UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934: For the period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 33-26991
American Builders & Contractors Supply Co., Inc.
Amcraft Building Products Co., Inc.
Mule-Hide Products Co., Inc.
-------------------------------------------------------------------
(Exact names of registrant as specified in its charter)
Delaware 5033 39-1413708
Delaware 5033 39-1701778
Texas 5033 62-1277211
- ----------------------------------------------------------------------------------------------------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer Identification No.)
incorporation or organization) Industrial Classification
Code Number)
One ABC Parkway
Beloit, Wisconsin 53511
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (608) 362-7777
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, no par value, 147.04 shares as of October 31, 1998
Index
American Builders and Contractors Supply Co., Inc. and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-September 30, 1998 and December 31, 1997
Condensed consolidated statements of operations and retained earnings-Three
months ended September 30, 1998 and 1997; Nine months ended September 30,
1998 and 1997
Condensed consolidated statements of cash flows-Nine months ended September
30, 1998 and 1997
Notes to condensed consolidated financial statements - September 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part 1. Financial Information
American Builders & Contractors Supply Co., Inc. And Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
September 30, December 31,
ASSETS 1998 1997
------------- ------------
Current Assets:
Cash $ 3,117,000 $ 4,140,000
Accounts receivable 177,592,000 143,106,000
Inventories 152,960,000 128,847,000
Prepaids expenses and other 3,547,000 3,763,000
------------ ------------
Total current assets 337,216,000 279,856,000
Property and equipment, net 71,338,000 71,614,000
Net receivable from sole stockholder 5,333,000 7,328,000
Intangible assets, net 7,428,000 7,988,000
Goodwill 40,763,000 41,732,000
Security deposits 1,015,000 1,026,000
Other assets 1,990,000 78,000
------------ ------------
$465,083,000 $409,622,000
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable $138,271,000 $ 78,489,000
Other payables and accrued liabilities 23,717,000 21,994,000
Current portion of long-term debt 5,244,000 6,141,000
------------ ------------
Total current liabilities 167,232,000 106,624,000
Long-term debt 275,950,000 281,206,000
Contingent liabilities (Note 2)
Stockholders's equity:
Common stock 109,000 109,000
Additional paid-in capital 1,755,000 1,755,000
Retained earnings 20,037,000 19,928,000
------------ ------------
Total stockholder's equity 21,901,000 21,792,000
------------ ------------
$465,083,000 $409,622,000
============ ============
See notes to condensed consolidated financial statements.
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Retained Earnings
(Unaudited)
Three months ended Nine months ended
September 30 September 30
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $335,724,000 $282,177,000 $865,375,000 $693,459,000
Cost of sales 258,232,000 218,295,000 665,486,000 537,222,000
------------ ------------ ------------ ------------
Gross profit 77,492,000 63,882,000 199,889,000 156,237,000
Operating expenses:
Distribution centers 57,562,000 48,709,000 167,407,000 130,233,000
General and administrative 3,776,000 3,221,000 12,164,000 10,637,000
Amortization of intangibles 434,000 167,000 1,301,000 363,000
------------ ------------ ------------ ------------
61,772,000 52,097,000 180,872,000 141,233,000
------------ ------------ ------------ ------------
Operating income 15,720,000 11,785,000 19,017,000 15,004,000
Other income (expense):
Interest income 104,000 87,000 426,000 331,000
Interest expense (6,491,000) (4,742,000) (19,213,000) (11,510,000)
------------ ------------ ------------ ------------
(6,387,000) (4,655,000) (18,787,000) (11,179,000)
------------ ------------ ------------ ------------
Income (loss) before provision
for income taxes 9,333,000 7,130,000 230,000 3,825,000
Provision for income taxes 45,000 117,000 121,000 273,000
------------ ------------ ------------ ------------
Net income 9,288,000 7,013,000 109,000 3,552,000
Retained earnings at
beginning of period 10,749,000 13,857,000 19,928,000 30,636,000
Distributions to sole stockholder -- (933,000) -- (14,251,000)
------------ ------------ ------------ ------------
Retained earnings at end of
period $ 20,037,000 $ 19,937,000 $ 20,037,000 $ 19,937,000
============ ============ ============ ============
See notes to condensed consolidated financial statements.
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30
1998 1997
------------ -------------
Operating activities
Net Income $ 109,000 $ 3,552,000
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation 10,461,000 7,921,000
Amortization of intangibles 1,301,000 363,000
Amortization of deferred financing costs 328,000 141,000
Provision for doubtful accounts 5,058,000 3,748,000
Loss on disposal of property and equipment 157,000 168,000
Changes in operating assets and liabilities:
Accounts receivable (39,161,000) (40,137,000)
Inventories (23,508,000) (26,550,000)
Prepaid expenses and other 216,000 (1,430,000)
Security deposits 11,000 146,000
Other assets (2,011,000) (534,000)
Trade accounts payable 59,782,000 52,240,000
Accrued liabilities 1,723,000 9,987,000
------------ ------------
Cash provided by operating activities 14,466,000 9,615,000
Investing activities
Additions to property and equipment (9,666,000) (20,915,000)
Proceeds from disposal of property and equipment 608,000 445,000
Acquisitions of businesses (2,273,000) (26,024,000)
------------ ------------
Cash used in investing activities (11,331,000) (46,494,000)
Financing activities
Net payments under line of credit (6,319,000) (39,785,000)
Proceeds from notes payable 3,683,000 100,107,000
Payments on notes payable (3,517,000) (8,284,000)
Payment of debt financing costs -- (3,572,000)
Net change in receivable from sole stockholder 1,995,000 320,000
Distributions to sole stockholder -- (14,251,000)
------------ ------------
Cash provided by (used in) financing activities (4,158,000) 34,535,000
------------ ------------
Net decrease in cash (1,023,000) (2,344,000)
Cash at beginning of period 4,140,000 2,630,000
------------ ------------
Cash at end of period $ 3,117,000 $ 286,000
============ ============
See notes to condensed consolidated financial statements.
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended September 30, 1998 are not
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in American Builders & Contractors Supply Co.,
Inc.'s (ABC or the Company) Annual Report on Form 10-K for the year ended
December 31, 1997.
2. Contingent Liabilities
At September 30, 1998, and December 31, 1997 the Company had guaranteed
debt of the sole stockholder in the amounts of $1,957,000 and $2,029,000
respectively. Certain assets owned by the Company are utilized as collateral as
part of an overall guaranty of this debt by the Company. The Company also had
outstanding letters of credit of $2,763,925 and $1,626,000 at September 30, 1998
and December 31, 1997, respectively, with respect to debt of the Company's sole
stockholder and his affiliates.
3. Guarantor Subsidiaries
Amcraft Building Products, Co., Inc. and Mule-Hide Products Co., Inc. (the
Guarantor Subsidiaries) are wholly owned subsidiaries of ABC and have fully and
unconditionally guaranteed the $100 million of Senior Subordinated Notes (Notes)
on a joint and several basis. The Guarantor Subsidiaries comprise all of the
Company's direct and indirect subsidiaries. The separate financial statements of
the Guarantor Subsidiaries have not been included herein because management has
concluded that such financial statements would not provide additional
information that is material to investors.
The following is summarized consolidated financial information of the
wholly owned subsidiaries.
September 30, 1998 December 31, 1997
Current assets:
Accounts receivable from ABC $ 5,207,000 $ 2,355,000
Other current assets-third parties 4,180,000 3,950,000
------------------ -----------------
Total 9,387,000 6,305,000
Noncurrent assets 655,000 707,000
Current liabilities (8,099,000) (6,895,000)
Noncurrent liabilities -- --
American Builders & Contractors Supply Co., Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Continued)
3. Guarantor Subsidiaries (continued)
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
Net Sales:
To ABC $36,739,000 $30,118,000
To third parties 4,487,000 4,152,000
----------- -----------
Total 41,226,000 34,270,000
Gross profit 6,713,000 5,409,000
Net income after elimination of intercompany profit 1,586,000 1,240,000
4. Comprehensive Income
The Company's comprehensive profit for the nine months ended September 30,
1998 and 1997, as required to be reported by FASB Statement No. 130, was
identical to the actual losses reported for those periods.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company. ABC is the largest wholesale distributor of roofing products
and one of the largest wholesale distributors of vinyl siding materials in the
United States, operating 205 distribution centers located in 40 states as of
September 30, 1998.
Since January 1, 1998, the Company has opened 7 distribution centers and
acquired an additional 3 (net of 1 consolidation), as well as consolidating 5
additional distribution centers from previous acquisitions. Also, 5 distribution
centers were closed. The results reported herein do not include the results of
acquired businesses prior to their acquisition dates.
Effects of Acquisitions. The Company has historically selected acquisition
candidates based, in part, on the opportunity to improve their operating
results. The Company seeks to leverage its purchasing power, broad product
selection and management expertise to improve the financial performance of its
acquired distribution centers while maintaining the acquired customer bases.
Results of operations reported herein for each period only include results of
operations for acquired businesses from their respective dates of acquisition.
Full-year operating results, therefore, could differ materially from those
presented. In addition, there has typically been a period following each
acquisition in which the acquired business does not perform at the same level as
the Company's existing distribution centers. As a result of the Company's
ongoing acquisition program, its results of operations have historically
reflected, and are likely to continue to reflect, the periodic inclusion of
underperforming businesses.
The Company has accounted for its acquisitions to date using the purchase
method of accounting. As a result, these acquisitions have affected, and will
prospectively affect, the Company's results of operations in certain significant
respects. The aggregate acquisition costs are allocated to the tangible and
intangible assets acquired and liabilities assumed by the Company based upon
their respective fair values as of the acquisition date. The cost of such assets
is then amortized according to the classes of assets acquired and the useful
lives thereof. The Company has begun to acquire larger distributors with better
operating results, necessitating payment of purchase prices in excess of the
fair value of net assets acquired resulting in goodwill, which is amortized over
a period of 25 to 35 years. Similar future acquisitions may result in additional
amortization expense. In addition, due to the effects of the increased borrowing
to finance future acquisitions, the Company's interest expense may increase in
future periods.
Provision for Income Taxes. ABC and its subsidiaries are operated as
Subchapter S corporations under the Internal Revenue Code. As a result, these
entities do not incur federal and state income taxes (except with respect to
certain states) and, accordingly, no discussion of income taxes is included in
"Results of Operations" below. Federal and state income taxes (except with
respect to certain states) on the income of such corporations are incurred and
paid directly by the Company's sole stockholder. Such corporations have
historically made periodic distributions to the stockholder with respect to such
tax liabilities. The Company entered into the Tax Allocation Agreement with the
sole stockholder, pursuant to which he will receive distributions from the
Company with respect to taxes associated with the Company's income.
Special Note Regarding Forward-Looking Statements
Certain matters discussed herein are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-
looking statements can generally be identified as such because the context of
the statement will include words such as the Company "believes," "anticipates,"
"expects" or words of similar import. Similarly, statements that describe the
Company's future plans, objectives or goals are forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties which
are described in close proximity to such statements and which could cause actual
results to differ materially from those currently anticipated. Readers are urged
to consider these factors carefully in evaluating the forward-looking statements
and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements made herein are only made as of the
date of this report and the Company undertakes no obligation to publicly update
such forward-looking statements to reflect subsequent events or circumstances.
Results of Operations
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three months and nine months
ended September 30, 1998 and 1997:
Three Months ended Nine Months ended
September 30 September 30
1998 1997 1998 1997
------------------ -----------------
Income statement data:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.9 77.4 76.9 77.5
------------------ -----------------
Gross profit 23.1 22.6 23.1 22.5
Operating expenses:
Distribution centers 17.1 17.3 19.3 18.8
General and administrative 1.1 1.1 1.4 1.5
Amortization 0.1 0.0 0.2 0.0
------------------ -----------------
Total operating expenses 18.3 18.4 20.9 20.3
------------------ -----------------
Operating income 4.8% 4.2% 2.2% 2.2%
================== =================
Comparison of the Three and Nine Month Periods Ended September 30, 1998 to the
Three and Nine Month Periods Ended September 30, 1997
The Company's results of operations are affected by the seasonal nature of
the roofing and siding business. See "Seasonality." Financial results for the
three and nine month periods ending September 30, 1998 met management's
expectations and forecasted amounts.
Net sales for the three months ended September 30, 1998 increased by $53.5
million, or 19.0% for the three months ended September 30, 1997. Net sales for
the nine months ended September 30, 1998 increased by $171.9 million, or 24.8%
for the nine months ended September 30, 1997. Components of the change in net
sales are as follows:
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------- -----------------------------------
Distribution % %
- ------------ 1998 1997 Increase Increase 1998 1997 Increase Increase
Centers
- ------- --------------------------------- -----------------------------------
In operation prior to
January 1, 1997 $263.9 $252.9 $11.0 4.4% $677.1 $650.4 $ 26.7 4.1%
Acquired in 1997 52.3 23.5 28.8 122.6% 138.2 33.6 104.6 311.3%
Opened in 1997 14.6 5.8 8.8 151.7% 39.8 9.5 30.3 318.9%
Acquired in 1998 1.5 -- 1.5 -- 4.3 -- 4.3 --
Opened in 1998 3.4 3.4 -- 6.0 -- 6.0 --
--------------------------------- -----------------------------------
Total $335.7 $282.2 $53.5 19.0% $865.4 $693.5 $171.9 24.8%
================================= ===================================
Increases in comparable distribution center sales are almost entirely due
to increases in volume as opposed to price increases. Such volume increases are
in part due to introduction of new products such as commercial roofing and
siding into certain distribution centers.
Cost of sales for the three months ended September 30, 1998 increased by
$39.9 million, or 18.3%, as compared to the three months ended September 30,
1997, primarily as a result of costs associated with increased sales. Cost of
sales decreased as a percentage of net sales over the same period to 76.9% in
1998 from 77.4% in 1997 principally due to a higher percentage of warehouse
sales versus "direct" sales (direct sales are shipped from ABC's vendors
directly to job sites and carry a high cost of sales percentage), and to a
lesser degree due to increased sales of high margin products, such as vinyl
siding and windows. Cost of sales for the nine months ended September 30, 1998
increased $128.3 million, or 23.9%, as compared to the nine months ended
September 30, 1997, again with the increase mainly due to the relatively same
percentage increase in net sales. Cost of sales as a percentage of net sales for
the nine months ended September 30, 1998 decreased to 76.9% from 77.5% for the
same period in 1997 due to the reasons cited above for the quarter.
Distribution center operating income, which consists of net sales less cost of
sales and operating expenses for the distribution centers, is a key measure that
the Company uses to evaluate individual distribution center performance.
Distribution center operating income for the three months ended September 30,
1998 increased by $4.7 million, or 30.9%, for the same period in 1997. For the
nine months ended September 30, distribution center operating income increased
by $6.5 million, or 25.0%, in 1997. As a percentage of net sales, distribution
center expenses decreased .1% for the three month period due to a slow down in
acquisition activity and managements focus to lower these expenses and improve
payroll productivity and other cost cutting measures. For the nine month period
distribution center expenses increased .6% in 1998 compared to the same periods
in 1997, due mainly to various costs associated with the recent acquisitions.
In addition, the Company has experienced a higher percentage of warehouse sales,
which require greater distribution center operating expenses. Components of
distribution center operating income and the change therein are as follows:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------- ----------------------------
Distribution Centers 1998 1997 Change 1998 1997 Change
- -------------------- -------------------------- ----------------------------
In operation prior to January 1, 1997 16.8 14.3 2.5 29.7 25.0 4.7
Acquired in 1997 2.5 1.0 1.5 1.6 1.2 0.4
Opened in 1997 0.6 (0.1) 0.7 1.2 (0.2) 1.4
Acquired in 1998 0.0 -- 0.0 0.1 -- 0.1
Opened in 1998 0.0 -- 0.0 (0.1) -- (0.1)
-------------------------- ----------------------------
Total 19.9 15.2 4.7 32.5 26.0 6.5
========================== ============================
For the three months ended September 30, general and administrative expenses
increased by $.6 million as compared to the same period in 1997, while remaining
at 1.1 percent of net sales. For the nine months ended September 30, 1998,
general and administrative expenses increased $1.6 million as compared to the
same period in 1997. As a percentage of net sales, these expenses decreased to
1.4% in 1998 compared to 1.5% in 1997.
Interest expense for the three months ended September 30, 1998 increased by
$1.8 million or 38.3%, as compared to the three months ended September 30, 1997,
primarily as a result of additional borrowings necessary to fund both 1997
acquisitions and internal growth. The higher interest costs associated with the
Company's issuance in May 1997 of the Notes also accounted for some of the
increase in interest expense.
Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash provided by operations was
$14.5 million and $9.6 million for the nine months ended September 30, 1998 and
1997, respectively. The increase was due primarily to changes in working
capital caused by the timing of payments received or made for trade receivables
and payables and inventories.
Cash Flows from Investing Activities. Net cash used in investing activities
was $(11.3) million and $(46.5) million for the nine months ended September 30,
1998 and 1997, respectively. The decreased use of cash in 1998 was due mainly
to less acquisitions of companies in 1998 compared to 1997.
Cash Flows from Financing Activities. Net cash provided by (used in)
financing activities was $(4.2) million and $34.5 million for the nine months
ended September 30, 1998 and 1997, respectively, due principally to debt
repayment in 1998 and additional debt in 1997.
Liquidity. The Company's principal source of funds for the foreseeable future
are anticipated to be cash flows from operating activities and borrowings under
its revolving credit agreement. The Company believes that these funds will
provide the Company with sufficient liquidity and capital resources to meet its
financial obligations, including the payment of principal and interest on the
Notes, as well as to provide funds for working capital, capital expenditures and
other needs for the foreseeable future. The Company's future operating
performance and ability to service or refinance the Notes and to repay, extend
or refinance its credit agreement will be subject to future economic conditions
and to financial business and other factors, many of which are beyond the
Company's control.
Year 2000 Issue
The Company utilizes information technology and a number of computer programs in
its internal operations including financial systems and various administrative
functions ("IT" systems). The Company also uses a variety of equipment in its
business which contain embedded technology such as microcontrollers ("Non-IT"
systems).
To the extent that the source code of the software applications of these IT
systems or the embedded technologies of these non-IT systems are unable to
appropriately interpret and process the upcoming calendar year 2000 ("Year
2000"), some level of modification or possible replacement of such applications
would be necessary for proper continuous performance. Without such modification
or replacement, the normal course of the Company's business could be disrupted
of otherwise adversely impacted.
State of readiness
- ------------------
The Company has developed a four step plan to modify or replace its IT and Non-
IT systems. The four steps include assessment, remediation, testing, and
implementation.
Assessment Remediation Testing Implementation
---------- ----------- ------- --------------
IT System 100% complete 95% complete 40% complete 20% complete
Expected
completion Complete December 1998 June 1999 September 1999
Assessment Remediation Testing Implementation
---------- ----------- ------- --------------
Non-IT System 75% complete 50% complete 20% complete 20% complete
Expected
completion December 1998 March 1999 September 1999 September 1999
The Company has queried its significant suppliers. To date, the Company is not
aware of any supplier with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity, or capital resources. However, the
Company has no means of ensuring that all suppliers will be Year 2000 ready.
Due to the availability of alternative suppliers, the inability of any one
supplier to complete their Year 2000 resolution process in a timely fashion is
not expected to have a material impact on the Company.
Management believes that expenditures to complete the Year 2000 compliance will
not be material to its operations.
Risks
- -----
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company would have
to manually process customer orders, invoice customers and collect payments. In
addition, disruptions in the economy generally resulting from year 2000 issues
could also materially adversely affect the Company. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time.
Contingency Plans
- -----------------
The Company has developed contingency plans for certain applications and is
working on such plans for others. These plans include, among other actions,
manual work arounds, increasing staffing, increasing inventories, and shifting
processes to compliant locations.
Seasonality
Because of cold weather in many of the markets in which the Company does
business and the seasonal nature of the roofing and siding business generally,
the Company's revenues vary substantially through the year, with its lowest
revenues typically occurring in the months of December through February.
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1998.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Builders and Contractors Supply
Co., Inc.
November 11, 1998 /s/ Kendra A. Story
- ---------------------- --------------------------------------------
Date: Kendra A. Story
Chief Financial Officer and Director
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule