SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 1, 1997
KEVCO, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 000-21621 75-2666013
(STATE OR OTHER (COMMISSION (IRS EMPLOYER
JURISDICTION FILE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
1300 S. UNIVERSITY DRIVE, SUITE 200, FORT 76107
WORTH, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code (817) 332-2758
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Shelter Acquisition
On December 1, 1997, Kevco, Inc., a Texas corporation (the "Company" or
"Kevco"), through a wholly-owned subsidiary, acquired (the "Shelter Stock
Acquisition") approximately 95.5% of the common stock (the "Shelter Common
Stock") of Shelter Components Corporation, an Indiana corporation ("Shelter")
through the consummation of a cash tender offer (the "Tender Offer") for the
Shelter Common Stock, which tender offer was commenced pursuant to the terms
of an Agreement and Plan of Merger (the "Merger Agreement") entered into on
October 21, 1997 by Kevco, a wholly-owned subsidiary of Kevco and Shelter.
The Company intends to acquire the remaining outstanding shares of Shelter
Common Stock pursuant to the "short form" merger (the "Merger"; the
acquisition of Shelter through the Shelter Stock Acquisition and after giving
effect to the Merger is herein referred to as the "Shelter Acquisition")
provision of Section 23-1-40-4 of the Business Corporation Law of the State of
Indiana, as amended (the "IBCL"), without the need for any action by any other
shareholder of Shelter Common Stock following any waiting period required by
the IBCL.
As a result of the Shelter Stock Acquisition, the Company became the
indirect holder (through its indirect ownership of Shelter Common Stock) of a
proportionate interest of, and upon consummation of the Merger all, of the
assets and properties, real and personal, tangible and intangible, and
liabilities of Shelter. Shelter is a wholesale distributor of building
products to the United States manufactured housing industry and the Company's
subsidiary intends to continue the use of the assets it acquired substantially
in accordance with their prior use.
Pursuant to the terms of the Merger Agreement, on December 4, 1997, each of
the then directors of Shelter, other than Larry D. Renbarger, resigned and
vacancies were filled by the following officers of Kevco, Jerry E. Kimmel,
Clyde A. Reed, Jr., Ellis L. McKinley, Jr., and Richard S. Tucker. In addition
on December 4, 1997, the following individuals assumed the following positions
with Shelter, Jerry E. Kimmel -- Chairman of the Board; Ellis L. McKinley, Jr.
- -- Vice President and Treasurer; and Richard S. Tucker -- Secretary.
To the best knowledge of the Company, at the time of the Shelter Stock
Acquisition there was no material relationship between (i) Shelter on the one
hand and (ii) the Company, or any of its affiliates, its shareholders, any
director or officer of the Company, or any associate of such director or
officer on the other; except, that as required by the Merger Agreement,
certain officers and directors of Shelter agreed to tender their shares of
Shelter Common Stock pursuant to the Tender Offer.
The aggregate consideration paid by the Company as a result of the Shelter
Stock Acquisition was approximately $129.9 million in cash and after giving
effect to the Merger and the retirement of options of Shelter the Company will
have paid in the aggregate approximately $138.8 million in cash. The
acquisition consideration for the Shelter Acquisition was determined by arms-
length negotiations between the parties to the Merger Agreement.
The primary source of funds used in the Shelter Stock Acquisition was (i)
$101.9 million in proceeds from the private placement by the Company of $105
million of 10 3/8% Senior Subordinated Notes due 2007 consummated December 1,
1997 (the "Offering") and (ii) $28.0 million in borrowings under its Second
Amended and Restated Credit Agreement with NationsBank of Texas, N.A. as a
lender and administrative agent and Guaranty Federal Bank, F.S.B., The
Sumitano Bank, Limited, and National City Bank Kentucky (the "Senior Credit
Facility"). The primary source of funds that will be used for the Merger is
anticipated to be additional borrowings under the Senior Credit Facility.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) The audited consolidated balance sheets of Kevco as of December 31, 1996
and 1995, and the related audited consolidated statements of income,
stockholders' equity and cash flows for the three year period then ended
and the unaudited consolidated financial statements as of September 30,
1997 and for the nine month periods ended September 30, 1997 and 1996 are
attached hereto as Annex A and made a part hereof.
(b) The audited consolidated balance sheets of Shelter as of December 31, 1996
and 1995 and the related audited consolidated statements of income,
shareholders' equity and cash flows for the three year period then ended
and the unaudited consolidated financial statements as of September 30,
1997 and for the nine month periods ended September 30, 1997 and 1996 are
attached hereto as Annex B and made a part hereof.
2
(c) The otherwise required financial statements of Consolidated Forest
Products L.L.C., an Alabama limited liability company and Bowen Supply,
Inc., a Georgia corporation were previously field with the Securities and
Exchange Commission (the "SEC") and appear on Annexes B and A,
respectively, to the Company's Current Report on Form 8-K/A dated February
27, 1997 and filed with the SEC on May 8, 1997 and are not required herein
in reliance on General Instruction B.3. to Form 8-K.
(e) The unaudited pro forma condensed combined balance sheet of the Company
attached hereto as Annex C has been adjusted to give effect to the Merger
and the Offering, as though such transactions had occurred on September
30, 1997. The unaudited pro forma combined statements of income for the
year ended December 31, 1996, the nine-month period ended September 30,
1997 and the last twelve months ended September 30, 1997, are based on the
consolidated financial statements of the Company adjusted to give effect
to the Pro Forma Transactions (as defined herein) as if such transaction
had occurred on January 1, 1996.
(f) Exhibits.
2.1 Agreement and Plan of Merger, dated as of October 21, 1997, between
Kevco, Inc., SCC Acquisition Corp. and Shelter Components Corporation.(1)
4.1 Articles of Incorporation of Kevco, Inc., as amended.(2)
4.2 Bylaws of Kevco, Inc.(2)
4.3 Form of certificate evidencing ownership of the Common Stock of Kevco,
Inc.(2)
23.1 Consent of Coopers & Lybrand L.L.P.(3)
23.2 Consent of Rylander, Clay & Opitz, L.L.P.(3)
23.3 Consent of Price Waterhouse LLP.(3)
23.4 Consent of Coopers & Lybrand L.L.P.(3)
- ---------------------
(1) Previously filed as an exhibit to the Company's Tender Offer Statement or
Schedule 14D-1, filed October 28, 1997, and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-11173) and incorporated herein by reference.
(3) Filed herewith.
3
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 hereunto duly authorized.
Kevco, Inc.
/s/ Ellis L. McKinley, Jr.
By:__________________________________
Ellis L. McKinley, Jr.
Vice President, Chief Financial
Officer
and Treasurer
Date: December 16, 1997
4
ANNEX A
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Kevco, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kevco, Inc.
as of December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 13 to the consolidated financial statements, Kevco,
Inc. retroactively changed its method of accounting for inventory from the
last-in, first-out method to the first-in, first-out method and the
consolidated financial statements for all years presented have been restated
accordingly.
We also audited the adjustments described in Note 13 that were applied to
restate the 1994 financial statements. In our opinion, such adjustments are
appropriate and have been properly applied.
/s/ Coopers & Lybrand L.L.P.
Fort Worth, Texas
February 21, 1997, except for
Note 13 as to which the date
is June 30, 1997
A-1
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas
We have audited the accompanying statements of income, stockholders' equity
and cash flows of Kevco, Inc. (an S-Corporation) for the year ended December
31, 1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Kevco,
Inc. for the year ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ Rylander, Clay & Opitz, L.L.P.
Fort Worth, Texas
March 24, 1995
A-2
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
---------------
1996 1995
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,078 $ 977
Trade receivables (less allowance for doubtful accounts of
$100 and $160 in 1996 and 1995, respectively).............. 9,458 14,769
Inventories................................................. 23,722 19,201
Prepaid expenses and other.................................. 338 343
------- -------
Total current assets...................................... 35,596 35,290
Property and equipment, net................................... 10,208 9,758
Intangible assets, net........................................ 9,495 10,162
Other assets.................................................. 440 459
------- -------
Total assets.............................................. $55,739 $55,669
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable...................................... $ 6,666 $11,258
Accrued liabilities......................................... 3,107 3,231
Income taxes payable........................................ 762 --
Current portion of long-term debt........................... 367 1,057
Current deferred income taxes............................... 168 --
------- -------
Total current liabilities................................. 11,070 15,546
Long-term debt, less current portion.......................... 9,464 30,206
Deferred compensation obligation.............................. 383 361
Deferred income taxes......................................... 629 --
------- -------
Total liabilities......................................... $21,546 $46,113
------- -------
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized;
6,809 and 4,700 shares issued in 1996 and 1995,
respectively............................................... 68 47
Additional paid-in capital.................................. 32,854 3,034
Loan to stockholder......................................... -- (3,437)
Retained earnings........................................... 1,271 10,660
Treasury stock, 306 shares at cost.......................... -- (748)
------- -------
Total stockholders' equity................................ $34,193 $ 9,556
------- -------
Total liabilities and stockholders' equity................ $55,739 $55,669
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
A-3
KEVCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
Net sales.......................................... $267,344 $182,519 $99,279
Cost of sales...................................... 226,653 155,641 83,356
-------- -------- -------
Gross profit..................................... 40,691 26,878 15,923
Commission income.................................. 5,497 2,610 1,066
-------- -------- -------
46,188 29,488 16,989
Selling, general and administrative expenses....... 29,723 20,889 11,941
-------- -------- -------
Operating income................................. 16,465 8,599 5,048
Interest income.................................... 151 355 346
Interest expense................................... (2,209) (1,692) (627)
Other income....................................... -- -- 800
-------- -------- -------
Income before income tax provision............... 14,407 7,262 5,567
Income tax provision............................... 1,695 45 51
-------- -------- -------
Net income....................................... $ 12,712 $ 7,217 $ 5,516
======== ======== =======
Pro forma information (unaudited) (Note 1):
Historical income before income taxes............ $ 14,407 $ 7,262 $ 5,567
Income tax expense adjustments................... 5,475 2,832 2,171
-------- -------- -------
Pro forma net income............................. $ 8,932 $ 4,430 $ 3,396
======== ======== =======
Pro forma earnings per share..................... $ 1.61 $ 0.90 $ 0.69
======== ======== =======
Weighted average shares outstanding.............. 5,531 4,946 4,946
The accompanying notes are an integral part of the consolidated financial
statements.
A-4
KEVCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
TREASURY
COMMON STOCK STOCK ADDITIONAL
-------------- ------------- PAID-IN LOAN TO RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDER EARNINGS TOTAL
Balance at December 31,
1993................... 4,700 $47 306 $(748) $ 2,837 $(4,937) $ 6,651 $ 3,850
Net income............ -- -- -- -- -- -- 5,516 5,516
Distribution to
stockholders......... -- -- -- -- -- -- (4,022) (4,022)
Collections from
stockholder.......... -- -- -- -- -- 750 -- 750
----- --- ---- ----- ------- ------- -------- --------
Balance at December 31,
1994................... 4,700 47 306 (748) 2,837 (4,187) 8,145 6,094
Net income............ -- -- -- -- -- -- 7,217 7,217
Distribution to
stockholders......... -- -- -- -- -- -- (4,702) (4,702)
Collections from
stockholder.......... -- -- -- -- -- 750 -- 750
Contributed capital... -- -- -- -- 197 -- -- 197
----- --- ---- ----- ------- ------- -------- --------
Balance at December 31,
1995................... 4,700 47 306 (748) 3,034 (3,437) 10,660 9,556
Net income............ -- -- -- -- -- -- 12,712 12,712
Distribution to
stockholders......... -- -- -- -- -- -- (14,407) (14,407)
Collections from
stockholder.......... -- -- -- -- -- 375 -- 375
Distribution of loan
to stockholders...... -- -- -- -- -- 3,062 (3,062) --
Contributed capital... -- -- -- -- 86 -- -- 86
Retirement of treasury
stock................ (306) (3) (306) 748 (745) -- -- --
Contribution of S
corporation retained
earnings with change
to C corporation
status............... -- -- -- -- 4,632 -- (4,632) --
Issuance of stock..... 2,415 24 -- -- 25,847 -- -- 25,871
----- --- ---- ----- ------- ------- -------- --------
Balance at December 31,
1996................... 6,809 $68 -- $ -- $32,854 $ -- $ 1,271 $ 34,193
===== === ==== ===== ======= ======= ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
A-5
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
Cash flows from operating activities:
Net income..................................... $ 12,712 $ 7,217 $ 5,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 1,792 1,041 399
Gain on sale of assets....................... (10) (16) (11)
Deferred compensation obligation............. 22 28 (7)
Deferred income taxes........................ 797 -- --
Changes in assets and liabilities, net of effects
from purchase of Service Supply Systems, Inc.:
Trade receivables, net......................... 5,311 (2,014) (835)
Inventories.................................... (4,521) (1,363) (1,604)
Prepaid expenses and other..................... 5 71 (9)
Trade accounts payable......................... (4,592) 3,650 (591)
Accrued liabilties............................. (124) (166) 218
Income taxes payable........................... 762 -- --
-------- -------- -------
Net cash provided by operating activities.... 12,154 8,448 3,076
-------- -------- -------
Cash flows from investing activities:
Purchase of equipment.......................... (1,586) (2,844) (432)
Proceeds from sale of assets................... 21 594 11
Decrease in other assets....................... 19 180 (47)
Purchase of Service Supply Systems, Inc., net
of cash acquired.............................. -- (17,449) --
Loan origination fees.......................... -- (913) --
-------- -------- -------
Net cash used by investing activities........ (1,546) (20,432) (468)
-------- -------- -------
Cash flows from financing activities:
Net proceeds from initial public offering...... 25,871 -- --
(Payment) proceeds from line of credit......... (6,500) (4,587) 2,400
Payments of long-term debt..................... (14,932) (1,900) (1,578)
Proceeds from long-term debt................... -- 30,700 --
Payment of acquired debt....................... -- (8,124) --
Distributions paid............................. (14,407) (4,702) (4,022)
Capital contributions.......................... 86 197 --
Collections on loan to stockholder............. 375 750 750
-------- -------- -------
Net cash (used) provided by financing
activities.................................. (9,507) 12,334 (2,450)
-------- -------- -------
Net increase in cash and cash equivalents........ 1,101 350 158
Beginning cash and cash equivalents.............. 977 627 469
-------- -------- -------
Ending cash and cash equivalents................. $ 2,078 $ 977 $ 627
======== ======== =======
Supplemental cash flow information:
Cash paid during the period for:
Interest..................................... $ 2,162 $ 1,471 $ 604
======== ======== =======
Income taxes................................. $ 456 $ 45 $ 51
======== ======== =======
A-6
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
Supplemental schedule of noncash investing and financing activities:
The Company distributed the loan to stockholder of $3,062 to the Company's
stockholders effective June 30, 1996.
During 1995, the Company purchased all of the capital stock of Service
Supply Systems, Inc. for $17,700. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired........................................ $32,400
Cash paid for the capital stock...................................... 17,700
-------
Liabilities assumed................................................ $14,700
=======
Of the $14,700 in liabilities assumed, $8,100 was immediately paid off with
the proceeds from long-term debt.
Noncompete obligations of $544 were incurred when the Company purchased
Service Supply Systems, Inc. and entered into two noncompete agreements which
are being amortized over the life of the agreements.
The accompanying notes are an integral part of the consolidated financial
statements.
A-7
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS
Kevco, Inc. manufactures and distributes products and materials for use by
the manufactured housing and recreational vehicle industries.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Kevco, Inc. and its wholly-owned subsidiaries (the "Company"). All significant
intercompany transactions and accounts have been eliminated.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, deposits with banks and all highly liquid investments with original
maturities of three months or less. The carrying value of cash and cash
equivalents approximates fair value as of December 31, 1996 and 1995.
INVENTORIES
Inventories are stated at the lower of cost or market. Inventories purchased
for resale and manufacturing inventories are valued using the first-in, first-
out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Additions to and major improvements of property and equipment are capitalized.
Maintenance and repair costs are expensed as incurred. When assets are retired
or otherwise disposed of, their costs and related accumulated depreciation are
removed from the accounts and any resulting gains or losses are included in
the operations for the period.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
Buildings.................................................. 40 years
Furniture and equipment.................................... 5 to 10 years
Transportation equipment................................... 4 to 10 years
Leasehold improvements..................................... 10 years
INTANGIBLE ASSETS
Intangible assets are comprised of noncompete agreements, loan origination
fees and goodwill. Noncompete agreements are amortized on a straight-line
basis over the terms of the related agreements (24 to 30 months). Loan
origination fees associated with the acquisition of the Company's term debt
and revolving credit facility have been capitalized and are being amortized on
a straight-line basis over five years. The excess of acquisition cost of
acquired businesses over the fair value of net assets acquired ("goodwill") is
amortized, using the straight-line method, over 40 years. The Company reviews
goodwill to assess recoverability periodically. At each balance sheet date,
management assesses whether there has been a permanent impairment in the value
of goodwill by considering factors such as expected future operating income,
current operating results, and other economic factors. Management believes no
impairment has occurred.
A-8
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DEFERRED COMPENSATION OBLIGATION
The Company has entered into deferred compensation agreements with certain
employees, whereby payments will be made upon death or retirement for a ten
year period and such liability has been recorded at the present value of the
anticipated future payments.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment or the time
of receipt in the case of direct shipments from vendors to customers.
Commissions are recognized as earned.
INCOME TAXES
Income taxes are provided based on earnings reported for tax return purposes
in addition to a provision for deferred income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. The provision for income taxes includes
deferred taxes determined by the change in the deferred tax liability (or
asset) which is computed based on the differences between the financial
statement and income tax bases of assets and liabilities, all of which are
measured by applying enacted tax laws and rates. Deferred tax expense is the
result of changes in the deferred tax liability or asset.
INTEREST RATE HEDGE
The Company entered into an interest rate hedge agreement in conjunction
with its primary credit facility to alter interest rate exposure on both the
revolver and the term debt. Amounts expected to be paid or received on the
interest rate hedge are recognized as adjustments to interest expense. Any
gain or loss from the termination of this hedge agreement will be recognized
at that time.
CONCENTRATION OF CREDIT RISK
The Company's sales are primarily to the manufactured housing and
recreational vehicle industries across a wide geographical area and generally
require no advance payment from customers. The Company had sales to two
customers representing approximately 16% and 14% of net sales in 1996.
The Company estimates future credit losses based on continual evaluation of
customers' financial condition, historical loss experience and current
economic conditions. The estimated future credit losses are expensed through
an allowance for doubtful accounts and actual credit losses are charged to the
allowance when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses in the reporting
periods. Actual results could differ from those estimates.
STOCK SPLIT
On August 29, 1996, the Company effected a .47-for-1 reverse stock split of
its common stock. All share and per share amounts included in the accompanying
financial statements and notes have been restated to reflect the stock split.
A-9
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED PRO FORMA NET INCOME
Pro forma net income represents the results of operations adjusted to
reflect a provision for income tax on historical income before income taxes,
which gives effect to the change in the Company's income tax status to a C
corporation prior to the consummation of the Company's initial public
offering. The difference between the pro forma income tax rates utilized and
the federal statutory rate of 35% relates primarily to state income taxes (5%,
less effect of federal tax benefit).
UNAUDITED PRO FORMA EARNINGS PER SHARE
Historical net income per common share is not presented because it is not
indicative of the ongoing entity. Pro forma earnings per share have been
computed by dividing pro forma net income by the weighted average number of
shares of common stock outstanding during the period. Pro forma earnings per
share data has been presented to reflect the effect of the assumed issuance of
that number of shares of common stock that would generate sufficient cash to
pay an S corporation distribution in an amount equal to previously taxed but
undistributed earnings.
2. ACQUISITION:
The Company purchased all of the capital stock of Service Supply Systems,
Inc. ("Service Supply") on June 30, 1995 for approximately $17,700,000 and at
that date merged Service Supply with and into the Company. The acquisition was
accounted for as a purchase and, accordingly, the operating results of Service
Supply have been included in the operating results of the Company since June
30, 1995. The acquisition cost in excess of the fair value of net assets of
Service Supply of $7,087,000 has been accounted for as goodwill and will be
amortized over its useful life of 40 years.
3. INVENTORIES:
Inventories are comprised of the following (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
1996 1995
Raw materials.............................................. $ 4,385 $ 2,314
Work-in-process............................................ 332 303
Finished goods............................................. 1,324 828
Goods held for resale...................................... 17,681 15,756
------- -------
$23,722 $19,201
======= =======
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
1996 1995
Land....................................................... $ 242 $ 242
Buildings.................................................. 5,195 4,774
Furniture and equipment.................................... 6,181 5,213
Transportation equipment................................... 3,277 3,232
Leasehold improvements..................................... 564 503
------- -------
15,459 13,964
Less accumulated depreciation.............................. (5,251) (4,206)
------- -------
Property and equipment, net.............................. $10,208 $ 9,758
======= =======
A-10
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and equipment under capital leases consists of buildings of
$2,231,000 and furniture and equipment of $640,000 for the years ended
December 31, 1996 and 1995, and accumulated depreciation of $1,982,000 and
$1,846,000 for the years ended December 31, 1996 and 1995, respectively.
5. INTANGIBLE ASSETS:
Intangible assets consist of the following (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
1996 1995
Goodwill................................................... $ 9,113 $ 9,113
Loan origination fees...................................... 913 913
Noncompete agreements...................................... 544 544
------- -------
10,570 10,570
Less accumulated amortization.............................. (1,075) (408)
------- -------
Intangible assets, net................................... $ 9,495 $10,162
======= =======
6. LONG-TERM DEBT:
Long-term debt consists or the following (in thousands):
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
(IN THOUSANDS)
Revolving credit facility payable to a bank, due June 30,
1998, with interest payable monthly. Interest is paid at
the bank's prime rate or LIBOR rates based on pricing
options elected by the Company plus a margin determined
by operating statistics of the Company (8.25% and 7.93%
at December 31, 1996 and 1995, respectively),
$11,611 net of an outstanding letter of credit in the
amount of $389, was available under the credit facility
at December 31, 1996.................................... $8,000 $14,500
Term debt payable to a bank with interest payable monthly
and quarterly principal payments of $625 commencing on
October 1, 1996 until maturity at June 30, 2001.
Interest is paid at LIBOR rates based on pricing options
selected by the Company plus a margin determined by
operating statistics of the Company (7.54% at
December 31, 1995)...................................... -- 14,500
Capital lease obligations to a related party,
collateralized by equipment, maturing through 2007, with
interest rates from 13.9% to 26.8%...................... 1,548 1,681
Obligations payable under noncompete and consulting
agreements, due in 24 to 48 months with payments ranging
from $3,000 to $10,833 per month, maturing through 1999,
interest imputed at 8.50%............................... 283 582
------ -------
Totals................................................... 9,831 31,263
Less current portion..................................... (367) (1,057)
------ -------
$9,464 $30,206
====== =======
The term debt and revolving credit facility are collateralized by
substantially all of the assets of the Company and its subsidiaries, including
a pledge of all outstanding capital stock of such subsidiaries. The related
credit agreement contains certain restrictions and conditions which include
cash flow requirements, limitations on acquisitions of property and equipment,
and restrictions on distributions to stockholders.
A-11
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following are scheduled maturities of debt (in thousands):
YEAR ENDING
DECEMBER 31,
1997............................................................. $ 367
1998............................................................. 8,131
1999............................................................. 127
2000............................................................. 114
2001............................................................. 111
Thereafter........................................................ 981
------
$9,831
======
In addition, in order to reduce interest rate risk on the credit facility,
the Company has entered into an interest rate hedge agreement in the notional
amount of $15.0 million, whereby the Company will receive interest payments
should LIBOR increase above 9.00% and, conversely, will make interest payments
should LIBOR decrease below 5.25%, the effect of which limits the Company's
interest expense within the range of 9.00% to 5.25% LIBOR on $15.0 million of
debt. Management intends to hold the interest rate hedge until maturity on
August 28, 1998. The Company has incurred no gain or loss related to this
interest rate hedge for the year ended December 31, 1996. The fair value of
the interest rate hedge agreement is not considered to be material.
The fair value of long-term debt was $10.6 and $32.0 million as of December
31, 1996 and 1995, respectively. The fair value of the Company's long-term
debt was calculated by discounting future cash flows using an estimated fair
market value interest rate.
In February 1997, the Company and its lender amended the credit agreement in
order to fund the acquisitions discussed in Note 13. The term debt was
increased to $30.0 million and the revolving credit facility increased to
$35.0 million, each maturing in 2001. The term debt will be payable $0 in
1997; $2 million in 1998; $8 million in 1999; $10 million in 2000; and $10
million in 2001. The interest rate structure, restrictions and conditions are
similar to the credit agreement prior to amendment.
7. INCOME TAXES:
Prior to November 6, 1996, the Company was treated for federal and state
income tax purposes as an S corporation under Subchapter S of the Internal
Revenue Code. As a result, the Company's earnings for such period were taxed
at the stockholder level. Effective November 6, 1996, the Company terminated
its S corporation status and restructured to create an operating company with
a subsidiary. From November 6, 1996, the Company's earnings have been taxed as
a C corporation and provisions for income taxes have been reflected in the
consolidated financial statements. The Company recorded a nonrecurring net
deferred tax provision of approximately $353,000 associated with the
recognition of a related deferred tax liability due to the termination of the
Company's S corporation status.
A-12
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes for the years ended December 31, 1996, 1995
and 1994 consists of the following (in thousands):
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
Federal:
Current................................................... $ 559 $-- $--
Deferred.................................................. 692 -- --
State:
Current................................................... 339 45 51
Deferred.................................................. 105 -- --
------ ---- ----
$1,695 $ 45 $ 51
====== ==== ====
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the treatment of certain items
for financial statement purposes and the treatment of those items for
corporation tax purposes. The deferred tax assets and liabilities represent
the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1996 were as follows (in thousands):
Deferred tax assets:
Accrued liabilities.............................................. $ 214
Allowance for doubtful accounts.................................. 40
Inventory capitalization......................................... 196
Deferred compensation............................................ 153
Capital leases................................................... 264
Noncompete agreements............................................ 127
Inventory reserve................................................ 217
-------
Total gross deferred tax assets................................ 1,211
-------
Deferred tax liabilities:
Depreciation..................................................... (1,173)
IRC Section 481 inventory adjustment............................. (835)
-------
Total gross deferred tax liabilities........................... (2,008)
-------
Net deferred tax liabilities................................. $ (797)
=======
Current deferred income tax liability.............................. $ (168)
Noncurrent deferred income tax liability........................... (629)
-------
Net deferred tax liabilities................................. $ (797)
=======
A-13
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The differences between the consolidated provision for income taxes and
income taxes computed using income before income taxes and the U.S. federal
income tax rate for the years ended December 31, 1996, 1995 and 1994 are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
Amount computed using statutory rate (35%)...... $ 5,042 $ 2,542 $ 1,948
Increase (decrease) in taxes resulting from:
Recognition of deferred tax liability in
connection with S corporation termination.... 353 -- --
Tax effect of change in method of valuing
inventory.................................... 388
State income taxes............................ 225 45 51
Tax effect of income not subject to federal
tax due to corporation S status.............. (4,329) (2,542) (1,948)
Other, net.................................... 16 -- --
------- ------- -------
$ 1,695 $ 45 $ 51
======= ======= =======
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases various equipment and buildings under capital and
noncancelable operating leases with an initial term in excess of one year. As
of December 31, 1996, future minimum rental payments required under these
capital and operating leases are summarized as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
1997.................................................... $ 432 $2,175
1998.................................................... 363 1,926
1999.................................................... 340 1,375
2000.................................................... 340 995
2001.................................................... 304 759
Thereafter.............................................. 1,573 690
------- ------
Total................................................... 3,352 $7,920
======
Less amount representing interest....................... (1,804)
-------
Present value of minimum lease payments................. $ 1,548
=======
Rental expense for operating leases was $3,839,000, $2,640,000 and
$1,574,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with its majority
stockholder for a five-year term renewable annually and has entered into a
consulting agreement with a former stockholder through October 1998.
LITIGATION
There are claims and pending actions incident to the business operations of
the Company. Management does not expect resolution of these matters to have a
material adverse effect on the Company's financial position or future results
of operations or cash flows.
A-14
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RETIREMENT PLAN:
The Company has a defined contribution retirement plan which covers
substantially all full-time employees and is qualified under Section 401(k) of
the Internal Revenue Code. Under the plan, employees may voluntarily
contribute a percentage of their compensation to the plan and the Company may
make discretionary contributions. The Company's contributions to the plan for
the years ended December 31, 1996, 1995 and 1994 were $100,000, $225,000 and
$150,000, respectively.
10. RELATED PARTY TRANSACTIONS:
The Company leases certain buildings and data processing equipment under
capital leases from partnerships partially owned by the majority stockholder
of the Company. Two of the leased warehouses were financed through economic
development and industrial revenue bonds; one series of which was issued by
Newton, Kansas in the original principal amount of $575,000, and with respect
to which, the Company is the sub-lessee of the premises and a co-guarantor,
and one series of which was issued by Elkhart, Indiana in the original
principal amount of $400,000, and with respect to which, the Company is the
lessee of the premises and has agreed to perform the obligations of the lessor
contained in the mortgage. Lease payments for the facilities and equipment
were approximately $672,000 in each of the years ended 1996, 1995 and 1994.
The Company loaned its majority stockholder $5.0 million in 1993, payable in
monthly principal installments of $62,500 plus interest at 9% at December 31,
1995, due November 1997. The Company distributed the loan to stockholder to
the Company's stockholders effective June 30, 1996.
11. OTHER INCOME:
The Company received $800,000 in 1994 from a disability insurance policy on
a former stockholder who was determined disabled and used the proceeds to
retire a note payable to the former stockholder.
12. STOCK-BASED COMPENSATION PLANS:
The Company sponsors the Kevco, Inc. 1995 Stock Option Plan and the Kevco,
Inc. 1996 Stock Option Plan (the "Plans"), which are stock-based incentive
compensation plans. The Company applies APB Opinion 25 and related standards
in accounting for the Plans. In 1995, the FASB issued FASB Statement No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided not
to elect these provisions of SFAS 123. However, disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in 1995 are required by
SFAS 123 and are presented below.
Under the Plans, the Company is authorized to issue up to 702,735 shares of
common stock pursuant to "Awards" granted in the form of incentive stock
options (intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended) and nonqualified stock options. Awards may be granted to
selected employees and directors of the Company. During 1995 and 1996, the
Company granted only nonqualified stock options under the Plans.
NONQUALIFIED STOCK OPTIONS
The Plans provide that the exercise price of any stock option will be
determined by the Board of Directors on the date of grant. The stock options
granted in 1995 or 1996 vest over periods of 10 years and 7 years,
respectively. All options vested in November 1996, at the time of the initial
public offering. In accordance with APB 25, the Company has not recognized any
compensation cost for these stock options granted during 1995 and 1996.
A-15
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1995 and 1996, and the changes during the year ended on those dates is
presented below:
NONQUALIFIED STOCK OPTIONS
---------------------------------------
1996 1995
------------------- -------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES OF AVERAGE SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES
Outstanding at beginning of year...... 47,854 $ 5.64 -- N/A
Granted............................... 393,450 $11.17 47,854 $5.64
Exercised............................. -- N/A -- N/A
Forfeited............................. 26,108 $10.42 -- N/A
Expired............................... -- N/A -- N/A
Outstanding at end of year............ 415,196 $10.58 47,854 $5.64
Exercisable at end of year............ 415,196 $10.58 -- N/A
Weighted-average fair value of options
granted during the year.............. $ 1.84 -- $ 1.39 --
The fair value of each stock option granted is estimated on the date of
grant using the minimum value method of option pricing with the following
weighted-average assumptions for grants in 1995 and 1996, respectively:
dividend yield of zero percent for both years; risk-free interest rates are
different for each grant and range from 5.77% to 6.19%; and the expected lives
of 5 and 3.5 years, respectively, for the 1995 and 1996 options. In
determining the "minimum value," SFAS 123 does not require the volatility of
the Company's common stock underlying the options to be calculated or
considered because the Company was not publicly-traded when the options were
granted.
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED WEIGHTED EXERCISABLE WEIGHTED
AT AVERAGE AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES 1996 LIFE PRICE 1996 PRICE
-------- ------------ --------- -------- ------------ --------
$ 5.64 44,306 7.85 $ 5.64 44,306 $ 5.64
11.17 370,890 5.66 11.17 370,890 11.17
------- ---- ------ ------- ------
415,196 5.90 $10.58 415,196 $10.58
======= ==== ====== ======= ======
NET INCOME AND NET INCOME PER COMMON SHARE
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1995 and 1996 would approximate the pro forma
amounts below (in thousands):
SFAS 123 PRO SFAS 123 PRO
AS REPORTED FORMA AS REPORTED FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1995 1995
SFAS 123 charge........... -- $ 711 -- $ 34
Pro forma net income...... $8,863 $8,422 $4,286 $4,265
Pro forma net income per
common share............. $ 1.60 $ 1.52 $ .87 $ 0.86
A-16
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its stock-based
compensation plans.
13. CHANGE IN ACCOUNTING PRINCIPLE:
During the second quarter of 1997, the Company adopted the FIFO method to
value inventories for which the LIFO method has previously been utilized for
determining cost. The FIFO method will better measure the current value of
such inventories, provide a more appropriate matching of revenues and
expenses, and conform all inventories of the Company to the same accounting
method. Additionally, the change will enhance the comparability of the
Company's financial statements by changing to the predominant method utilized
in its industry.
As required by generally accepted accounting principles, the Company applied
this change retroactively, which resulted in a decrease in net income of
approximately $276,000 for the year ended December 31, 1996 and an increase in
net income of approximately $236,000 and $269,000 for the years ended December
31, 1995 and 1994, respectively. The cumulative effect of this restatement on
retained earnings at January 1, 1994 was an increase of $313,000. Pro forma
net income (see Note 1) increased approximately $69,000, $144,000 and $164,000
for the years ended December 31, 1996, 1995 and 1994, respectively and pro
forma earnings per share (see Note 1) increased by $0.01, $0.03, and $0.04 for
the years ended December 31, 1996, 1995, and 1994, respectively, as a result
of applying the change retroactively.
14. SUBSEQUENT EVENTS:
In February 1997, the Company acquired certain assets and liabilities of
Consolidated Forest Products, L.L.C. for approximately $13,870,000.
Consolidated Forest Products, L.L.C. is a privately held manufacturer of wood
products based in Haleyville, Alabama.
In February 1997, the Company acquired the common stock of Bowen Supply,
Inc. for approximately $19,500,000. Bowen Supply, Inc. is a privately held
distributor of building products to the manufactured housing and recreational
vehicle industries based in Americus, Georgia.
The Company will account for these transactions under the purchase method.
A-17
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents.......................... $ 77 $ 2,078
Trade accounts receivable, less allowance for
doubtful accounts of $132
and $100 in 1997 and 1996, respectively........... 25,190 9,458
Inventories........................................ 34,988 23,722
Prepaid expenses and other current assets.......... 1,447 338
-------- -------
Total current assets.............................. 61,702 35,596
Property and equipment, net......................... 18,563 10,208
Intangible assets, net.............................. 33,600 9,495
Other assets........................................ 713 440
-------- -------
Total assets...................................... $114,578 $55,739
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable............................. $ 22,245 $ 6,666
Accrued liabilities................................ 4,050 3,107
Income taxes payable............................... 118 762
Current portion of long-term debt.................. 112 367
Current deferred income taxes...................... 50 168
-------- -------
Total current liabilities......................... 26,575 11,070
Long-term debt, less current portion................ 45,737 9,464
Deferred income taxes............................... 629 629
Deferred compensation obligation.................... 1,240 383
-------- -------
Total liabilities................................. 74,181 21,546
-------- -------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares autho-
rized; 6,825 shares issued and outstanding........ 68 68
Additional paid-in capital......................... 32,974 32,854
Retained earnings.................................. 7,355 1,271
-------- -------
Total stockholders' equity........................ 40,397 34,193
-------- -------
Total liabilities and stockholders' equity........ $114,578 $55,739
======== =======
See accompanying notes to consolidated financial statements.
A-18
KEVCO, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
-------- --------
(UNAUDITED)
Net sales............................................. $271,957 $205,048
Cost of sales......................................... 235,138 174,055
-------- --------
Gross profit......................................... 36,819 30,993
Commission income..................................... 4,413 4,100
-------- --------
41,232 35,093
Selling, general and administrative expenses.......... 28,738 22,590
-------- --------
Operating income..................................... 12,494 12,503
Interest expense...................................... 2,354 1,626
-------- --------
Income before income taxes........................... 10,140 10,877
Income taxes.......................................... 4,056 30
-------- --------
Net income........................................... $ 6,084 $ 10,847
======== ========
Earnings per share.................................... $ 0.88
========
Weighted average shares outstanding................... 6,916
========
Pro forma information (Note 5)
Historical income before income taxes................ $ 10,877
Income tax expense adjustments....................... 4,133
--------
Pro forma net income................................. $ 6,744
========
Pro forma earnings per share......................... $ 1.32
========
Weighted average shares outstanding.................. 5,098
========
See accompanying notes to consolidated financial statements.
A-19
KEVCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER
30
----------------
1997 1996
------- -------
(UNAUDITED)
Cash flows form operating activities:
Net income.................................................. $ 6,084 $10,847
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 2,172 1,318
Gain on sale of assets..................................... (3) (4)
Deferred compensation obligation........................... 375 24
Changes in assets and liabilities.......................... (2,390) (474)
------- -------
Net cash provided by operating activities.................. 6,238 11,711
Cash flows from investing activities:
Purchase of Consolidated.................................... (13,420) --
Purchase of Bowen........................................... (19,115) --
Purchase of equipment....................................... (2,000) (1,086)
Proceeds from sale of assets................................ 806 4
Increase in other assets.................................... (509) (314)
------- -------
Net cash used by investing activities...................... (34,238) (1,396)
Cash flows from financing activities:
Proceeds (payments) on line of credit, net.................. 4,600 (5,500)
Proceeds from long-term debt................................ 30,000 --
Distributions paid.......................................... -- (5,915)
Payments of long-term debt.................................. (8,721) (99)
Capital contributions....................................... -- 86
Collections on loan to stockholder.......................... -- 375
Stock options exercised..................................... 120 --
------- -------
Net cash provided (used) by financing activities........... 25,999 (11,053)
------- -------
Net decrease in cash and cash equivalents.................... (2,001) (738)
Beginning cash and cash equivalents.......................... 2,078 977
------- -------
Ending cash and cash equivalents............................. $ 77 $ 239
======= =======
See accompanying notes to consolidated financial statements.
A-20
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The Annual Report on Form 10-K for the year ended December 31, 1996, for
Kevco, Inc. includes a summary of significant accounting policies and should
be read in conjunction with this Form 10-Q. Prior to the effective date of the
initial public offering (see Note 3), Kevco, Inc. restructured and created an
operating company subsidiary with a subsidiary. As a result, the financial
statements are referred to as consolidated financial statements. The
accompanying consolidated financial statements of Kevco, Inc. and its wholly-
owned subsidiaries (the "Company") have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles ("GAAP") for complete financial
statements. All significant intercompany transactions and accounts have been
eliminated.
In the opinion of management, the consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the balance sheets as of September 30, 1997
and December 31, 1996, the statements of income for the nine-month period
ended September 30, 1997 and 1996 and the statements of cash flows for the
nine-month period ended September 30, 1997 and 1996. The results of operations
for the nine-month period ended September 30, 1997 are not necessarily
indicative of the results of operations for the entire fiscal year ending
December 31, 1997.
On August 29, 1996, the Company effected a 0.47-for-1 reverse stock split of
its common stock and retired its treasury shares. All share and per share
amounts included in the accompanying financial statements and footnotes have
been restated to reflect the reverse stock split.
2.ACQUISITIONS
On February 27, 1997, the Company acquired substantially all of the assets,
and assumed certain liabilities, of Consolidated Forest Products, L.L.C.
("Consolidated") (the "Consolidated Acquisition") for approximately $14.0
million. The acquisition was accounted for as a purchase and, accordingly, the
operating results of Consolidated have been included in the operating results
of the Company since February 27, 1997. The acquisition cost in excess of the
fair value of net assets of Consolidated of approximately $9.6 million has
been accounted for as goodwill and will be amortized over its estimated useful
life of 40 years.
On February 28, 1997, the Company purchased all of the capital stock of
Bowen Supply, Inc. ("Bowen") (the "Bowen Acquisition") for approximately $19.5
million. The acquisition was accounted for as a purchase and, accordingly, the
operating results of Bowen have been included in the operating results of the
Company since February 28, 1997. The acquisition cost in excess of the fair
value of net assets of Bowen of approximately $14.9 million has been accounted
for as goodwill and will be amortized over its estimated useful life of 40
years.
The following pro forma financial information combines the historical
results of the Company as if the Consolidated Acquisition, the Bowen
Acquisition and the initial public offering had occurred as of the beginning
of each period presented:
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1997 1996
-------- --------
(DOLLARS IN
THOUSANDS)
Net sales............................................... $294,253 $305,379
Net income.............................................. $ 6,467 $ 10,001
Earnings per share...................................... $ 0.93 $ 1.45
A-21
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3.INITIAL PUBLIC OFFERING
In November 1996, the Company completed an initial public offering of
2,415,000 shares of the Company's common stock (including an over-allotment
option of 315,000 shares exercised in December 1996) for $12.00 per share,
netting proceeds to the Company after underwriting discounts and expenses of
approximately $26.0 million. Proceeds to the Company were used to repay all of
the outstanding balance of the Company's $20.0 million revolving credit
facility of $9.0 million and a permanent reduction of all of the outstanding
balance of the Company's term loan of $13.9 million. Proceeds were also used
to make an S corporation distribution of approximately $3.7 million
representing previously taxed but undistributed earnings through June 30, 1996
(see Note 7 and 8).
4.INVENTORIES
Inventories are comprised of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
Raw materials........................................ $ 7,922 $ 4,385
Work-in process...................................... 636 332
Finished goods....................................... 1,938 1,324
Goods held for resale................................ 24,492 17,681
------- -------
$34,988 $23,722
======= =======
During the second quarter of 1997, the Company adopted the FIFO method to
value inventories for which the LIFO method had previously been utilized for
determining cost. The FIFO method will better measure the current value of
such inventories, provide a more appropriate matching of revenues and
expenses, and conform all inventories of the Company to the same accounting
method. Additionally, the change will enhance the comparability of the
Company's financial statements by changing to the predominant method utilized
in its industry.
The Company applied this change retroactively, which resulted in an increase
in retained earnings of approximately $542,000 and $818,000 at January 1, 1997
and 1996, respectively. There was no material impact on net income or earnings
per share for the three and nine months ended September 30, 1996.
5.PRO FORMA INFORMATION
Pro forma net income for 1996 represents the results of operations adjusted
to reflect a provision for income taxes on historical income before income
taxes, which gives effect to the change in the Company's income tax status to
a C corporation concurrently with the consummation of the Company's initial
public offering. The difference between the pro forma income tax rates
utilized and the federal statutory rate of 34% relates primarily to state
income taxes.
Pro forma earnings per share for 1996 has been computed by dividing pro
forma net income by the weighted average number of shares of common stock
outstanding during the period.
In accordance with a regulation of the Securities and Exchange Commission,
pro forma earnings per share data for 1996 have been presented to reflect the
effect of the assumed issuance of that number of shares of common stock that
would generate sufficient cash to pay an S corporation distribution in an
amount equal to previously taxed but undistributed earnings.
Historical earnings per share for 1996 is not presented because it is not
indicative of the ongoing entity.
A-22
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6.INCOME TAXES
Prior to November 6, 1996, the Company's stockholders had elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code. As a
result, there was no provision for federal income taxes in the historical
financial statements for the nine-month period ended September 30, 1996, as
such taxes were the responsibility of the individual stockholders. Effective
November 6, 1996, the Company converted to a C corporation and became subject
to federal income taxes on an ongoing basis.
7.STOCKHOLDERS' EQUITY
In conjunction with its initial public offering, the Company terminated its
S corporation status and distributed to its stockholders approximately $3.7
million, representing previously taxed but undistributed earnings at June 30,
1996. On December 31, 1996, the Company repaid notes in the approximate
aggregate amount of $5.2 million that were issued immediately prior to the
consummation of the offering, which notes were the final S corporation
distribution and represented earnings from July 1, 1996 to the consummation of
the offering.
8.CREDIT AGREEMENT
In February 1997, the Company and its lender amended the credit agreement in
order to fund the Consolidated Acquisition and the Bowen Acquisition (see Note
2). The term debt was increased to $30.0 million and the revolving credit
facility was increased to $35.0 million, each maturing in 2001. The Company's
term debt and revolver are collateralized by inventory, accounts receivable
and property and equipment and the common stock of the Company's subsidiaries
(see Note 1). The related credit agreement contains certain restrictions and
conditions that include cash flow and various financial ratio requirements,
and limitations on incurrence on debt or liens, acquisitions of property and
equipment, distributions to shareholders and certain events constituting a
Change of Control (as defined in such agreement).
9.RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"). SFAS 128 simplifies the standards for computing earnings per share
("EPS") previously found in APB Opinion No. 15, Earnings Per Share
("Opinion 15"), and makes them comparable to international EPS standards. SFAS
128 replaces the presentation of primary EPS with a presentation of basic EPS.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion 15. SFAS 128 also requires
dual presentation of basic and diluted EPS on the face of the income statement
for entities with complex capital structures and a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. SFAS 128
requires restatement of all prior-period EPS data presented. The Company is
currently evaluating SFAS 128. However, management does not believe that it
will have a material impact on the consolidated financial statements of the
Company.
A-23
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In February 1997, The FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 129 establishes standards for disclosing information about
an entity's capital structure and applies to all entities. This statement
continues the previous requirements to disclose certain information about an
entity's capital structure found in APB Opinions No. 10, Omnibus Opinion -
1966, and No. 15, Earnings per Share, and FASB Statement No. 47, Disclosure of
Long-Term Obligations, for entities that were subject to the requirements of
those standards. This statement supersedes specific disclosure requirements of
Opinions 10 and 15 and Statement 47 and consolidates them in this statement
for ease of retrieval and for greater visibility to non-public entities. This
statement is effective for financial statements for periods ending after
December 15, 1997. It is not expected that the Company will experience any
material revision in its disclosures when SFAS No. 129 is adopted.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. This
statement has no impact on the financial condition or results of operations of
the Company, but may require changes to the Company's disclosure requirements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement supersedes FASB Statement No. 14, Financial Reporting for Segments
of a Business Enterprise, but retains the requirement to report information
about major customers. It amends FASB Statement No. 94, Consolidation of All
Majority-Owned Subsidiaries, to remove the special disclosure requirements for
previously unconsolidated subsidiaries. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This statement
need not be applied to interim financial statements in the initial year of
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application. This statement has no impact on the
financial condition or results of operations of the Company, but may require
changes in the Company's disclosure requirements.
10.SUBSEQUENT EVENT
On October 21, 1997, Kevco signed a definitive merger agreement with Shelter
Components Corporation ("Shelter") for Kevco to acquire all the outstanding
shares of Shelter. Pursuant to the agreement, Kevco will pay $17.50 per share
for each share of common stock of Shelter which currently has approximately
7.8 million shares of common stock outstanding. The transaction will be a cash
tender offer followed by a cash merger to acquire any shares not previously
tendered. As a result of the transaction, Shelter will become a wholly-owned
subsidiary of Kevco.
A-24
KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In connection with the acquisition of Shelter, Kevco has entered into an
arrangement to amend its credit agreement with a bank at closing of the
acquisition to allow for aggregate senior borrowings of up to $125 million.
The aggregate amount will be comprised of a revolving credit facility of $35
million and a term loan facility of up to $90 million. The revolving credit
facility will mature six years from date of closing and assuming a term loan
facility of $90 million, the term loan scheduled repayments will be $0.5
million in 1998, $5.5 million in 1999, $8.0 million in 2000, $8.0 million in
2001, $10.5 million in 2002, $10.5 million in 2003 and $47.0 million in 2004.
Borrowings under the revolving credit facility require monthly, bi-monthly or
quarterly interest payments (depending on whether interest accrues based on
the prime rate or LIBOR) calculated as a blend of the bank's prime rate and
LIBOR based on pricing options selected by the Company plus a margin
determined by operating statistics of the Company. Borrowings under the term
loan facility require monthly, bi-monthly or quarterly interest payments
(depending on whether interest accrues based on the prime rate or LIBOR) based
on a blend of the bank's prime rate and LIBOR based on pricing options
selected by the Company plus a margin determined by operating statistics of
the Company. The term loan and revolving credit facility is collateralized by
substantially all of the assets of the Company and its subsidiaries as well as
the capital stock of such subsidiaries. The related credit agreement contains
certain restrictions and conditions that include cash flow and various
financial ratio requirements, and limitations on incurrence of debt or liens,
acquisitions of property and equipment, distributions to stockholders and
certain events constituting a Change of Control (as defined in the agreement).
In addition to the funds available under the amended credit facility, the
Company will issue senior subordinated notes in the aggregate principal amount
of $105 million to complete the acquisition of the outstanding shares of
Shelter.
A-25
ANNEX B
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Shelter Components Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Shelter
Components Corporation and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
Indianapolis, Indiana
February 18, 1997
B-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Shelter Components Corporation:
We have audited the accompanying consolidated statements of income,
shareholders' equity and cash flows of Shelter Components Corporation and
subsidiaries for the year ended December 31, 1994. These financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, and the consolidated results of operations and cash
flows of Shelter Components Corporation and subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
South Bend, Indiana
February 7, 1995
B-2
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1996 1995
ASSETS
Current assets
Cash and cash equivalents.................................. $ 21,096 $ 24
Trade receivables, less allowance for doubtful receivables,
1996 and 1995--$500....................................... 22,827 25,452
Inventories................................................ 41,475 50,049
Deferred income taxes...................................... 2,128 1,412
Prepaid expenses and other................................. 595 457
Real estate held for sale.................................. 2,576 --
-------- --------
Total current assets..................................... 90,697 77,394
Property, plant and equipment, net........................... 19,381 17,587
Cost in excess of net assets acquired, net of accumulated am-
ortization, 1996--$1,482 and 1995--$1,125................... 10,312 11,554
Other assets................................................. 520 879
-------- --------
Total assets............................................. $120,910 $107,414
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt............................................ $ 6,000 $ 4,723
Current maturities of long-term debt....................... 1,904 2,009
Accounts payable, trade.................................... 23,067 23,159
Income taxes payable....................................... 2,381 43
Accrued liabilities:
Salaries and wages........................................ 2,142 2,015
Accrued expenses related to sale of business.............. 1,703 --
Other..................................................... 3,416 3,716
-------- --------
Total current liabilities................................ 40,613 35,665
-------- --------
Long-term debt............................................... 16,639 19,596
-------- --------
Deferred income taxes........................................ 745 944
-------- --------
Other deferred liabilities................................... 133 41
-------- --------
Commitments (Note 8)
Shareholders' equity
Preferred stock, $.01 par value; authorized and unissued
1,000,000 shares
Common stock, $.01 par value; authorized 10,000,000 shares,
issued 1996--7,680,623 shares and 1995--6,098,969 shares.. 76 61
Additional paid-in capital................................. 11,914 11,613
Retained earnings.......................................... 50,827 39,545
-------- --------
62,817 51,219
Less, Treasury stock, at cost, 1996--24,482 shares and
1995--26,767 shares..................................... 37 51
-------- --------
Total shareholders' equity............................. 62,780 51,168
-------- --------
Total liabilities and shareholders' equity............. $120,910 $107,414
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
B-3
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
Net sales....................................... $521,022 $462,323 $333,104
Cost of sales................................... 447,701 393,775 281,808
-------- -------- --------
Gross profit.................................. 73,321 68,548 51,296
Commission income............................... 2,459 3,005 3,111
-------- -------- --------
75,780 71,553 54,407
Selling, general and administrative expenses.... 60,194 52,709 39,136
-------- -------- --------
Operating income.............................. 15,586 18,844 15,271
Gain on sale of carpet business................. (5,919) -- --
Interest income................................. (177) (142) (38)
Interest expense................................ 1,831 2,472 1,035
-------- -------- --------
Income before income taxes.................... 19,851 16,514 14,274
Income taxes.................................... 8,153 6,476 5,577
-------- -------- --------
Net income.................................... $ 11,698 $ 10,038 $ 8,697
======== ======== ========
Net income per share............................ $ 1.51 $ 1.31 $ 1.19
======== ======== ========
Weighted average common and common equivalent
shares outstanding............................. 7,738 7,680 7,300
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
B-4
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
Balance at January 1, 1994........ $ 58 $ 8,395 $21,522 $(246) $29,729
Exercise of stock options....... -- 4 -- 38 42
Cash dividends ($.05 per
share)......................... -- -- (346) -- (346)
Cash paid in lieu of fractional
shares......................... -- -- (6) -- (6)
Net income...................... -- -- 8,697 -- 8,697
---- ------- ------- ----- -------
Balance at December 31, 1994...... 58 8,399 29,867 (208) 38,116
Exercise of stock options....... -- 171 -- 157 328
Cash dividends ($.05 per
share)......................... -- -- (360) -- (360)
Issuance of common shares in
connection with a business
acquisition (Note 9)........... 3 2,923 -- -- 2,926
Tax benefit from early sale of
stock acquired with options.... -- 120 -- -- 120
Net income...................... -- -- 10,038 -- 10,038
---- ------- ------- ----- -------
Balance at December 31, 1995...... 61 11,613 39,545 (51) 51,168
Exercise of stock options....... -- 246 -- 14 260
Cash dividends ($.05 per
share)......................... -- -- (413) -- (413)
Cash paid in lieu of fractional
shares......................... -- -- (3) -- (3)
Five-for-four stock split....... 15 (15) -- -- --
Tax benefit from early sale of
stock acquired with options.... -- 70 -- -- 70
Net income...................... -- -- 11,698 -- 11,698
---- ------- ------- ----- -------
Balance at December 31, 1996...... $ 76 $11,914 $50,827 $ (37) $62,780
==== ======= ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
B-5
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994
Cash flows from operating activities:
Net income.................................... $ 11,698 $ 10,038 $ 8,697
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation.................................. 2,337 1,930 1,508
Amortization.................................. 1,013 967 524
Loss (gain) on sales of property, plant and
equipment.................................... 29 11 (53)
Deferred income taxes......................... (915) (38) (130)
Gain on sale of carpet business............... (5,919) -- --
Changes in certain assets and liabilities,
excluding effects from acquisitions and
dispositions:
Trade receivables............................. 2,760 (1,346) (6,327)
Inventories................................... (738) 1,481 (17,484)
Prepaid expenses and other.................... (138) (154) 167
Accounts payable, trade....................... 2,687 (1,159) 6,479
Other current liabilities..................... 2,174 172 (183)
-------- --------- --------
Net cash provided by (used in) operating
activities................................. 14,988 11,902 (6,802)
-------- --------- --------
Cash flows from investing activities:
Proceeds from sales of property, plant and
equipment.................................... 61 51 120
Acquisitions of property, plant and
equipment.................................... (8,368) (2,790) (2,136)
Acquisitions of businesses, net of cash
acquired..................................... (145) (732) (732)
Proceeds from sale of carpet business, net of
$1,921 costs and expenses paid............... 16,367 -- --
Other, net.................................... 110 180 132
-------- --------- --------
Net cash provided by (used in) investing
activities................................. 8,025 (3,291) (2,616)
-------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of debt................ 83,837 171,697 100,382
Repayment of debt............................. (85,622) (180,271) (90,652)
Proceeds from exercise of stock options....... 260 328 42
Cash dividends paid........................... (413) (360) (346)
Other, net.................................... (3) -- (6)
-------- --------- --------
Net cash (used in) provided by financing
activities................................. (1,941) (8,606) 9,420
-------- --------- --------
Increase in cash............................ 21,072 5 2
Cash, beginning of year......................... 24 19 17
-------- --------- --------
Cash, end of year............................... $ 21,096 $ 24 $ 19
======== ========= ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 1,894 $ 2,516 $ 979
Income taxes................................ 6,660 6,894 5,940
Non-cash investing and financing activities:
Reclassification of short-term borrowings to
reflect debt refinancing..................... -- -- 8,000
Obligations assumed in business acquisitions.. -- 9,438 897
Short-term debt issued in business
acquisition.................................. -- 1,500 --
Long-term debt issued in business
acquisition.................................. -- 5,522 --
Common stock issued in business acquisition... -- 2,926 --
The accompanying notes are an integral part of these consolidated financial
statements.
B-6
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business--Shelter Components Corporation and subsidiaries
(individually and collectively referred to as the "Corporation") manufacture
and distribute products and materials primarily for use by the Manufactured
Housing, Modular Housing and Recreational Vehicle industries.
SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation--The consolidated financial statements include
the accounts of the Corporation and its wholly-owned subsidiaries. All
intercompany balances and transactions have been eliminated.
Inventories--Inventories are stated at the lower of cost or market, with
cost determined by the first-in, first-out method.
Property, Plant and Equipment--Property, plant and equipment are carried at
cost less accumulated depreciation. Depreciation is computed primarily by the
straightline method over the estimated useful lives of the assets. Upon sale
or retirement of property, plant and equipment, the asset cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in income.
Intangibles--Non-compete agreements are amortized on a straight-line basis
over the terms of the related agreements (3 to 5 years). The excess of
acquisition cost of acquired businesses over the fair value of net assets
acquired ("goodwill") is amortized, using the straight-line method, over
periods ranging from 10 to 40 years. The Corporation periodically reviews the
carrying value of goodwill to assess that recoverability and impairments are
recognized in operating results when a permanent diminution in value has
occurred.
Income Taxes--Deferred income taxes are determined using the liability
method in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109 "Accounting for Income Taxes".
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments--The fair value of all financial
instruments where the face value differs from the fair value are estimated
based upon quoted amounts or the use of current rates available for similar
financial instruments. If fair value accounting had been used at December 31,
1996 and 1995, instead of the historic basis of accounting used in the
financial statements, long-term debt would exceed the reported level by
approximately $1.5 million in each year.
Product Warranty Expense--Provisions are made currently for the estimated
future costs that will be incurred under product warranties presently in
force.
Revenue Recognition and Concentration of Credit Risk--Revenue from product
sales is recognized at the time of shipment and commissions are recognized as
earned on an accrual basis. Although the Corporation has a concentration of
credit risk in the Manufactured Housing and Recreational Vehicle industries,
there is no geographical concentration of credit risk. Sales to one customer
were approximately 11%, 12% and 10% of the Corporation's consolidated net
sales in 1996, 1995 and 1994, respectively. Two of the Corporation's customers
merged during 1996 resulting in combined sales approximating 13% of the 1996
consolidated net sales. The Corporation performs an ongoing credit evaluation
of its customers' financial condition, and credit is extended to customers on
an unsecured basis. Future credit losses are provided for currently through
the allowance for doubtful receivables. Actual credit losses are charged to
the allowance when incurred. The amounts provided for
B-7
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
such losses are determined based on the Corporation's historical loss
experience considering current economic conditions.
Earnings Per Common Share--Primary and fully diluted earnings per common
share computations are based on the weighted average number of shares of
common stock and the dilutive effect of common stock equivalents (see Note 6)
outstanding during each year, adjusted for all stock splits declared during
the periods presented.
NOTE 2: INVENTORIES
Inventories consist of the following components:
1996 1995
(IN THOUSANDS)
Raw materials................................................ $ 5,466 $ 8,272
Work-in-process.............................................. 382 4,986
Finished goods............................................... 814 6,866
Goods held for resale........................................ 34,813 29,925
------- -------
Total...................................................... $41,475 $50,049
======= =======
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The cost and accumulated depreciation are summarized as follows:
1996 1995
(IN THOUSANDS)
Land........................................................ $ 1,984 $ 1,435
Buildings................................................... 12,915 10,569
Leasehold improvements...................................... 278 1,217
Machinery and equipment..................................... 6,276 9,739
Office equipment............................................ 2,584 2,569
Transportation equipment.................................... 2,206 2,184
------- -------
26,243 27,713
Less, Accumulated depreciation.............................. 6,862 10,126
------- -------
Property, plant and equipment, net.......................... $19,381 $17,587
======= =======
NOTE 4: DEBT
The Corporation has a $25 million, unsecured, revolving bank line of credit
(the "Revolver"). The Revolver requires monthly interest payments based on
market interest rates (6.47% at December 31, 1996) and an annual commitment
fee of 1/8% based on the unused portion of the Revolver. Outstanding
borrowings under the Revolver at December 31, 1996 were $6 million which were
repaid in January 1997. There were no outstanding borrowings under the
revolving line of credit at December 31, 1995.
B-8
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of the following:
1996 1995
(IN THOUSANDS)
9.24% senior notes.......................................... $15,000 $15,000
6.4% senior notes........................................... 1,500 3,000
Term loan, payable in monthly installments including
interest at 6.75% with a final maturity of February 1999,
collateralized by a real estate mortgage................... 1,279 1,420
Unsecured note, payable in quarterly installments of $50
including interest imputed at 9.24% with a final maturity
of January 2000............................................ 556 697
Other....................................................... 208 1,488
------- -------
Total long-term debt...................................... 18,543 21,605
Less, Current maturities.................................... 1,904 2,009
------- -------
Long-term debt, net of current maturities................. $16,639 $19,596
======= =======
In February 1995, the Corporation issued $15 million, 9.24%, unsecured
senior notes under a note agreement where interest is payable quarterly and
principal is payable in eight annual installments of $1,875,000 commencing
March 1998.
The unsecured $1.5 million, 6.4% senior note outstanding at December 31,
1996 was paid in full on February 15, 1997.
Aggregate annual maturities of long-term debt for each of the next five
years ending December 31 are as follows: 1997-$1,904,000; 1998-$2,285,000;
1999-$3,055,000; 2000-$1,924,000 and 2001-$1,875,000.
The revolver and senior note agreements contain, among other provisions,
certain covenants including: maintenance of minimum net worth and certain
financial ratios; limitations on indebtedness, liens and leases; and
limitations on the payment of cash dividends. Under the senior note agreements
and revolver, retained earnings of $39.2 million at December 31, 1996 is
restricted, as to cash dividends and purchases or redemptions of shares of
common stock.
NOTE 5: RETIREMENT PLAN
The Corporation has a defined contribution plan which covers substantially
all fulltime employees of the Corporation and is qualified under Section
401(k) of the Internal Revenue Code. Under the plan, employees may voluntarily
contribute a percentage of their compensation and the plan allows the
Corporation to make discretionary matching contributions. Retirement plan
expense, including administrative expenses, aggregated $271,000; $259,000 and
$198,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 6: SHAREHOLDERS' EQUITY
The Corporation is authorized to issue 1,000,000 shares of special
(preferred) shares (par value $.01), of which none have been issued. The
special shares have no voting rights or powers, except the Corporation's Board
of Directors is vested with authority to determine and state the designations
and relative preferences, limitations, voting rights, if any, and other rights
of the special shares.
On May 30, 1996, the Board of Directors declared a five-for-four stock split
of the Corporation's common stock, paid on July 8, 1996 to shareholders of
record on June 24, 1996. On February 8, 1994, the Board of Directors declared
a three-for-two stock split of the Corporation's common stock, paid on March
8, 1994 to shareholders of record on February 22, 1994. All historical share
and per share data has been restated for all periods presented herein to
reflect these stock splits.
B-9
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1996, the Board of Directors approved the Shelter Components Employee
Stock Purchase Plan which allows all full-time employees to purchase shares of
the Corporation's common stock through payroll deduction at market prices. As
of December 31, 1996, 4,422 shares of common stock had been purchased by
employees participating in the plan. The Corporation pays the expenses of
administering the plan.
The Corporation has a stock incentive plan authorizing the grant of
incentive stock options and nonqualified stock options to purchase up to
937,500 shares of the Corporation's common stock. Under the plan, the
incentive stock option price may not be less than the fair market value of the
Corporation's common stock at the date of grant. Generally, the options become
exercisable over staggered periods and expire five years from the date of
grant.
The transactions for shares under options for each of the three years in the
period ended December 31, 1996 were as follows:
SHARES
UNDER PER SHARE
OPTION OPTION PRICE
Outstanding, January 1, 1994.......................... 322,144 $1.54-$6.94
Exercised........................................... (24,884) 1.54- 2.02
--------
Outstanding, December 31, 1994........................ 297,260 1.54- 6.94
Exercised........................................... (104,235) 1.54- 6.94
Granted............................................. 241,250 9.20
--------
Outstanding, December 31, 1995........................ 434,275 1.54- 9.20
Exercised........................................... (65,823) 1.54- 9.20
Cancelled........................................... (19,687) 6.94- 9.20
--------
Outstanding, December 31, 1996........................ 348,765 6.94- 9.20
========
Exercisable, December 31, 1996........................ 136,401 $6.94-$9.20
========
As of December 31, 1996, 331,095 shares were reserved for the granting of
future stock options under this plan, compared with 106,330 shares at December
31, 1995.
In 1996, the Board of Directors implemented a non-qualified stock option
plan for the purpose of granting stock options to the Corporation's non-
employee directors. The plan provides for annual grants of 2,500 options to
each non-employee director at the fair market value of the Corporation's
common stock at the date of the grant. The options are immediately exercisable
upon grant. In May 1996, a total of 20,000 options were granted to the non-
employee directors of the Corporation at an exercise price of $10.90 per
share, all of which were outstanding and exercisable at December 31, 1996. As
of December 31, 1996, 180,000 shares were reserved for the granting of future
stock options to non-employee directors under this plan.
B-10
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Corporation has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The Corporation applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plan.
Accordingly, no compensation cost has been recognized for its fixed stock
option plan. Had compensation cost for the 1995 grant been determined based on
the fair value method as defined in SFAS No. 123, the Corporation's net income
and income per share would have been reduced to the proforma amounts indicated
below.
1996 1995
----------------- -----------------
REPORTED PROFORMA REPORTED PROFORMA
Net income............................... $11,698 $11,548 $10,038 $9,888
Net income per share..................... 1.51 1.49 1.31 1.29
The fair value of the option grant is estimated on the date of grant with
the following assumptions: expected volatility 32%; risk-free interest rate of
6.04%; and expected life of 3 years.
NOTE 7: INCOME TAXES
Income taxes consist of the following:
1996 1995 1994
(IN THOUSANDS)
Federal:
Current............................................ $7,724 $5,414 $4,728
Deferred........................................... (784) (33) (110)
------ ------ ------
6,940 5,381 4,618
------ ------ ------
State:
Current............................................ 1,344 1,100 979
Deferred........................................... (131) (5) (20)
------ ------ ------
1,213 1,095 959
------ ------ ------
Total.............................................. $8,153 $6,476 $5,577
====== ====== ======
The components of the net deferred tax asset and the net deferred tax
liability as of December 31, 1996 and 1995 were as follows:
1996 1995
(IN THOUSANDS)
Current deferred tax asset:
Allowance for doubtful receivables...................... $ 196 $ 196
Inventories............................................. 895 601
Accrued liabilities and other........................... 1,037 615
------- -------
Deferred tax asset.................................... $ 2,128 $ 1,412
======= =======
Noncurrent deferred tax asset (liability):
Depreciation............................................ $ (643) $ (743)
Acquired companies...................................... (210) (214)
Other................................................... 108 13
------- -------
Deferred tax liability................................ $ (745) $ (944)
======= =======
B-11
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of income taxes computed at the statutory
federal income tax rate to the reported provision:
1996 1995 1994
(IN THOUSANDS)
Computed income taxes at federal statutory rate...... $6,948 $5,782 $4,996
State income taxes, net of federal benefit........... 789 711 630
Writedown of non-deductible goodwill................. 280 -- --
Other................................................ 136 (17) (49)
------ ------ ------
Total.............................................. $8,153 $6,476 $5,577
====== ====== ======
NOTE 8: COMMITMENTS, CONTINGENCIES AND RELATED PARTIES
LEASE COMMITMENTS
The Corporation leases certain facilities under noncancellable agreements
which expire at various dates through September 2000. The lease agreements
require the Corporation to pay property taxes, utilities, insurance, and
repairs and maintenance on the properties. In addition, certain of the
building leases are with entities which are principally owned by certain
directors and officers of the Corporation. During 1996, the Corporation
exercised its option to purchase certain real estate totalling $3.6 million
from ELJO Investments, a partnership principally owned by certain directors
and officers of the Corporation. The aggregate purchase price was below the
fair market value of the properties at the date of purchase. During 1996, the
Corporation also purchased a facility from Stults Realty, Inc. which is owned
by Mr. Stults, the Corporation's President pursuant to a provision in the
January 1995 agreement to purchase the assets of BABSCO, Inc. The purchase
price was approximately $600,000, which reflected the fair market value of the
property.
The Corporation also leases certain transportation, manufacturing,
distribution and office equipment under lease agreements with expiring terms
through May 2004. The transportation leases require weekly rentals plus
additional amounts based upon actual mileage.
The above described leases are accounted for as operating leases. Total
rental expense in the consolidated statements of income for the years ended
December 31, 1996, 1995 and 1994 aggregated $3,759,000, $3,474,000 and
$2,901,000 respectively, including payments to related parties of $266,000 in
1996, $711,000 in 1995, and $531,000 in 1994. Future minimum annual lease
payments under these operating leases, excluding mileage payments that may be
required under transportation vehicle leases, are as follows:
YEAR (IN THOUSANDS)
1997...................... $2,053
1998...................... 1,724
1999...................... 1,254
2000...................... 711
2001...................... 219
Thereafter................ 168
------
$6,129
======
SELF INSURANCE
The Corporation is self-insured for certain employee health benefits
($100,000 per individual with an annual aggregate of approximately $1.4
million) and workers' compensation ($500,000 per occurrence with an annual
B-12
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
aggregate of approximately $1.1 million). The Corporation accrues for the
estimated losses occurring from both asserted and unasserted claims. The
estimate of the liability for unasserted claims arising from incurred but not
reported claims is based on an analysis of historical claims data.
OTHER RELATED PARTY TRANSACTIONS
The Corporation made purchases from an electrical wire products supplier in
which the Corporation's President has a 16% ownership interest. Total
purchases for 1996 and 1995 were approximately $3 million per year. The
Corporation believes the purchases were at a price and terms which approximate
general market prices and terms for similar products.
OTHER
Certain claims are pending against the Corporation with respect to matters
arising out of the ordinary conduct of the business. In the opinion of
management, based upon presently available information, either adequate
provision for anticipated costs has been made by insurance, accruals or
otherwise, or the ultimate anticipated costs resulting will not materially
affect the Corporation's consolidated financial position or results of
operations.
During 1996, the Corporation committed to the expansion of its corporate
offices. At December 31, 1996, the outstanding contractual obligation amounted
to $1.1 million.
NOTE 9: BUSINESS ACQUISITIONS
The following acquisitions have been accounted for using the purchase method
of accounting, with the operating results of the acquired businesses being
included in the Corporation's consolidated financial statements from the date
of acquisition.
In January 1995, the Corporation acquired the business operations and
operating assets of BABSCO, Inc. ("BABSCO"), located in Elkhart, Indiana, and
having additional operations in Plymouth and Warsaw, Indiana and Mt. Joy,
Pennsylvania. BABSCO is a wholesale distributor of a full line of electrical
products to the Recreational Vehicle, Manufactured Housing and Modular Housing
industries, and to electrical contractors in the Northern Indiana and Southern
Michigan region. The total purchase price was $18.2 million, consisting of
three promissory notes totalling $7.0 million, 336,323 restricted shares of
common stock with a market value of $2.9 million, and $8.3 million of assumed
liabilities as of the closing date. The promissory notes included a $1.5
million demand note, an $800,000 note payable in quarterly installments over
five years and a $4.7 million note paid in January 1996. The $7.5 million
excess of the purchase price over the fair value of acquired assets
("goodwill") is being amortized over a 20-year period.
The following represents unaudited proforma financial information as if the
acquisition of BABSCO had occurred at the beginning of 1994 (in thousands,
except per share amounts):
1994
Net sales....................... $380,022
Net income...................... 9,400
Net income per common share..... 1.23
On May 2, 1994 the Corporation acquired the business operations and
operating assets of TATCO, Inc. ("TATCO") located in Lancaster, Pennsylvania.
TATCO is a wholesale distributor of building and component products to the
Manufactured and Modular Housing industries. The purchase price, including
liabilities assumed
B-13
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and amounts due under non-compete, employment, and earnout agreements totalled
$2.1 million. The $700,000 excess of the purchase price over the fair value of
acquired assets ("goodwill") is being amortized over a ten-year period.
Proforma financial information had TATCO been acquired as of the beginning of
1994 has not been presented as it is not materially different from historical
results of the Corporation.
NOTE 10: DISPOSAL OF CARPET BUSINESS
On December 31, 1996, the Corporation sold the carpet manufacturing and yarn
processing operations and certain assets and transferred certain liabilities
of its wholly-owned subsidiary, Danube Carpet Mills, Inc., for $18.3 million
in cash. The transaction resulted in a pre-tax gain of $5.9 million which
amounts to a net gain of $.41 per share after income taxes. The gain is net of
$4.5 million of expenses incurred in connection with the sale of the business,
including an $800,000 non-deductible charge for goodwill related to the carpet
and yarn operations. Condensed income statement information and a listing of
the assets and liabilities retained at December 31, 1996 relating to these
operations after eliminating intercompany transactions and allocations are as
follows:
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
Sales.............................................. $74,851 $68,210 $64,573
Cost of sales...................................... 63,403 55,385 52,228
------- ------- -------
Gross profit..................................... 11,448 12,825 12,345
Selling, general and administrative expenses....... 10,547 8,709 7,658
Interest expense................................... 4 3 15
Gain on sale of business........................... (5,919) -- --
------- ------- -------
Income before income taxes......................... $ 6,816 $ 4,113 $ 4,672
======= ======= =======
DECEMBER 31, 1996
Accounts receivable........................................ $3,594
Receivable due from buyer.................................. 135
Real estate held for sale to buyer......................... 1,648
Accounts payable and accrued expenses...................... (2,444)
Income taxes payable....................................... (2,963)
------
Net liabilities retained in excess of assets............. $ (30)
======
B-14
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
A S S E T S
CURRENT ASSETS
Cash.......................................................... $ 13,139 $ 21,096
Trade receivables, net........................................ 33,010 22,827
Inventories................................................... 43,001 41,475
Deferred income taxes......................................... 2,128 2,128
Prepaid expenses and other.................................... 440 595
Real estate held for sale..................................... 759 2,576
-------- --------
Total current assets........................................ 92,477 90,697
PROPERTY, PLANT AND EQUIPMENT, NET.............................. 25,929 19,381
COST IN EXCESS OF NET ASSETS ACQUIRED, net of accumulated
amortization................................................... 13,126 10,312
OTHER ASSETS.................................................... 1,322 520
-------- --------
Total assets................................................ $132,854 $120,910
======== ========
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
CURRENT LIABILITIES
Short-term debt............................................... $ -- $ 6,000
Current maturities of long-term debt.......................... 3,007 1,904
Accounts payable, trade....................................... 33,079 23,067
Accrued expenses and income taxes payable..................... 8,302 9,642
-------- --------
Total current liabilities................................... 44,388 40,613
-------- --------
LONG-TERM DEBT.................................................. 17,208 16,639
-------- --------
DEFERRED INCOME TAXES........................................... 745 745
-------- --------
OTHER DEFERRED LIABILITIES...................................... 223 133
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value............................... -- --
Common stock, $.01 par value.................................. 77 76
Additional paid-in capital.................................... 12,759 11,914
Retained earnings............................................. 57,491 50,827
-------- --------
70,327 62,817
Less, Treasury stock.......................................... 37 37
-------- --------
Total shareholders' equity.................................. 70,290 62,780
-------- --------
Total liabilities and shareholders' equity.................. $132,854 $120,910
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
B-15
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
Net sales................................................. $357,879 $397,065
Cost of sales............................................. 307,906 339,549
-------- --------
Gross profit............................................ 49,973 57,516
Commission income......................................... 2,074 1,827
-------- --------
52,047 59,343
Operating expenses........................................ 40,810 44,291
-------- --------
Operating income........................................ 11,237 15,052
Gains on sales of real estate............................. 447 --
Interest income........................................... 755 102
Interest expense.......................................... (1,219) (1,398)
-------- --------
Income before income taxes.............................. 11,220 13,756
Income taxes.............................................. 4,320 5,365
-------- --------
Net income.............................................. $ 6,900 $ 8,391
======== ========
Earnings per common and common equivalent share........... $ .89 $ 1.08
======== ========
Weighted average common and common equivalent shares
outstanding.............................................. 7,797 7,749
======== ========
Cash dividends per share.................................. $ .03 $ .02
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
B-16
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 7,419 $ 11,693
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property, plant and equipment............. (6,210) (6,057)
Acquisition of business, net of cash acquired............. (866) --
Proceeds from sale of property, plant and equipment....... 1,822 --
Other, net................................................ (1,056) 8
-------- --------
Net cash used in investing activities................... (6,310) (6,049)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ 4,658 73,146
Repayment of debt......................................... (14,412) (78,823)
Other, net................................................ 688 34
-------- --------
Net cash used in financing activities................... (9,066) (5,643)
-------- --------
Increase (decrease) in cash............................. (7,957) 1
Cash, beginning of period................................... 21,096 24
-------- --------
Cash, end of period......................................... $ 13,139 $ 25
======== ========
SUPPLEMENTAL INFORMATION:
Non cash investing and financing activities:
Acquisition of a business:
Obligations assumed..................................... $ 2,372 --
Long-term debt issued................................... 3,500 --
-------- --------
$ 5,872 $ --
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
B-17
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997
NOTE A--BASIS OF PRESENTATION
The financial statements have been prepared from the unaudited financial
records of the Corporation. In the opinion of management, the financial
statements include all adjustments consisting only of normal recurring
adjustments, necessary for a fair statement of the results of operations and
financial position for the interim periods. The results of operations for the
nine months ended September 30, 1997 are not necessarily indicative of the
results to be expected for the full year ending December 31, 1997.
The Consolidated Balance Sheet at December 31, 1996 has been derived from
the Audited Consolidated Financial Statements at that date, but does not
include all disclosures required by generally accepted accounting principles.
The Consolidated Statements of Income and Cash Flows for the nine months
ended September 30, 1996 include the results of operations and cash flows of
Danube Carpet Mills, Inc. ("Danube"), the business operations and certain
assets of which were sold on December 31, 1996. (See also Note E.)
NOTE B--INVENTORIES
Inventories at September 30, 1997 and December 31, 1996 consisted of the
following components (in thousands):
9/30/97 12/31/96
------- --------
Raw materials............................................. $ 7,557 $ 5,466
Work in process........................................... 566 382
Finished goods............................................ 797 814
Goods held for resale..................................... 34,081 34,813
------- -------
$43,001 $41,475
======= =======
NOTE C--DEBT
In January 1997, the Corporation repaid the $6 million revolving line of
credit balance using funds available from the December 31, 1996 sale of
Danube's operations. There were no outstanding borrowings under the $25
million bank revolver at September 30, 1997.
In February 1997, the Corporation paid the final $1.5 million principal
installment on a 6.4% institutional investor note.
In June 1997, the Corporation issued convertible 7% notes payable totaling
$3.5 million in connection with the acquisition of the operations and net
assets of Plastic Solutions, Inc. ("PSI") (See Note D). Principal and interest
payments are due annually with final installments due February 2001. The notes
also provide an option for the noteholders to elect to receive payments in
cash or in shares of the Corporation's common stock or a combination thereof
at each payment date. The conversion price is $13.50 per share.
NOTE D--BUSINESS ACQUISITION
On June 27, 1997, the Corporation acquired the net assets and operations of
Plastic Solutions, Inc. ("PSI"), a South Bend, Indiana manufacturer of
injection molded plastic parts with annual sales of approximately $9 million.
The total purchase price of $6.7 million consisted of cash of approximately
$.9 million, $3.5 million in convertible long-term notes payable to the
sellers, and $2.3 million of liabilities assumed. The purchase
B-18
SHELTER COMPONENTS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1997
agreement also provides for additional consideration payable to the sellers
contingent upon the future results of PSI through the year 2000. The excess of
the purchase price over the fair value of the acquired assets ("goodwill") was
approximately $3.2 million.
The results of operations for all periods presented would not have been
materially different than reported if PSI had been acquired on January 1,
1996.
NOTE E--DISPOSAL OF CARPET BUSINESS
On December 31, 1996, the Corporation sold the operations and certain assets
of its carpet and yarn manufacturing subsidiary, Danube Carpet Mills, Inc. The
following reflects Danube's 1996 results of operations for the nine month
period ended September 30, 1996:
(IN THOUSANDS EXCEPT
PER SHARE DATA)
Net sales............................................ $ 57,945
============
Net income........................................... $ 2,073
============
Net income per share................................. $ .27
============
NOTE F--SUBSEQUENT EVENTS--SALE OF REAL ESTATE
On October 3, 1997, the Corporation sold the remaining real estate held in
connection with the December 1996 sale of the operations and net assets of
Danube Carpet Mills, Inc. The proceeds from the sale were $1.7 million and
resulted in a net after-tax gain of approximately $.4 million or $.05 per
share to be recorded in the fourth quarter of 1997.
NOTE G--SUBSEQUENT EVENTS--MERGER AGREEMENT
On October 21, 1997, the Corporation signed a definitive merger agreement
with Kevco, Inc. for Kevco to acquire all the outstanding shares of the
Corporation at $17.50 per share through a cash tender offer. As a result of
the transaction, and if the tender offer is successful, the Corporation will
become a wholly-owned subsidiary of Kevco.
The transaction has been recommended by the Board of Directors of each
company. The cash tender offer is subject to Kevco receiving at least a
majority of the outstanding shares of Shelter (on a fully-diluted basis) as
well as the receipt of the required regulatory approvals and completion of
anticipated financing, and is expected to be completed on or before December
31, 1997. On October 28, 1997, the Corporation filed its
Solicitation/Recommendation Statement on Schedule 14D-9 relative to the cash
tender offer by Kevco.
Kevco, headquartered in Fort Worth, Texas, is a leading wholesale
distributor and manufacturer of building products to the manufactured housing
and recreational vehicle industries and reported net sales of $267 million and
pro forma net income of $8.9 million, or $1.60 per share for the year ended
December 31, 1996.
B-19
ANNEX C
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The unaudited pro forma condensed combined financial data is based on the
consolidated financial statements of Kevco, Inc. ("Kevco"), the consolidated
financial statements of Bowen Supply, Inc. ("Bowen"), the consolidated
financial statements of Consolidated Forest Products, L.L.C. ("Consolidated
Forest") and the consolidated financial statements of Shelter Components
Corporation ("Shelter") included elsewhere in this Form 8-K or previously
filed with the Securities and Exchange Commission. The unaudited pro forma
financial data gives effect to (i) the effect on weighted average shares and
earnings per share of the sale of 2,415,000 shares of common stock of Kevco
and the tax impact of Kevco's conversion from an S corporation to a C
corporation in November 1996 (including an over-allotment option of 315,000
shares exercised in December 1996) ("Public Offering"), (ii) the acquisition
by Kevco of Bowen ("Bowen Acquisition") and Consolidated Forest ("Consolidated
Forest Acquisition" and, collectively with the Bowen Acquisition, the "Kevco
Acquisitions"), (iii) Shelter's sale of the operations and certain assets of
Danube Carpet Mills, Inc. ("Danube") by Shelter and the acquisition by Shelter
of PSI ("PSI Acquisition"), (iv) the acquisition by Kevco of Shelter ("Shelter
Acquisition"), (v) the Senior Credit Facility and (vi) the Offering
(collectively, the "Pro Forma Transactions") as if these transactions had
occurred on January 1, 1996.
The unaudited pro forma condensed combined balance sheet at September 30,
1997 is based on the consolidated financial statements of Kevco adjusted to
give effect to the Shelter Acquisition and the Offering as if such
transactions had occurred on September 30, 1997. The unaudited pro forma
condensed combined statements of income for the year ended December 31, 1996,
the nine month-period ended September 30, 1997 and the last twelve months
ended September 30, 1997, are based on the consolidated financial statements
of Kevco and adjusted to give effect to the Pro Forma Transactions as if such
transactions had occurred on January 1, 1996. The acquisition adjustments and
offering adjustments are based upon historical financial information of Kevco,
Bowen, Consolidated Forest, PSI and Shelter and certain assumptions that
management of Kevco believes are reasonable. The Kevco Acquisitions, the PSI
Acquisition and the Shelter Acquisition are accounted for under the purchase
method of accounting. Under this method of accounting, the purchase price has
been allocated to the assets and liabilities acquired based on preliminary
estimates of fair value. The actual fair value is determined as of the
consummation of each of the acquisitions. The unaudited pro forma financial
data does not necessarily reflect the results of operations or the financial
position of Kevco that actually would have resulted had the Pro Forma
Transactions occurred at the date indicated, or project the results of
operations or financial position of Kevco for any future date or period.
The unaudited pro forma condensed combined financial data should be read in
conjunction with the consolidated financial statements of Kevco, Bowen,
Consolidated Forest and Shelter and the notes thereto included elsewhere in
this Form 8-K or previously filed with the Securities and Exchange Commission.
C-1
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
SHELTER PRO
KEVCO SHELTER ACQUISITION FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(1) TOTAL
ASSETS ---------- ---------- -------------- --------
Current Assets:
Cash and cash
equivalents.............. $ 77 $ 13,139 $(13,139)(2) $ 77
Trade accounts receivable,
net ..................... 25,190 33,010 -- 58,200
Inventories............... 34,988 43,001 -- 77,989
Other current assets ..... 1,447 3,327 -- 4,774
-------- -------- -------- --------
Total current assets.... 61,702 92,477 (13,139) 141,040
Property and equipment,
net........................ 18,563 25,929 -- 44,492
Intangible assets, net ..... 33,600 13,126 (13,126)(3) 127,549
88,024 (3)
5,925 (4)
Other assets................ 713 1,322 -- 2,035
-------- -------- -------- --------
Total assets............ $114,578 $132,854 $ 67,684 $315,116
======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.... $ 22,245 $ 33,079 $ -- $ 55,324
Accrued liabilities....... 4,050 7,279 -- 11,329
Current portion of long-
term debt................ 112 3,007 (2,271)(5) 848
Other liabilities......... 168 1,023 935 (6) 2,126
-------- -------- -------- --------
Total current
liabilities............ 26,575 44,388 (1,336) 69,627
Long-term debt, less current
portion.................... 45,737 17,208 (14,444)(7) 202,255
153,754 (7)
Other liabilities........... 1,869 968 -- 2,837
-------- -------- -------- --------
Total liabilities....... 74,181 62,564 137,974 274,719
Total stockholders'
equity................. 40,397 70,290 (70,290)(8) 40,397
-------- -------- -------- --------
Total liabilities and
stockholders' equity... $114,578 $132,854 $ 67,684 $315,116
======== ======== ======== ========
C-2
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) The Shelter Acquisition will be accounted for using the purchase method of
accounting. The aggregate purchase price was determined as follows:
Shares outstanding at September 30, 1997................... 7,765
Options outstanding at September 30, 1997.................. 376
---------
Total.................................................... 8,141
Purchase price per share................................... $ 17.50
---------
$ 142,468
Exercise of options outstanding (a)........................ (3,625)
---------
Purchase price............................................. $ 138,843
Acquisition costs (b)...................................... 5,410
---------
Total purchase price..................................... $ 144,253
=========
(a) Represents cash to be received by Kevco in settlement of stock options
outstanding as of September 30, 1997 (376,000 options outstanding at an
average price of $9.64 per share).
(b) Represents fees and costs directly associated with the Shelter
Acquisition consisting of investment banking, legal and other
professional costs.
(2) Reflects the utilization of existing cash to finance a portion of the
Shelter Acquisition.
(3) Goodwill was adjusted to reflect: (i) the elimination of existing goodwill
of Shelter and (ii) the excess of purchase cost over the fair value of net
assets acquired which amount will be amortized on a straight line basis
over an estimated life of 40 years.
(4) Intangibles were adjusted to reflect the capitalization of financing costs
that will be amortized over the life of the Senior Credit Facility and the
Notes.
(5) Current portion of long-term debt was adjusted to reflect the retirement
of a portion of long-term debt. See note (7).
(6) The adjustment reflects accrued severance costs related to the involuntary
termination of employees resulting from the Shelter Acquisition.
(7) Long-term debt was adjusted to reflect gross proceeds of $105,000 from the
issuance of the Notes and additional borrowings of $48,754 from the Senior
Credit Facility, net of $14,444 of long-term debt of Shelter that was
retired.
(8) The adjustment reflects the elimination of the stockholders' equity of
Shelter.
C-3
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
LAST TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
KEVCO PRO SHELTER PRO SHELTER KEVCO
FORMA FORMA ACQUISITION OFFERING COMBINED
TOTALS(A) TOTALS(B) ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------- ----------- ----------- ----------- ---------
Net sales............... $384,269 $470,907 $ -- $ -- $855,176
Cost of sales........... 330,583 404,977 -- -- 735,560
-------- -------- ------ -------- --------
Gross profit.......... 53,686 65,930 -- -- 119,616
Commission income....... 6,224 2,706 -- -- 8,930
-------- -------- ------ -------- --------
59,910 68,636 -- -- 128,546
Selling, general and ad-
ministrative expenses.. 41,035 54,356 (5,346)(1) 91,014
(1,232)(2)
2,201 (3)
-------- -------- ------ -------- --------
Operating income...... 18,875 14,280 4,377 -- 37,532
Interest expense........ (4,068) (1,039) (18,580)(4) (19,536)
4,862 (4)
(711)(4)
Other income (expense).. 174 447 -- -- 621
-------- -------- ------ -------- --------
Income before income
taxes.................. 14,981 13,688 4,377 (14,429) 18,617
Income taxes............ 5,992 5,267 1,751 (5) (4,632)(5) 8,378
-------- -------- ------ -------- --------
Net income............ $ 8,989 $ 8,421 $2,626 $ (9,797) $ 10,239
======== ======== ====== ======== ========
Earnings per share...... $ 1.30 $ 1.48
======== ========
Weighted average shares
outstanding............ 6,916 6,916
======== ========
Other Data:
Operating income...... $ 18,875 $ 14,280 $4,377 $ -- $ 37,532
Depreciation and
amortization......... 3,346 3,839 969 -- 8,154
-------- -------- ------ -------- --------
EBITDA (6)............ $ 22,221 $ 18,119 $5,346 $ -- $ 45,686
======== ======== ====== ======== ========
- ---------------------
(A) Includes the pro forma effect of the Public Offering and the Kevco
Acquisitions.
(B) Includes the pro forma effect of the sale of the operations and certain
assets of Danube and the PSI Acquisition.
C-4
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
LAST TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(1) Pursuant to EITF 95-3, Kevco has accrued liabilities for the involuntary
termination of certain employees which are included in the financial
statements along with the pro forma effect of the elimination of duplicate
costs. Costs include only direct costs and benefits of these employees.
Kevco believes that the elimination of duplicate employees will have no
material effect on the other reported amounts within the unaudited pro
forma condensed combined financial statements.
(2) To eliminate the historical amortization of goodwill of Shelter.
(3) Represents the amortization of excess purchase price over fair value of
net assets acquired related to the Shelter Acquisition over a period of 40
years.
(4) Interest expense was adjusted to reflect: (i) $18,580 resulting from the
effective interest rate of the Senior Credit Facility at 8.25% and the
Notes at 10 3/8%; (ii) the elimination of interest on existing debt of
$4,862 to be repaid from the proceeds of the Senior Credit Facility and
(iii) the amortization of financing costs of $711 over the life of the
indebtedness.
(5) Income tax expense was adjusted to reflect an effective tax rate of 45%,
which is the expected effective tax rate of the Company after giving
effect to the Shelter Acquisition. The effective rate is higher than the
statutory rate of approximately 40% because of the nondeductibility of
goodwill resulting from the Shelter Acquisition.
(6) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income reflected
in the determination of net income.
C-5
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
LAST TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(A)KEVCO PRO FORMA
PUBLIC CONSOLIDATED KEVCO
KEVCO OFFERING BOWEN SUPPLY FOREST ACQUISITION PRO FORMA
HISTORICAL ADJUSTMENTS HISTORICAL(3) HISTORICAL(4) ADJUSTMENTS TOTALS
---------- ----------- ------------- ------------- ----------- ---------
Net sales............... $334,253 $ -- $17,666 $32,350 $ -- $384,269
Cost of sales........... 287,790 -- 13,915 28,960 (82)(5) 330,583
-------- ---- ------- ------- ------ --------
Gross profit.......... 46,463 -- 3,751 3,390 82 53,686
Commission income....... 5,810 -- 414 -- -- 6,224
-------- ---- ------- ------- ------ --------
52,273 -- 4,165 3,390 82 59,910
Selling, general and
administrative
expenses............... 35,870 -- 2,869 2,811 (213)(6) 41,035
(622)(7)
303(8)
17(9)
-------- ---- ------- ------- ------ --------
Operating income...... 16,403 -- 1,296 579 597 18,875
Interest expense........ (2,786) 108 (1) (149) (381) (1,100)(10) (4,068)
254 (11)
(14)(9)
Other income (expense).. -- -- 227 (53) -- 174
-------- ---- ------- ------- ------ --------
Income before income
taxes................. 13,617 108 1,374 145 (263) 14,981
Income taxes............ 5,377 43 (2) 551 -- 21 (12) 5,992
-------- ---- ------- ------- ------ --------
Net income............ $ 8,240 $ 65 $ 823 $ 145 $ (284) $ 8,989
======== ==== ======= ======= ====== ========
Earnings per share...... $ 1.19 $ 1.30
======== ========
Weighted average shares
outstanding............ 6,916 6,916
======== ========
Other Data:
Operating income...... $ 16,403 $ -- $ 1,296 $ 579 $ 597 $ 18,875
Depreciation and
amortization......... 2,641 -- 138 460 107 3,346
-------- ---- ------- ------- ------ --------
EBITDA(13)............ $ 19,044 $ -- $ 1,434 $ 1,039 $ 704 $ 22,221
======== ==== ======= ======= ====== ========
C-6
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
LAST TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(A)KEVCO PRO FORMA
(1) To reflect a decrease in interest expense for the month ended October 31,
1996, as if debt of $16.9 million, at an average interest rate of 7.65%,
had been repaid on October 1, 1996 from the net proceeds of the Public
Offering consummated on November 1, 1996. Indebtedness repaid reflects the
portion of net proceeds that were available to repay debt after making
final S corporation distributions of $9.1 million in 1996.
(2) To reflect a provision for income taxes at an effective rate of 40%
associated with the Kevco's conversion to a C corporation offset by the
tax effect of the decrease in interest expense referred to in (1).
(3) The Bowen Acquisition was consummated on February 28, 1997. Historical
results represent unaudited results of operations of Bowen for the five
months ended February 28, 1997.
(4) The Consolidated Forest Acquisition was consummated on February 27, 1997.
Historical results represent unaudited results of operations of
Consolidated Forest for the five months ended February 27, 1997.
(5) To reflect the amortization of the fair value adjustment to inventory of
$82 related to the Bowen Acquisition.
(6) To eliminate amortization of historical goodwill of $10 and $203 related
to Bowen and Consolidated Forest, respectively.
(7) To eliminate expense of $196 related to an executive of Bowen who was
retired in connection with the Bowen Acquisition, to eliminate historical
management fees of Consolidated Forest of $69 and to reflect a reduction
in commission expense of $357 resulting from the amendment of a contract
with a third party in connection with the Consolidated Forest Acquisition.
(8) To reflect the amortization of the fair value adjustments to property and
equipment of $25 related to the Consolidated Forest Acquisition, and to
reflect the amortization of loan origination fees of $18 and $18 and
goodwill of $155 and $87 related to the Bowen Acquisition and Consolidated
Forest Acquisition, respectively.
(9) To reflect the amortization and interest expense related to the non-
compete agreements entered into in connection with the Consolidated Forest
Acquisition.
(10) To reflect interest expense on borrowings to fund the Kevco Acquisitions
at an assumed interest rate of 7.6% totalling $648 and $452 related to
the Bowen Acquisition and Consolidated Forest Acquisition, respectively.
(11) To eliminate historical interest expense related to long-term debt not
assumed by Kevco in the Consolidated Forest Acquisition.
(12) Income tax expense was adjusted to reflect an effective tax rate of 40%,
which is the expected effective tax rate of Kevco.
(13) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income
reflected in the determination of net income.
C-7
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
LAST TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(B)SHELTER PRO FORMA
SHELTER
SHELTER SALE OF PSI ACQUISITION PRO FORMA
HISTORICAL DANUBE(1) HISTORICAL(2) ADJUSTMENTS TOTALS
---------- --------- ------------- ----------- ---------
Net sales............... $481,836 $(16,836) $5,907 $ -- $470,907
Cost of sales........... 416,058 (16,022) 5,246 (305)(3) 404,977
-------- -------- ------ ---- --------
Gross profit.......... 65,778 (814) 661 305 65,930
Commission income....... 2,706 -- -- -- 2,706
-------- -------- ------ ---- --------
68,484 (814) 661 305 68,636
Selling, general and
administrative expenses
....................... 56,713 (3,000) 576 67 (4) 54,356
-------- -------- ------ ---- --------
Operating income...... 11,771 2,186 85 238 14,280
Interest expense........ (822) 4 (151) (70)(5) (1,039)
Other income (expense).. 6,366 (5,919) -- -- 447
-------- -------- ------ ---- --------
Income before income
taxes................ 17,315 (3,729) (66) 168 13,688
Income taxes............ 7,107 (1,880) -- 40 (6) 5,267
-------- -------- ------ ---- --------
Net income............ $ 10,208 $ (1,849) $ (66) $128 $ 8,421
======== ======== ====== ==== ========
Other Data:
Operating income...... $ 11,771 $ 2,186 $ 85 $238 $ 14,280
Depreciation and
amortization......... 3,359 (140) 327 293 3,839
-------- -------- ------ ---- --------
EBITDA (7)............ $ 15,130 $ 2,046 $ 412 $531 $ 18,119
======== ======== ====== ==== ========
C-8
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
LAST TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(B)SHELTER PRO FORMA
(1) The operations and certain assets of Danube were sold on December 31,
1996. Historical results represent results of operations related to Danube
for the three months ended December 31, 1996.
(2) The PSI Acquisition was consummated on June 27, 1997. Historical results
represent results of operations of PSI for the nine months ended June 27,
1997.
(3) To: (i) eliminate one-time bonuses given to employees of PSI in connection
with the sale; (ii) reduce compensation expense pursuant to post
acquisition employment agreements and (iii) record additional depreciation
expense for equipment adjusted to fair market value in connection with the
PSI Acquisition.
(4) To: (i) record amortization of goodwill; (ii) reduce compensation expense
for a certain employment agreement and (iii) eliminate non-recurring
charges incurred in connection with the PSI Acquisition.
(5) To reflect interest expense on debt issued, net of interest expense on the
repayment of existing debt in connection with the PSI Acquisition.
(6) Income tax expense was adjusted to reflect Shelter's effective tax rate of
38.5%.
(7) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income reflected
in the determination of net income.
C-9
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
KEVCO PRO SHELTER SHELTER KEVCO
FORMA PRO FORMA ACQUISITION OFFERING COMBINED
TOTALS(A) TOTALS(B) ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------- --------- ----------- ----------- ---------
Net sales............... $289,952 $362,139 $ -- $ -- $652,091
Cost of sales........... 250,896 311,329 -- -- 562,225
-------- -------- ------ ------- --------
Gross profit.......... 39,056 50,810 -- -- 89,866
Commission income....... 4,506 2,074 -- -- 6,580
-------- -------- ------ ------- --------
43,562 52,884 -- -- 96,446
Selling, general and
administrative expenses
....................... 30,667 41,239 (3,597)(1) -- 69,077
(883)(2)
1,651 (3)
-------- -------- ------ ------- --------
Operating income...... 12,895 11,645 2,829 -- 27,369
Interest expense........ (2,869) (612) (13,935)(4) (14,652)
3,297 (4)
(533)(4)
Other income (expense).. 52 447 -- -- 499
-------- -------- ------ ------- --------
Income before income
taxes.................. 10,078 11,480 2,829 (11,171) 13,216
Income taxes............ 4,031 4,422 1,054 (5) (3,561)(5) 5,946
-------- -------- ------ ------- --------
Net income............ $ 6,047 $ 7,058 $1,775 $(7,610) $ 7,270
======== ======== ====== ======= ========
Earnings per share...... $ 0.87 $ 1.05
======== ========
Weighted average shares
outstanding............ 6,916 6,916
======== ========
Other Data:
Operating income...... $ 12,895 $ 11,645 $2,829 $ -- $ 27,369
Depreciation and
amortization......... 2,455 2,864 768 -- 6,087
-------- -------- ------ ------- --------
EBITDA (6)............ $ 15,350 $ 14,509 $3,597 $ -- $ 33,456
======== ======== ====== ======= ========
- ---------------------
(A) Includes the pro forma effect of the Kevco Acquisitions.
(B) Includes the pro forma effect of the PSI Acquisition.
C-10
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(1) Pursuant to EITF 95-3, Kevco has accrued liabilities for the involuntary
termination of certain employees which are included in the financial
statements along with the pro forma effect of the elimination of duplicate
costs. Costs include only direct costs and benefits of these employees.
Kevco believes that the elimination of duplicate employees will have no
material effect on the other reported amounts within the unaudited pro
forma condensed combined financial statements.
(2) To eliminate the historical amortization of goodwill of Shelter.
(3) Represents the amortization of excess purchase price over fair value of
net assets acquired related to the Shelter Acquisition over a period of 40
years.
(4) Interest expense was adjusted to reflect: (i) $13,935 resulting from the
effective interest rate of the Senior Credit Facility at 8.25% and the
Notes at 10 3/8%; (ii) the elimination of interest on existing debt of
$3,297 to be repaid from the proceeds from the Senior Credit Facility and
(iii) the amortization of financing costs of $533 over the life of the
indebtedness.
(5) Income tax expense was adjusted to reflect an effective tax rate of 45%,
which is the expected effective tax rate of the Company after giving
effect to the Shelter Acquisition. The effective rate is higher than the
statutory rate of approximately 40% because of the nondeductibility of
goodwill resulting from the Shelter Acquisition.
(6) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income reflected
in the determination of net income.
C-11
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(A)KEVCO PRO FORMA
KEVCO
CONSOLIDATED PRO
KEVCO BOWEN SUPPLY FOREST ACQUISITION FORMA
HISTORICAL HISTORICAL(1) HISTORICAL(2) ADJUSTMENTS TOTALS
---------- ------------- ------------- ----------- --------
Net sales............... $271,957 $6,710 $11,285 $ -- $289,952
Cost of sales........... 235,138 5,398 10,393 (33)(3) 250,896
-------- ------ ------- ---- --------
Gross profit.......... 36,819 1,312 892 33 39,056
Commission income....... 4,413 93 -- -- 4,506
-------- ------ ------- ---- --------
41,232 1,405 892 33 43,562
Selling, general and ad-
ministrative expenses.. 28,738 1,097 1,038 (85)(4) 30,667
(249)(5)
121 (6)
7 (7)
-------- ------ ------- ---- --------
Operating income...... 12,494 308 (146) 239 12,895
Interest expense, net... (2,354) (51) (120) (440)(8) (2,869)
102 (9)
(6)(7)
Other income (expense).. -- 46 6 -- 52
-------- ------ ------- ---- --------
Income before income
taxes................ 10,140 303 (260) (105) 10,078
Income taxes............ 4,056 123 -- (148)(10) 4,031
-------- ------ ------- ---- --------
Net income............ $ 6,084 $ 180 $ (260) $ 43 $ 6,047
======== ====== ======= ==== ========
Earnings per share...... $ 0.88 $ 0.87
======== ========
Weighted averaged shares
outstanding............ 6,916 6,916
======== ========
Other Data:
Operating income...... $ 12,494 $ 308 $ (146) $239 $ 12,895
Depreciation and
amortization......... 2,172 56 184 43 2,455
-------- ------ ------- ---- --------
EBITDA (11)........... $ 14,666 $ 364 $ 38 $282 $ 15,350
======== ====== ======= ==== ========
C-12
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(A)KEVCO PRO FORMA
(1) The Bowen Acquisition was consummated on February 28, 1997. Historical
results represent unaudited results of operations of Bowen for the two
months ended February 28, 1997.
(2) The Consolidated Forest Acquisition was consummated on February 27, 1997.
Historical results represent unaudited results of operations of
Consolidated Forest for the two months ended February 27, 1997.
(3)To reflect the amortization of the fair value adjustment to inventory of
$33 related to the Bowen Acquisition.
(4) To eliminate amortization of historical goodwill of $4 and $81 related to
Bowen and Consolidated Forest, respectively.
(5) To eliminate expense of $78 related to an executive of Bowen who was
retired in connection with the Bowen Acquisition, to eliminate historical
management fees of Consolidated Forest of $28 and to reflect a reduction
in commission expense of $143 resulting from the amendment of a contract
with a third party in connection with the Consolidated Forest Acquisition.
(6) To reflect the amortization of the fair value adjustments to property and
equipment of $10 related to the Consolidated Forest Acquisition, and to
reflect the amortization of loan origination fees of $7 and $7 and
goodwill of $62 and $35 related to the Bowen Acquisition and Consolidated
Forest Acquisition, respectively.
(7) To reflect the amortization and interest expense related to the non-
compete agreements entered into in connection with the Consolidated Forest
Acquisition.
(8) To reflect interest expense on borrowings to fund the Kevco Acquisitions
at an assumed interest rate of 7.6% totalling $259 and $181 related to the
Bowen Acquisition and Consolidated Forest Acquisition, respectively.
(9) To eliminate historical interest expense related to long-term debt not
assumed by Kevco in the Consolidated Forest Acquisition.
(10) Income tax expense was adjusted to reflect an effective tax rate of 40%,
which is the expected effective tax rate of Kevco.
(11) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income
reflected in the determination of net income.
C-13
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
(B) SHELTER PRO FORMA
SHELTER
SHELTER PSI ACQUISITION PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS TOTALS
---------- ------------- ----------- ---------
Net sales..................... $357,879 $4,260 $ -- $362,139
Cost of sales................. 307,906 3,682 (259)(2) 311,329
-------- ------ ----- --------
Gross profit................ 49,973 578 259 50,810
Commission income............. 2,074 -- -- 2,074
-------- ------ ----- --------
52,047 578 259 52,884
Selling, general and
administrative expenses...... 40,810 380 49 (3) 41,239
-------- ------ ----- --------
Operating income............ 11,237 198 210 11,645
Interest expense.............. (464) (113) (35)(4) (612)
Other income (expense)........ 447 -- -- 447
-------- ------ ----- --------
Income before income taxes.. 11,220 85 175 11,480
Income taxes.................. 4,320 -- 102 (5) 4,422
-------- ------ ----- --------
Net income.................. $ 6,900 $ 85 $ 73 $ 7,058
======== ====== ===== ========
Other Data:
Operating income............ $ 11,237 $ 198 $ 210 $ 11,645
Depreciation and
amortization............... 2,454 215 195 2,864
-------- ------ ----- --------
EBITDA (6).................. $ 13,691 $ 413 $ 405 $ 14,509
======== ====== ===== ========
C-14
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(B)SHELTER PRO FORMA
(1) The PSI Acquisition was consummated on June 27, 1997. Historical results
represent results of operations of PSI for the six months ended June 27,
1997.
(2) To: (i) eliminate one-time bonuses given to employees of PSI in connection
with the sale; (ii) reduce compensation expense pursuant to post
acquisition employment agreements and (iii) record additional depreciation
expense for equipment adjusted to fair market value in connection with the
PSI Acquisition.
(3) To: (i) record amortization of goodwill; (ii) reduce compensation expense
for a certain Employment Agreement and (iii) eliminate non-recurring
charges incurred in connection with the PSI Acquisition.
(4) To reflect interest expense on debt issued, net of interest expense on the
repayment of existing debt in connection with the PSI Acquisition.
(5) Income tax expense was adjusted to reflect Shelter's effective tax rate of
38.5%.
(6) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income reflected
in the determination of net income.
C-15
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
KEVCO SHELTER SHELTER KEVCO
PRO FORMA PRO FORMA ACQUISITION OFFERING COMBINED
TOTALS(A) TOTALS(B) ADJUSTMENTS ADJUSTMENTS PRO FORMA
--------- --------- ----------- ----------- ---------
Net sales............... $401,119 $454,567 $ -- $ -- $855,686
Cost of sales........... 341,473 391,440 -- -- 732,913
-------- -------- ------- -------- --------
Gross profit.......... 59,646 63,127 -- -- 122,773
Commission income....... 6,900 2,459 -- -- 9,359
-------- -------- ------- -------- --------
66,546 65,586 -- -- 132,132
Selling, general and
administrative
expenses............... 42,264 50,553 (4,914)(1) -- 88,722
(1,382)(2) --
2,201 (3) --
-------- -------- ------- -------- --------
Operating income...... 24,282 15,033 4,095 -- 43,410
Interest expense........ (4,420) (1,994) -- (18,580)(4) (19,536)
6,169 (4)
(711)(4)
Other income............ 61 -- -- -- 61
-------- -------- ------- -------- --------
Income before income
taxes................ 19,923 13,039 4,095 (13,122) 23,935
Income taxes............ 7,969 5,072 1,535 (5) (3,805)(5) 10,771
-------- -------- ------- -------- --------
Net income............ $ 11,954 $ 7,967 $ 2,560 $ (9,317) $ 13,164
======== ======== ======= ======== ========
Earnings per share...... $ 1.73 $ 1.90
======== ========
Weighted average shares
outstanding............ 6,911 6,911
======== ========
Other Data:
Operating income...... $ 24,282 $ 15,033 $ 4,095 $ -- $ 43,410
Depreciation and
amortization......... 3,418 3,596 819 -- 7,833
-------- -------- ------- -------- --------
EBITDA (6)............ $ 27,700 $ 18,629 $ 4,914 $ -- $ 51,243
======== ======== ======= ======== ========
- ---------------------
(A) Includes the pro forma effect of the Public Offering and the Kevco
Acquisitions.
(B) Includes the pro forma effect of the sale of the operations and certain
assets of Danube and the PSI Acquisition.
C-16
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(1) Pursuant to EITF 95-3, Kevco has accrued liabilities for the involuntary
termination of certain employees which are included in the financial
statements along with the pro forma effect of the elimination of duplicate
costs. Costs include only direct costs and benefits of these employees.
Kevco believes that the elimination of duplicate employees will have no
material effect on the other reported amounts within the unaudited pro
forma condensed combined financial statements.
(2)To eliminate the historical amortization of goodwill of Shelter.
(3) Represents the amortization of excess purchase price over fair value of
net assets acquired related to the Shelter Acquisition over a period of 40
years.
(4) Interest expense was adjusted to reflect: (i) $18,580 resulting from the
effective interest rate of the Senior Credit Facility at 8.25% and the
Notes at 10 3/8%; (ii) the elimination of interest on existing debt of
$6,169 to be repaid from the proceeds from the Senior Credit Facility and
(iii) the amortization of financing costs of $711 over the life of the
indebtedness.
(5) Income tax expense was adjusted to reflect an effective tax rate of 45%,
which is the expected effective tax rate of the Company after giving
effect to the Shelter Acquisition. The effective rate is higher than the
statutory rate of approximately 40% because of the nondeductibility of
goodwill resulting from the Shelter Acquisition.
(6) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income reflected
in the determination of net income.
C-17
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) KEVCO PRO FORMA
PUBLIC BOWEN CONSOLIDATED KEVCO
KEVCO OFFERING SUPPLY FOREST ACQUISITION PRO FORMA
HISTORICAL ADJUSTMENTS HISTORICAL HISTORICAL(3) ADJUSTMENTS TOTALS
---------- ----------- ---------- ------------- ----------- ---------
Net sales............... $267,344 $ -- $41,301 $92,474 $ -- $401,119
Cost of sales........... 226,653 -- 33,270 81,746 (196)(4) 341,473
-------- ------- ------- ------- ------- --------
Gross profit.......... 40,691 -- 8,031 10,728 196 59,646
Commission income....... 5,497 -- 1,403 -- -- 6,900
-------- ------- ------- ------- ------- --------
46,188 -- 9,434 10,728 196 66,546
Selling, general and
administrative
expenses............... 29,723 -- 6,180 7,597 (511)(5) 42,264
(1,493)(6)
727 (7)
41 (8)
-------- ------- ------- ------- ------- --------
Operating income...... 16,465 -- 3,254 3,131 1,432 24,282
Interest expense........ (2,058) 1,296 (1) (364) (1,230) (2,641)(9) (4,420)
611 (10)
(34)(8)
Other income (expense).. -- -- 15 46 -- 61
-------- ------- ------- ------- ------- --------
Income before income
taxes................ 14,407 1,296 2,905 1,947 (632) 19,923
Income taxes............ 1,695 4,643 (2) 1,149 -- 482 (11) 7,969
-------- ------- ------- ------- ------- --------
Net income............ $ 12,712 $(3,347) $ 1,756 $ 1,947 $(1,114) $ 11,954
======== ======= ======= ======= ======= ========
Historical income before
income taxes........... $ 14,407
Income tax expense
adjustment(2).......... 5,475
--------
Pro forma net income.... $ 8,932
========
Pro forma earnings per
share.................. $ 1.61 $ 1.73
======== ========
Pro forma weighted
average shares
outstanding............ 5,531 1,380 (13) 6,911
======== ======= ========
Other Data:
Operating income...... $ 16,465 $ -- $ 3,254 $ 3,131 $ 1,432 $ 24,282
Depreciation and
amortization......... 1,792 -- 308 1,061 257 3,418
-------- ------- ------- ------- ------- --------
EBITDA(12)............ $ 18,257 $ -- $ 3,562 $ 4,192 $ 1,689 $ 27,700
======== ======= ======= ======= ======= ========
C-18
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(A)KEVCO PRO FORMA
(1) To reflect a decrease in interest expense as if debt of $16.9 million, at
an average interest rate of 7.65%, had been repaid on January 1, 1996 from
the net proceeds of the Public Offering. Indebtedness repaid reflects the
portion of net proceeds that were available to repay debt after making
final S corporation distributions of $9.1 million in 1996.
(2) To reflect a provision for income taxes at an effective rate of 40%
associated with the Kevco's conversion to a C corporation offset by the
tax effect of the decrease in interest expense referred to in (1).
(3)For the year ended September 29, 1996, which represents Consolidated
Forest's fiscal year end.
(4) To reflect the amortization of the fair value adjustment to inventory of
$196 related to the Bowen Acquisition.
(5) To eliminate amortization of historical goodwill of $23 and $488 related
to Bowen and Consolidated Forest, respectively.
(6) To eliminate expense of $471 related to an executive of Bowen who was
retired in connection with the Bowen Acquisition, to eliminate historical
management fees of Consolidated Forest of $166 and to reflect a reduction
in commission expense of $856 resulting from the amendment of a contract
with a third party in connection with the Consolidated Forest Acquisition.
(7) To reflect the amortization of the fair value adjustments to property and
equipment of $60 related to the Consolidated Forest Acquisition, and to
reflect the amortization of loan origination fees of $42 and $42 and
goodwill of $372 and $211 related to the Bowen Acquisition and
Consolidated Forest Acquisition, respectively.
(8) To reflect the amortization and interest expense related to the non-
compete agreements entered into in connection with the Consolidated Forest
Acquisition.
(9) To reflect interest expense on borrowings to fund the Kevco Acquisitions
at an assumed interest rate of 7.6% totalling $1,556 and $1,085 related to
the Bowen Acquisition and Consolidated Forest Acquisition, respectively.
(10) To eliminate historical interest expense related to long-term debt not
assumed by the Kevco in the Consolidated Forest Acquisition.
(11) Income tax expense was adjusted to reflect an effective tax rate of 40%,
which is the expected effective tax rate of Kevco.
(12) EBITDA is defined as net income plus interest expense, income taxes,
depreciation, amortization, and other expenses less other income
reflected in the determination of net income.
(13) To reflect the incremental weighted average shares issued in connection
with the Public Offering in November 1996.
C-19
KEVCO, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
(B) SHELTER PRO FORMA
SHELTER
SHELTER SALE OF PSI ACQUISITION PRO FORMA
HISTORICAL DANUBE(1) ACQUISITION(2) ADJUSTMENTS TOTALS
---------- --------- -------------- ----------- ---------
Net sales............... $521,022 $(74,851) $8,396 $ -- $454,567
Cost of sales........... 447,701 (63,403) 7,180 (38)(3) 391,440
-------- -------- ------ ----- --------
Gross profit.......... 73,321 (11,448) 1,216 38 63,127
Commission income....... 2,459 -- -- -- 2,459
-------- -------- ------ ----- --------
75,780 (11,448) 1,216 38 65,586
Selling, general and
administrative
expenses............... 60,194 (10,547) 673 233 (4) 50,553
-------- -------- ------ ----- --------
Operating income...... 15,586 (901) 543 (195) 15,033
Interest expense........ (1,654) 4 (243) (101)(5) (1,994)
Other income (expense).. 5,919 (5,919) -- -- --
-------- -------- ------ ----- --------
Income before income
taxes................ 19,851 (6,816) 300 (296) 13,039
Income taxes............ 8,153 (3,083) -- 2 (6) 5,072
-------- -------- ------ ----- --------
Net income............ $ 11,698 $ (3,733) $ 300 $(298) $ 7,967
======== ======== ====== ===== ========
Other Data:
Operating income...... $ 15,586 $ (901) $ 543 $(195) $ 15,033
Depreciation and
amortization......... 3,350 (560) 437 369 3,596
-------- -------- ------ ----- --------
EBITDA (7)............ $ 18,936 $ (1,461) $ 980 $ 174 $ 18,629
======== ======== ====== ===== ========
C-20
KEVCO, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
(B)SHELTER PRO FORMA
(1) The operations and certain assets of Danube were sold on December 31,
1996. Historical results represent results of operations related to Danube
for the year ended December 31, 1996.
(2) The PSI Acquisition was consummated on June 27, 1997. Historical results
represent results of operations of PSI for the year ended December 31,
1996.
(3) To: (i) eliminate non-recurring compensation expense; (ii) reduce
compensation expense pursuant to post acquisition employment agreements
and (iii) record additional depreciation expense for equipment adjusted to
fair market value in connection with the PSI Acquisition.
(4) To: (i) record amortization of goodwill; (ii) reduce compensation expense
for a certain Employment Agreement and (iii) eliminate non-recurring
charges incurred in connection with the PSI Acquisition.
(5) To reflect interest expense on debt issued, net of interest expense on the
repayment of existing debt in connection with the PSI Acquisition.
(6) Income tax expense was adjusted to reflect Shelter's effective tax rate of
39%.
(7) EBITDA is defined as net income plus interest expense, income taxes,
depreciation and amortization, and other expenses less other income
reflected in the determination of net income.
C-21