participate in the CABP Executive Bonus Plan
for fiscal year 1997, in accordance with the eligibility criteria
stated therein (including the requirement that you remain an active
employee at the time the bonus is paid), but not beyond. Should you
find employment of any type prior to the end of your twelve (12) month
severance period as defined above, the Company's obligation to
continue severance payments to you shall cease effective that date.
You acknowledge that other than the above-described compensation and
that compensation provided in paragraph 11 below (stock options), you
are not entitled to any compensation from CABP of any kind.
2. In return for the benefits listed in this document, I agree to
release CABP as follows:
I agree, on behalf of myself and all of my heirs or personal
representatives to release Wm. Cameron & Co., CABP, Cameron Ashley
Building Products (Cameron Division), Cameron Ashley Inc., and Cameron
Ashley Building Products, Inc., and all subsidiaries of them, and all
of their present or former officers, agents, employees, employee
benefit plans and the trustees, administrators, fiduciaries and
insurers of such plans from any and all claims for relief of any kind,
whether known to me or unknown, which in any way arise out of or
relate to my employment or the termination of my employment at
CABP, concerning events occurring at any time up through my last day
of employment with CABP including, but not limited to, any and all
claims of discrimination of any kind, including age discrimination.
This settlement and waiver includes all such claims, whether under any
applicable federal laws, including, but not limited to, the Federal
Age Discrimination in Employment Act, Title VII of the Civil Rights
Act of 1964, as amended, Texas Commission on Human Rights Act, Section
451 of the Texas Labor Code, breach of contract, defamation,
intentional infliction of emotional distress or other tortious
conduct, Americans with Disabilities Act, the Family and Medical Leave
Act, Worker Adjustment and Retraining Notification Act, Equal Pay and
Employee Retirement Income Security Act or under any applicable state
or local laws or ordinances or any other legal restrictions on CABP's
rights. I further agree not to file a claim or suit of any kind
against CABP (or any company/subsidiary noted above) relating to my
employment or to the termination of my employment or to participate
voluntarily in any employment-related claim brought by any other party
against CABP (or any company/subsidiary noted above).
EMPLOYEE INITIALS ________
CO. REP. INITIALS ________
<PAGE> 3
AGREEMENT & GENERAL RELEASE
JANUARY 19, 1998
PAGE 3
3. While I understand that I have had the following obligations since I
began my employment with CABP, I confirm that I shall not disclose any
of the Company's trade secrets or other confidential or restricted
information and shall not make use of such trade secrets or
confidential or restricted information in any fashion at any time. I
also agree that I will not solicit or recruit any of CABP's current
employees to work at or be associated with any company that might hire
me in the future.
4. This Agreement and General Release does not constitute an admission
of any kind by CABP, but is simply an accommodation which offers
certain extra benefits to which I would not otherwise be entitled in
return for my agreeing to and signing this document. I further
understand and agree that if I breach a material term or condition of
this Agreement and General Release, I automatically forfeit all these
extra benefits and that CABP will be entitled to obtain from a court
of competent jurisdiction a temporary restraining order and a
permanent injunction prohibiting any further violation(s). If I
violate this Agreement after receiving any of these benefits, I agree
that I immediately will return those benefits to CABP. In any action
brought to enforce any provisions of this Agreement, in addition to
any other relief granted, the prevailing party shall recover its
reasonable costs of enforcement including, but without limitations to
costs and reasonable attorney fees incurred therein.
I understand that I may have 21 days from the date of this document to
consider this Agreement and have been advised by CABP to consult with
an attorney and/or tax consultant if I so desire. I further agree not
to voluntarily make the terms and conditions or the circumstances
surrounding this Agreement known to anyone other than the attorney
and/or tax consultant from whom I receive counseling, as referred to
above, or, if I am married, to my spouse. However, before disclosing
such information to these individuals, I will first obtain their
agreement not to disclose such information.
I understand that if I sign this Agreement and General Release, I will
then have 7 days to cancel it in writing if I so choose. However, if I
elect to cancel this Agreement, I understand I will not be entitled to
any of these benefits. I realize this Agreement is not effective or
enforceable until the 7-day period expires.
EMPLOYEE INITIALS ________
CO. REP. INITIALS ________
<PAGE> 4
AGREEMENT & GENERAL RELEASE
JANUARY 19, 1998
PAGE 4
5. CABP will not contest my claim for unemployment compensation insurance
should I apply for it as a result of my separation from CABP; provided
I file my claim for such benefits after the expiration of my salary
continuation severance payments as defined in paragraph 1 above.
6. I acknowledge and accept that should I ever challenge this Agreement
and General Release in a court of law at any time and should that
challenge be upheld on my behalf by said court, I agree to immediately
return to CABP all money paid to me by CABP under this Agreement and
General Release.
7. You will be paid for all accrued, but unused, vacation for 1998 based
on service with CABP at your current base salary.
8. You will be proffered continuation of insurance benefits in accordance
with COBRA after the completion of your project and you leave the
active payroll. While employed on your project, you will remain
eligible for active benefits.
9. CABP will provide outplacement assistance through the Dallas office of
Drake Beam Morin for a period not to exceed the duration of your salary
continuation severance payments. Participation in outplacement may, at
your option, begin immediately.
10. The terms and conditions of your participation in and the parameters
of the project referred to this Agreement and General Release shall be
as described in the attached Addendum, which is incorporated by
reference herein.
11. Notwithstanding provisions in your stock option contract to the
contrary, you may exercise within one (1) year of your last day of
employment your vested CABP stock options - 41,667 of which shall be
vested as of your last day of employment.
I acknowledge and represent by my signature below that I am entering into this
Agreement freely and voluntarily and I am satisfied that I have been given
sufficient opportunity to consider it. I have carefully read and understand all
of the provisions of this Agreement. I understand that it sets forth the entire
Agreement between CABP and me and I represent that no other statements,
promises, or commitments of any kind, written or oral, have been made to me by
CABP to cause me to accept it. I acknowledge acceptance of this Agreement by my
signature below.
EMPLOYEE INITIALS ________
CO. REP. INITIALS ________
<PAGE> 5
AGREEMENT & GENERAL RELEASE
JANUARY 19, 1998
PAGE 5
/s/ F. DIXON MCELWEE
- ----------------------------------- January 21, 1998
F. Dixon McElwee -------------
Date
AGREED TO AND ACCEPTED ON BEHALF OF CABP:
/s/ RONALD R. ROSS
- ----------------------------------- January 22, 1998
Ronald R. Ross, Chairman -------------
<PAGE> 6
AGREEMENT & GENERAL RELEASE
JANUARY 19, 1998
PAGE 6
ADDENDUM TO AGREEMENT AND GENERAL RELEASE
BETWEEN CABP AND F. DIXON MCELWEE
DATED JANUARY 9, 1998
1. This Addendum is incorporated by reference into the Agreement and General
Release between CABP and F. Dixon McElwee dated January 19, 1998.
2. It is understood and agreed that employee will at all times use his best
efforts to complete the below-described project within the time frame set
by CABP. During his service on this project, employee will be entitled to
receive his regular base salary as compensation.
3. It is understood and agreed that employee will perform his services in
completing said project at a level of performance acceptable to CABP.
4. It is understood and agreed that CABP in its discretion may terminate at any
time employee's employment and his participation in said project.
5. It is understood and agreed that should CABP terminate employee's
participation in said project for any reason, other than for acts of
dishonesty, said termination will immediately trigger employee's entitlement
to salary continuation severance payments and other benefits described in
Paragraphs 1 through 11 of the Agreement and General Release.
6. General Outline Of Project and Employee's Responsibilities therein:
o Employee will use his best efforts to continue to promote CABP's
stock before the investment community and its shareholders,
securing new analysts coverage from Robert Baird and obtaining a
commitment for coverage from one of the following firms: DLJ, Smith
Barney, Raymond James or Alex Brown.
o Employee will work closely with Robinson-Humphrey, Dillion Reed,
Wheat First, William McLay, J. C. Bradford and Hanifen-Imhoff in an
effort to increase CABP's shareholder retail base as a means of
moving towards achieving the minimum shareholder base for the
Company's stock listing on the New York Stock Exchange. CABP
currently has 1,200 shareholders. A NYSE listing currently requires
2,200 shareholders; or 500 shareholders and 1,000,000 in average
share trading per month over the latest 12 months. CABP has a
chance to qualify on the later front during January 1998. Employee
will work closely with Wall Street Analysts to achieve the required
trading volume of 695,000 shares in January, 1998 in order to
effect CABP's move to the NYSE in February, 1998.
EMPLOYEE INITIALS ________
CO. REP. INITIALS ________
<PAGE> 7
AGREEMENT & GENERAL RELEASE
JANUARY 19, 1998
PAGE 7
o Employee will use his best efforts to complete necessary senior
public financing for CABP's Canadian subsidiary and new warehouse
financing for Cameron Ashley Financial Services (CAFS) during the
first quarter of 1998 at an interest rate and on terms agreeable to
CABP's Chairman and Board of Directors.
o Employee will use his best efforts to obtain necessary senior
public financing for CABP at an interest rate and on terms
agreeable to the CABP's Chairman and Board of Directors and/or
begin work on a secondary stock offering during the first quarter
of 1998.
o Employee will use his best efforts to complete such other projects
and/or tasks as assigned by CABP's Chairman.
EMPLOYEE INITIALS ________
CO. REP. INITIALS ________
<PAGE> 1
EXHIBIT 11
CAMERON ASHLEY BUILDING PRODUCTS, INC.
COMPUTATION OF EARNINGS PER SHARE
(THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------------
July 31, 1998 July 31, 1997
-------------------------------------------- -----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $5,365 9,363 $ 0.57 $ 5,058 9,248 $ 0.55
====== ======
EFFECT OF DILUTIVE SECURITIES 1,456 1,063
Average options outstanding
Effects of treasury
stock method (based on
exercise proceeds and
tax benefits) (1,171) (884)
------ ------ ------ ------- ----- ------
DILUTED EPS
Income available to common
Stockholders assuming
dilution $5,365 9,648 $ 0.56 $ 5,058 9,427 $ 0.54
====== ====== ====== ======= ===== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------------------------------------------------------------------------
July 31, 1998 July 31, 1997
-------------------------------------------- -----------------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $8,756 9,345 $ 0.94 $ 9,539 9,183 $ 1.04
====== ======
EFFECT OF DILUTIVE SECURITIES 1,359 1,069
Average options outstanding
Effects of treasury
stock method (based on
exercise proceeds and
tax benefits) (1,083) (848)
------ ------ ------ ------- ----- ------
DILUTED EPS
Income available to common
Stockholders assuming
dilution $8,576 9,621 $ 0.91 $ 9,539 9,404 $ 1.01
====== ====== ====== ======= ===== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 10,626
<SECURITIES> 0
<RECEIVABLES> 146,775
<ALLOWANCES> 3,674
<INVENTORY> 123,105
<CURRENT-ASSETS> 283,091
<PP&E> 78,116
<DEPRECIATION> 30,085
<TOTAL-ASSETS> 381,383
<CURRENT-LIABILITIES> 123,776
<BONDS> 0
0
0
<COMMON> 63,835
<OTHER-SE> 53,265
<TOTAL-LIABILITY-AND-EQUITY> 381,383
<SALES> 613,311
<TOTAL-REVENUES> 613,311
<CGS> 491,053
<TOTAL-COSTS> 97,780
<OTHER-EXPENSES> 1,223
<LOSS-PROVISION> 3,077
<INTEREST-EXPENSE> 5,587
<INCOME-PRETAX> 14,591
<INCOME-TAX> 5,835
<INCOME-CONTINUING> 8,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,756
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.91
</TABLE>
