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Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From _____ To _____
Commission File Number: 000-21621
KEVCO, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2666013
----- ----------
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
University Centre I
1300 S. University Drive
Suite 200
Fort Worth, Texas 76107
----------------- -----
(Address of principal (Zip Code)
executive offices)
(817-332-2758)
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding for each of the issuer's classes or
common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 6,856,437 shares
- -------------------------------------- ----------------
(Class) (Outstanding as of May 4, 1999)
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KEVCO, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 ..................................................................... 3
Consolidated Statements of Operations for the three-month periods
ended March 31, 1999 and 1998 (unaudited) ................................................. 4
Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 1999 and 1998 (unaudited) ......................................... 5
Notes to Consolidated Financial Statements ................................................... 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................................... 10
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K .................................................... 17
Signatures ................................................................................... 23
Exhibit index ................................................................................ 24
Exhibits ..................................................................................... 25
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KEVCO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
1999 1998
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,006 $ 799
Trade accounts receivable, less allowance for doubtful
accounts of $658 and $740 in 1999 and 1998, respectively 63,029 51,367
Inventories, less reserve for obsolete inventory of $2,827
and $2,781 in 1999 and 1998, respectively 88,420 95,999
Assets held for sale 1,065 1,065
Other current assets 10,867 8,458
----------- ------------
Total current assets 165,387 157,688
Property and equipment, net 44,609 44,994
Intangible assets, net 118,646 119,590
Deferred tax asset 2,778 2,778
Other assets 6,578 6,785
----------- ------------
Total assets $ 337,998 $ 331,835
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,573 $ 7,209
Trade accounts payable 54,135 61,569
Accrued liabilities 19,374 15,533
Other current liabilities -- 243
----------- ------------
Total current liabilities 81,082 84,554
Long-term debt, less current portion 214,402 203,370
Deferred compensation obligation 823 1,024
----------- ------------
Total liabilities 296,307 288,948
----------- ------------
Stockholders' equity:
Common stock, $.01 par value; 100,000 shares authorized; 6,856 and
6,853 shares issued and outstanding in 1999 and 1998, respectively 69 69
Additional paid-in capital 33,412 33,392
Retained earnings 8,210 9,426
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Total stockholders' equity 41,691 42,887
----------- ------------
Total liabilities and stockholders' equity $ 337,998 $ 331,835
=========== ============
See accompanying notes to consolidated financial statements.
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KEVCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
------------------------
March 31, March 31,
------------------------
1999 1998
--------- ---------
Net sales $ 222,785 $ 212,051
Cost of sales 195,084 183,108
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Gross profit 27,701 28,943
Commission income 1,688 1,854
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29,389 30,797
Selling, general and administrative expenses 26,430 21,868
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Operating income 2,959 8,929
Interest expense 5,492 5,068
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(Loss)income before income taxes (2,533) 3,861
Income taxes (1,317) 1,733
--------- ---------
Net (loss)income $ (1,216) $ 2,128
========= =========
Earnings per share - basic $ (0.18) $ 0.31
========= =========
Earnings per share - diluted $ (0.18) $ 0.31
========= =========
Weighted average shares outstanding - basic 6,856 6,830
========= =========
Weighted average shares outstanding - diluted 6,856 6,928
========= =========
See accompanying notes to consolidated financial statements.
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KEVCO, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended March 31,
------------------------------
1999 1998
-------- --------
Cash flows from operating activities:
Net (loss)income $ (1,216) $ 2,128
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,410 2,022
Gain on sale of assets (14) --
Deferred compensation obligation (201) (68)
Changes in assets and liabilities (10,328) (14,527)
-------- --------
Net cash used by operating activities (9,349) (10,445)
Cash flows from investing activities:
Purchase of equipment (911) (2,468)
Proceeds from sale of assets 97 649
Proceeds from assets held for sale -- 2,870
Increase in other assets 278 (373)
-------- --------
Net cash (used) provided by investing activities (536) 678
Cash flows from financing activities:
Proceeds from line of credit, net 14,400 2,525
Proceeds from long-term debt -- 10,000
Payments of long-term debt (3,004) (2,430)
Payment for loan origination fees (324) --
Stock options exercised 20 37
Other -- (55)
-------- --------
Net cash provided by financing activities 11,092 10,077
-------- --------
Net increase in cash and cash equivalents 1,207 310
Beginning cash and cash equivalents 799 271
-------- --------
Ending cash and cash equivalents $ 2,006 $ 581
======== ========
See accompanying notes to consolidated financial statements.
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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, 1998,
for Kevco, Inc. includes a summary of significant accounting policies and should
be read in conjunction with this Form 10-Q. The accompanying consolidated
financial statements of Kevco, Inc. and its wholly-owned subsidiaries ("Kevco"
or the "Company") have been prepared pursuant to the rules and regulations of
the 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 March 31,
1999 and December 31, 1998, the statements of income for the three-month periods
ended March 31, 1999 and 1998 and the statements of cash flows for the
three-month periods ended March 31, 1999 and 1998. The results of operations for
the three-month period ended March 31, 1999 are not necessarily indicative of
the results of operations for the entire fiscal year ending December 31, 1999.
2. ACQUISITIONS
During the year ended December 31, 1997, Kevco acquired Shelter
Components Corporation on December 1, 1997 (the "Shelter Acquisition"), the
inventory and certain distribution rights from Shepherd Products Company on
December 12, 1997 (the "Shepherd Acquisition"), Bowen Supply, Inc. on February
28, 1997 (the "Bowen Acquisition") and Consolidated Forest Products, L.L.C. on
February 27, 1997 (the "Consolidated Forest Acquisition") for total purchase
prices approximating $144.8 million, $8.0 million, $20.2 million and $14.1
million, respectively. The acquisitions were made utilizing borrowings under the
Company's amended and restated credit facility and, in the case of the Shelter
Acquisition, net proceeds from the issuance of $105 million of 10 3/8% senior
subordinated notes due 2007. Each of the acquisitions was accounted for as a
purchase and the results of operations of the acquired companies were included
in the consolidated results of operations of the Company from their respective
acquisition dates. As a result of the acquisitions, approximately $115.1 million
of goodwill was recorded by the Company, which reflects the adjustments
necessary to allocate the individual purchase prices to the fair value of assets
acquired, liabilities assumed and additional purchase liabilities recorded.
Additional purchase liabilities included approximately $1.8 million ($0.2
million at March 31, 1999) for severance and related costs associated primarily
with the elimination of certain administrative and corporate positions, which
were recorded in connection with the Shelter Acquisition.
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KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. INVENTORIES
Inventories are comprised of the following (in thousands):
March 31, December 31,
1999 1998
----------- ------------
Raw materials $ 21,604 $ 23,535
Work-in process 1,559 1,055
Finished goods 7,508 6,961
Goods held for resale 57,749 64,448
----------- ------------
$ 88,420 $ 95,999
=========== ============
4. CREDIT AGREEMENT
In December 1997, Kevco and its lenders entered into the second amended
and restated credit agreement at closing of the Shelter Acquisition to allow
for aggregate senior borrowings of up to $125 million comprised of a
revolving credit facility of $45 million and a term loan facility of $80
million requiring quarterly installments. The revolving credit facility and
$40 million of the term loan facility were (prior to the fourth amended
agreement and waiver described below) to mature in 2003 with the remaining
term loan facility to mature in 2004. The term loan and revolving credit
facility are collateralized by substantially all of the assets of the
Company and its subsidiaries as well as the capital stock of such
subsidiaries.
In February 1999, the Company entered into a third amendment and
waiver, which allowed for an incremental commitment of $5.0 million due
March 31, 1999 and waived any event of default due to the Company's
violation of certain financial covenants contained in the credit agreement
through March 31, 1999. In March 1999, the Company requested and obtained an
additional $5.0 million incremental commitment and an extension of the
maturity date on the aggregate $10 million incremental commitment (the
"Incremental Commitment") and waiver of any events of default to April 15,
1999.
In April 1999, the Company entered into a fourth amendment and waiver
to its credit agreement. This amendment contains revised financial covenants
effective for the quarters ended March 31, 1999 through June 30, 2000 and
waived certain events of default. Under this amendment, the Incremental
Commitment matures on June 30, 1999 and the revolving credit facility and
term loan mature on June 30, 2000. No assurance can be made that the Company
will be able to access additional capital or that additional capital would
be available on terms acceptable to the Company.
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KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In addition to funds available under the credit agreement, the Company
issued $105 million of 10 3/8% senior subordinated notes due 2007 (the
"Notes") under the indenture dated as of December 1, 1997, as supplemented,
(the "Indenture"), to complete the acquisition of Shelter. Interest is
payable on June 1 and December 1 of each year commencing June 1, 1998. The
Notes are redeemable, in whole or in part, at the option of the Company, at
any time on or after December 1, 2002, at the redemption prices set forth in
the Indenture. In addition, at any time on or before December 1, 2000, the
Company may redeem up to 35% of the original aggregate principal amount of
the Notes with the net proceeds of a public equity offering at a redemption
price equal to 110.375% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the date of
redemption.
The credit agreement and Indenture contain 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 agreements).
5. EARNINGS PER SHARE
Basic earnings per share excludes dilution, and diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised and converted into common stock.
The reconciliation between basic and diluted weighted average shares
outstanding, follows:
Three Months Ended
March 31,
1999 1998
-------- --------
(in thousands)
Weighted average shares - basic 6,856 6,830
Plus shares applicable to stock
option plans -- 98
-------- --------
Weighted average shares - diluted 6,856 6,928
======== =======
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KEVCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. SEGMENT REPORTING
In June 1997, the FASB issued Statement of Financial Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which the
Company has adopted for the year ended December 31, 1998
The Company identifies such segments based upon management responsibility
within the United States. The Company operates in three business segments:
Distribution, Manufacturing and Wood Products. The Distribution segment
primarily distributes plumbing products, building products, electrical
components and hardware supplies to the manufactured housing and recreational
vehicle industries; the Manufacturing segment primarily manufactures and
distributes thermoformed products, laminated wallboard products and plastic
injection molded products primarily to the manufactured housing and recreational
vehicle industries; and the Wood Products segment primarily manufactures roof
trusses and lumber cut to customer specifications for use in manufactured homes.
During 1998, the Wood Products segment opened two new facilities which may
result in quarter-to-quarter comparisons not being indicative of future results.
The Company measures segment performance based upon revenue and
operating income results. The information in the Corporate/Other category
consists primarily of intercompany eliminations of Manufacturing sales to
Distribution and corporate operating expenses, and is utilized to reconcile to
the consolidated results.
Amounts are presented in thousands for the three months ended March 31.
TOTAL
THREE MONTHS ENDED: DISTRIBUTION MANUFACTURING WOOD PRODUCTS CORPORATE/OTHER COMPANY
------------ ------------- ------------- --------------- -----------
March 31,1999
Net Sales ........... $ 146,220 $ 37,358 $ 43,728 $ (4,521)(a) $ 222,785
Operating
Income ............ $ 6,434 $ 2,098 $ 1,472 $ (7,045)(b) $ 2,959
March 31, 1998
Net Sales ........... $ 145,775 $ 32,999 $ 35,851 $ (2,574)(a) $ 212,051
Operating
Income ............ $ 7,925 $ 2,603 $ 1,596 $ (3,195)(b) $ 8,929
(a) Consists primarily of intercompany eliminations of Manufacturing sales to
Distribution.
(b) Consists primarily of corporate operating expenses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion includes the operations of Kevco for each of
the periods discussed. This discussion and analysis should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
The Company recognizes revenues from product sales at the time of
shipment (or the time of product receipt, in the case of direct shipments from
suppliers to customers). In some cases the Company sells on a commission basis.
Commissions are recognized when earned and represent amounts earned in selling,
warehousing and delivering products for certain manufacturers of building
products with whom the Company has distribution agreements. Commission
arrangements do not require inventory investments or receivables financing, and
therefore are significantly less expensive to the Company than traditional
sales. To the extent the volume of items warehoused and shipped under commission
arrangements increases faster or slower than the volume of items related to
traditional sales, changes in net sales may not be representative of actual
increases or decreases in shipment volume.
The Company acquired Shelter Components in December 1997. Since that
time, the Company has been integrating Shelter into Kevco by, among other
things, consolidating certain corporate functions, consolidating overlapping
distribution warehouses from 47 facilities to 27 and integrating multiple
Shelter and Kevco computer systems into one. Management believes the
consolidation and integration activities and related costs will diminish, on a
declining scale, with such activities and costs substantially complete by the
end of 1999.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
Consolidated Statements of Operations data as a percentage of the Company's net
sales.
Three Months Ended
March 31,
------------------
1999 1998
------ ------
Net sales ................................ 100.0 % 100.0 %
Cost of sales ............................ 87.6 86.4
------ ------
Gross profit ........................ 12.4 13.6
Commission income ........................ 0.8 0.9
------ ------
13.2 14.5
Selling, general and
administrative expenses ............. 11.9 10.3
------ ------
Operating income .................... 1.3 4.2
Interest expense, net .................... 2.4 2.4
------ ------
Income(loss) before income taxes .... (1.1) % 1.8 %
====== ======
See note 6 to the consolidated financial statements for segment data.
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COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net sales increased by $10.7 million, or 5.1%, to $222.8 million for
the three months ended March 31, 1999 from $212.1 million for the comparable
1998 period. Management believes the increase in net sales is approximately the
same as the manufactured housing shipment increase for first quarter of 1999
compared to the first quarter of 1998.
Gross profit decreased by $1.2 million, or 4.3%, to $27.7 million for
the three months ended March 31, 1999 from $28.9 million for the comparable 1998
period, due primarily to lower gross margins as a result of a higher percentage
of lower margin direct net sales to total net sales. Gross profit, as a percent
of net sales, decreased to 12.4% in the first quarter of 1999 from 13.6% in the
first quarter of 1998. The decrease in gross profit, as a percentage of net
sales, was due primarily to increased costs as a result of the consolidation and
integration of Shelter distribution operations (including integration of
information services), wood product margins continuing below historical levels,
and an otherwise general decline in margins.
Selling, general and administrative expenses increased by $4.6 million
or 21.0%, to $26.4 million for the three months ended March 31, 1999 from $21.8
million for the comparable 1998 period. The increase was due primarily to the
increased sales volume, acquisition of Shelter and the related integration and
administrative expenses associated with the amendment of the Company's credit
agreement of approximately $0.9 million. Selling, general and administrative
expenses, as a percentage of net sales, increased to 11.9% for the three months
ended March 31, 1999 compared to 10.3% in the prior comparable period. The
increase is primarily related to the consolidation and integration of Shelter
distribution operations (including integration of information systems), whereby
the Company incurred costs significantly in excess of anticipated amounts which
has negatively impacted earnings and cash flow.
Net interest expense increased by $0.4 million to $5.5 million for the
three months ended March 31, 1999 from $5.1 million for the comparable 1998
period. The increase in net interest expense is primarily the result of a higher
level of borrowing in the current year.
For the three months ended March 31, 1999, the Company reported a net
loss of $1.2 million compared to a net income of $2.1 million in the comparable
1998 period. The decrease in net income is attributed primarily to the lower
gross margins and the increase in selling, general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company's growth has been financed through cash flow from
operations, borrowings under its bank credit facilities, proceeds from the
November 1996 initial public offering, proceeds from the issuance of $105
million of 10 3/8% senior subordinated notes due 2007 and the expansion of trade
credit. Net cash used by operating activities was $9.3 million and capital
expenditures were $0.9 million for the three months ended March 31, 1999. Cash
used in operations was primarily attributable to the net loss in the quarter and
an increase in working capital requirements generally as a result of seasonal
factors. Kevco is obligated to make
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payments on various capital leases in varying amounts, maturing through 2007 as
well as payments under various noncompete and consulting agreements, related to
recent acquisitions, in varying amounts, maturing through 2002.
In December 1997, Kevco and its lenders entered into the second amended
and restated credit agreement at closing of the Shelter Acquisition to allow for
aggregate senior borrowings of up to $125 million comprised of a revolving
credit facility of $45 million and a term loan facility of $80 million requiring
quarterly installments. The revolving credit facility and $40 million of the
term loan facility were (prior to the fourth amended agreement and waiver
described below) to mature in 2003 with the remaining term loan facility to
mature in 2004. The term loan and revolving credit facility are collateralized
by substantially all of the assets of the Company and its subsidiaries as well
as the capital stock of such subsidiaries.
In February 1999, the Company entered into a third amendment and waiver
to its credit agreement, which provided for an incremental commitment of $5.0
million due March 31, 1999 and waived any event of default due to the Company's
violation of the leverage ratio covenant and the fixed charge coverage ratio
covenant of such credit agreement through March 31, 1999. In March 1999, the
Company requested and obtained an additional $5.0 million incremental commitment
(the "Incremental Commitment") and waiver of any events of default to April 15,
1999.
In April 1999, the Company entered into a fourth amendment and waiver
to its credit agreement which consists of an $80 million term loan facility and
a $45 million revolving credit facility. This amendment contains revised
financial covenants effective for the quarters ended March 31, 1999 through June
30, 2000 and waived certain events of default. Under this amendment, the
Incremental Commitment matures on June 30, 1999, the revolving credit facility
matures on June 30, 2000 and the term loan has scheduled quarterly repayments
with a final maturity of June 30, 2000. The Company is also exploring strategic
alternatives to improve its liquidity, including equity or debt financing and
selected divestitures. Based on, among other things, its internal budgets and
cash flow projections, the Company believes it has sufficient cash to fund the
Company's planned obligations and debt service through 1999. No assurance can be
made that the Company would be able to access additional capital or that
additional capital would be available on terms acceptable to the Company.
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Borrowings under the term loan and revolving credit facility require
quarterly interest payments at the bank's prime rate plus a margin determined by
operating statistics of the Company. Mandatory repayment of the term loan
principal is due quarterly with payments of $1.35 million due on June 30, 1999,
September 30, 1999, December 31, 1999, and $1.98 million due on March 31, 2000
with the remaining outstanding balance due on June 30, 2000. The term loan and
revolving credit facility are 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. In addition, the term loan has certain prepayment conditions
related to the sale of assets, excess cash flow, sale of capital stock and
issuance of debt (as defined in the credit agreement).
In addition to the funds available under the amended credit agreement,
the Company issued $105 million of 10 3/8% senior subordinated notes due 2007
under the indenture dated as of December 1, 1997, as supplemented, (the
"Indenture") to complete the acquisition of the outstanding shares of Shelter.
The Indenture contains certain covenants that include, but are not limited to,
restrictions or limitations on the following: the incurrence of additional debt
or liens, the payment of dividends by the Company, the sale of certain assets,
the ability to consolidate with or merge into another person, the entering into
certain transactions with affiliates and the engagement in certain lines of
business.
The Indenture and credit agreement generally prohibit the payment of
dividends by the Company on its common stock. The Company does not anticipate
paying cash dividends on its common stock in the foreseeable future and intends
to retain its earnings to support operations and repay indebtedness.
ASSET MANAGEMENT
The Company actively manages its assets and liabilities through
compensating its corporate and facility managers for receivable collection,
inventory control and profits in relation to these and other net assets
employed.
For the three months ended March 31, 1999, days sales in average
receivables was approximately 26 days, days sales in average inventory was
approximately 44 days and days sales in average payables was approximately 30
days.
YEAR 2000
BACKGROUND. Many computer systems and equipment with embedded computer
chips in use today were designed and developed using two digits, rather than
four, to specify the year. As a result, such systems and equipment may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruptions of operations.
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STATE OF READINESS. During 1998, the Company began its assessment of
Year 2000 issues and established a Year 2000 project plan with the Chief
Information Officer as the project leader and engaged third party consultants to
assist in the evaluation of systems and issues. The plan can be described in the
following phases:
Phase I -- identification and assessment of the Year 2000 issues for
the Company's various internal systems and equipment;
Phase II -- remediation, including modification, upgrading and
replacement of hardware and software; and
Phase III -- testing to ensure Year 2000 compliance.
The Company is applying all aspects of this plan, with the assistance
of third party consultants, to both its information technology ("IT") systems
and non-IT systems. The Company's computer equipment and software that is
considered an IT or business system includes systems used to manage customer
orders, inventory, manufacturing, accounting functions, and telecommunications.
Non-IT systems include manufacturing equipment, alarm systems, security devices,
HVAC units, fax machines, and other miscellaneous systems.
The Company believes that it has identified and assessed the internal
business systems that are susceptible to system failures or processing errors as
a result of the Year 2000 issue. Those systems considered most critical to
continuing operations have received the highest priority. The Company has six
primary business systems that support operations. A majority of the remediation
efforts for these systems will consist of the Company performing an upgrade.
Four of these systems have been upgraded to Year 2000 compliant versions,
thoroughly tested using appropriate Year 2000 scenarios, and successfully placed
into production. The two remaining business systems are in the process of
remediation, and the scheduled date for completion of testing is August 1999.
In addition to the remediation of the information systems, the Company
is currently addressing its non-IT systems. During 1998, an assessment of the
Company's manufacturing equipment was performed. The results of the assessment
revealed no date sensitive manufacturing equipment, thus decreasing the risk of
any Year 2000 related manufacturing problems. Currently, an assessment of other
miscellaneous non-IT equipment is being performed which is expected to be
completed, and, if necessary, remediated in July 1999.
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The following chart is for summary purposes only and is qualified in
its entirety by reference to the discussion above.
===========================================================================================
PROGRAM AREA STATE OF READINESS STATUS
===========================================================================================
INTERNAL IT 4 systems Phase III Complete
----------------------------------------------------------------
2 systems Phase II and
Phase III estimated to be completed
August 1999
----------------------------------------------------------------
NON-IT Manufacturing Not Applicable -- Phase I revealed no date
sensitive equipment
----------------------------------------------------------------
Other Phase I and
Phase II estimated to be completed July
1999
===========================================================================================
THIRD PARTIES. The Company is reviewing, and has initiated formal
communications with critical third parties that provide or purchase services or
goods that are essential to Kevco's operations. This is being done in order to
determine the extent to which the Company is vulnerable to any failure by such
third parties to remediate their respective Year 2000 problems, and to resolve
such problems to the extent practicable. In connection with this assessment, the
Company is reviewing all significant contractual and other obligations with
third parties to ensure compliance in the event of a Year 2000 problem. The
assessment of these business partners will be ongoing, but all significant third
party communications and the related risk assessments are expected to be
completed by July 1999. The uncertainty associated with third party readiness,
however, cannot be eliminated as the accuracy and availability of third party
representations is not within the Company's control. In the event that the
Company is unable to obtain satisfactory assurance that a critical third party
provider/customer has successfully and timely achieved Year 2000 compliance, and
the Company is unable to replace such a provider/customer with an alternative
provider/customer, the Company's operations could be materially adversely
impacted. Currently, there is no known contractual liability to any third party
if all or a portion of the Company's IT or non-IT systems are not Year 2000
compliant.
COSTS. The Company currently estimates that its total Year 2000 project
cost will be approximately $0.6 million. Through March 31, 1999, the Company has
expended approximately $0.45 million. The Company has funded, and expects to
continue to fund, the expenditures related to its Year 2000 initiatives either
through cash generated from operations and current working capital, or if
required, its existing revolving credit facilities.
RISKS. Based on the progress it has made in addressing its Year 2000
issues and its plan and timetable to complete its compliance program, the
Company does not currently foresee significant risks associated with its Year
2000 issues. However, management believes that it is not possible to determine
with complete certainty that all Year 2000 problems affecting the Company have
been identified or will be corrected. Likewise, because of its constant progress
in addressing the various Year 2000 issues, the Company has not yet determined
the most likely worst case scenario relating to Year 2000 problems.
Nevertheless, management expects that the Company could likely suffer the
following consequences: (1) a significant number of operational inconveniences
and inefficiencies for the Company and its customers that could divert
management's time and attention and financial and human resources from its
ordinary business activities; and (2) a lesser number of serious system and/or
operational failures that may require significant efforts by the Company to
prevent or alleviate material business disruptions.
CONTINGENCY PLANNING. The Company has not yet completed a comprehensive
contingency plan with respect to the Year 2000 issue, but intends to have a plan
developed by
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August 1999. The contingency planning process is an ongoing one which will
require further modifications as the Company obtains additional information
regarding the Company's progress on the remediation phases of its IT and non-IT
systems, and on the status of third party Year 2000 readiness. The Company's
core business processes, as currently managed by the IT systems, can, if
necessary, operate for a limited time period on a manual, non-computerized
basis. If the Company is required to implement any of these contingency plans,
the implementation could have an adverse effect on the Company's financial
condition and results of operations.
FORWARD-LOOKING STATEMENTS
This report, including but not limited to the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology, such as, "may," "intend," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. Similar statements herein that
describe the Company's business strategy, outlook, objectives, plans, intentions
or goals are also forward-looking statements. Although the Company believes that
the expectations in such forward-looking statements are reasonable, there can be
no assurance that such expectations will prove to have been correct. All such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those in forward-looking
statements. These risks and uncertainties are beyond the ability of the Company
to control, and in many cases, the Company cannot predict all the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. Important factors that could
cause actual results to differ materially from the Company's expectations
include but are not limited to, the Company's substantial leverage and its
effects on the Company's ability to obtain additional capital as needed, the
Company's ability to integrate its operations and successfully implement new
management information systems, the Company's success in addressing and
remediating Year 2000 related issues, the Company's ability to operate its new
manufacturing facilities, customer demand for manufactured housing and
recreational vehicles, the effect of economic conditions, the impact of raw
materials prices, the Company's ability to maintain profitability in the event
of the loss of a significant customer and other risks detailed from time to time
in the reports filed by the Company with the Securities and Exchange Commission,
including the Company's Annual Report on Form 10-K.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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2.1 - Merger Agreement, dated June 6, 1995 by and among Kevco, Inc. and
Service Supply Systems, Inc., joined by a wholly-owned subsidiary of
Kevco, Inc.(1)
2.2 - Form of Plan and Agreement of Merger between Kevco Texas, Inc. and
Kevco Delaware, Inc.(1)
2.3 - Form of Bill of Sale and General Assignment from Kevco Delaware,
Inc., as Assignor, to Sunbelt Wood Components, Inc., as Assignee.(1)
2.4 - Form of Assumption Agreement between Kevco Delaware, Inc. and Sunbelt
Wood Components, Inc.(1)
2.5 - Asset Purchase Agreement by and among Consolidated Forest Products,
Inc., Consolidated Forest Products, L.L.C. and the members of
Consolidated Forest Products, L.L.C.(2)
2.6 - Stock Purchase Agreement by and among Kevco Delaware, Inc. and the
shareholders of Bowen Supply, Inc.(2)
2.7 - Agreement and Plan of Merger, dated as of October 21, 1997, between
Kevco, Inc., SCC Acquisition Corp. and Shelter Components
Corporation.(6)
2.8 - Stock Purchase Agreement dated as of December 23, 1998 between
Wingate Partners II, L.P. and the Company.(14)(8)
2.9 - Stock Purchase Agreement dated as of December 23, 1998 among Wingate
Partners II, L.P., Jerry E. Kimmel, and the Company.(14)(8)
2.10 - Letter, dated February 15, 1999, to Kevco, Inc. from Wingate Partners
II, L.P.(12)
2.11 - Letter, dated February 15, 1999, to Jerry E. Kimmel from Wingate
Partners II, L.P.(12)
3.1 - Articles of Incorporation of Kevco, Inc., as amended.(1)
3.2 - Bylaws of Kevco, Inc.(1)
4.1 - Form of certificate evidencing ownership of the Common Stock of
Kevco, Inc.(1)
10.1 - Amendment No. 2 to 1995 Stock Option Plan (Amended and Restated 1995
Stock Option Plan of Kevco, Inc.) and Supplementary Letter.(1)*
10.2 - 1996 Stock Option Plan of Kevco, Inc., as amended, and Supplementary
Letter.(1)*
10.3 - Form of Amended and Restated Employment Agreement between Gerald E.
Kimmel and Kevco, Inc., joined therein by Kevco Delaware, Inc. and
Sunbelt Wood Components, Inc.(1)*
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10.4 - Employment Agreement between C. Lee Denham and Kevco, Inc. dated
June 30, 1995.(1)*
10.5 - Lease between K & E Land & Leasing and Kevco, Inc. dated
December 1, 1977.(1)
10.6 - Amendment No. 1 to Lease, by and between K & E Land & Leasing and
Kevco, Inc. dated March , 1982.(1)
10.7 - Amendment No. 2 to Lease, by and between K & E Land & Leasing and
Kevco, Inc. dated May 30, 1983.(1)
10.8 - Amendment No. 3 to Lease, by and between K & E Land & Leasing and
Kevco, Inc. dated February 1, 1993.(1)
10.9 - Lease dated April 1, 1980 between City of Newton, Kansas and K & E
Land & Leasing.(1)
10.10 - Sublease and Lease Guarantee Agreement dated April 1, 1980 between
K & E Land & Leasing and Kevco, Inc.(1)
10.11 - Amendment No. 1 to Sublease and Lease Guaranty Agreement by and
between K & E Land & Leasing and Kevco, Inc. dated May 30, 1983.(1)
10.12 - Lease Agreement dated October 12, 1987 between 1741 Conant
Partnership & Kevco Inc.(1)
10.13 - Equipment Lease Agreement dated January 1, 1991 between K & E Land &
Leasing and Kevco, Inc.(1)
10.14 - Amendment No. 1 to Equipment Lease Agreement between K & E Land &
Leasing and Kevco, Inc. dated February 12, 1993.(1)
10.15 - Amendment No. 2 to Equipment Lease Agreement between K & E Land &
Leasing and Kevco, Inc. dated October 26, 1993.(1)
10.16 - Amendment No. 3 to Equipment Lease Agreement between K & E Land &
Leasing and Kevco, Inc. dated May 23, 1994.(1)
10.17 - Deferred Compensation Agreement between Kevco, Inc. and Clyde A.
Reed, Jr. dated May 24, 1977.(1)*
10.18 - Amendment No. 1 to Deferred Compensation Agreement dated
May , 1980.(1)*
10.19 - Amendment No. 2 to Deferred Compensation Agreement dated
March 10, 1992.(1)*
10.20 - Amended and Restated Health and Accident Plan of Kevco, Inc.(1)*
10.21 - Investment and Tax Advice Plan of Kevco, Inc.(1)*
10.22 - Credit Agreement among Kevco, Inc., certain Lenders and NationsBank
of Texas, N.A., as Administrative Lender dated June 30, 1995.(1)
10.23 - First Amendment to Credit Agreement, dated as of September 1, 1995,
among Kevco, Inc., the banks listed on the signature pages thereof,
and NationsBank of Texas, N.A.(1)
10.24 - Second Amendment to Credit Agreement, dated as of November 29, 1995,
among Kevco, Inc., the banks listed on the signature pages thereof,
and NationsBank of Texas, N.A.(1)
10.25 - Revolving Credit Note of Kevco, Inc. to NationsBank of Texas, N.A.
dated September 1, 1995 in the amount of $14,285,714.28.(1)
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10.26 - Term Loan Note of Kevco, Inc. to NationsBank of Texas, N.A. dated
September 1, 1995 in the amount of $10,714,285.72.(1)
10.27 - Revolving Credit Note of Kevco, Inc. to The Sumitomo Bank, Ltd. dated
February 2, 1996 in the amount of $5,714,285.72.(1)
10.28 - Term Loan Note of Kevco, Inc. to The Sumitomo Bank, Ltd. dated
February 2, 1996 in the amount of $4,285,714.28.(1)
10.29 - PaineWebber Standardized 401(K) Profit-Sharing Adoption Agreement
(No. 005) (To be used with Basic Plan Document No. 03 Only) for
Kevco, Inc. dated May 24, 1996 and PaineWebber Defined Contribution
Plan.(1)
10.30 - Promissory Note of Gerald E. Kimmel to Kevco, Inc. dated
October 26, 1993 in the amount of $5,000,000.(1)
10.31 - Amendment No. 4 to Lease dated December 1, 1977 by and between K & E
Land & Leasing and Kevco, Inc. dated October 26, 1993.(1)
10.32 - Assignment and Acceptance dated February 2, 1996 between The Daiwa
Bank, Limited and The Sumitomo Bank, Ltd., Chicago Branch.(1)
10.33 - Form of Tax Indemnification and Distribution Agreement.(1)
10.34 - Form of Promissory Note made by Kevco Texas, Inc. in the amount of
$3,733,000 (the Prior S Corporation Earnings Note).(1)
10.35 - Form of Promissory Note made by Kevco Texas, Inc. (the Future S
Corporation Earnings Note).(1)
10.36 - Form of Assignment of $5,000,000 Note made by Kevco, Inc.
(n/k/a Kevco Delaware, Inc.).(1)
10.37 - Form of Adoption Agreement by Kevco, Inc. and Kevco Texas, Inc.
(re: 1995 Stock Option Plan and 1996 Stock Option Plan).(1)
10.38 - Amendment No. 1 dated September 21, 1988, to Lease Agreement by 1741
Conant Partnership as lessor and Kevco, Inc. (n/k/a Kevco Delaware,
Inc.).(1)
10.39 - Letter Agreement dated June 22, 1982, between Kevco, Inc.
(n/k/a Kevco Delaware, Inc.) and K & E Land & Leasing.
(re: lease rentals).(1)
10.40 - Letter Agreement dated October 1, 1996 by Kevco, Inc., K & E Land &
Leasing, and 1741 Conant Partnership (re: lease rental).(1)
10.41 - Form of Parent Pledge Agreement.(1)
10.42 - Consent and Waiver, dated as of October 21, 1996, by and among
NationsBank of Texas, N.A., The Sumitomo Bank, Ltd. and Kevco Texas,
Inc.(1)
10.43 - Amended and Restated Credit Agreement, dated as of February 27, 1997,
by and among Kevco Delaware, Inc., certain lenders and NationsBank of
Texas, N.A.(4)
10.44 - Amendment No. 1 to Amended and Restated 1995 Stock Option Plan of
Kevco, Inc. (10)
10.45 - Senior Commitment Letter dated October 27, 1997 from NationsBank of
Texas, N.A. and NationsBanc Montgomery Securities, Inc.(6)
10.46 - First Amendment to Amended and Restated Credit Agreement dated as of
November 25, 1997 between Kevco Delaware, Inc., certain lenders and
NationsBank of Texas, N.A.(7)
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10.47 - Second Amended and Restated Credit Agreement dated December 1, 1997
between Kevco, Inc., certain lenders and NationsBank of Texas,
N.A.(7)(8)
10.48 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and
NationsBank of Texas, N.A. in the original principal amount of
$11,666,666.66.(7)
10.49 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and
National City Bank of Kentucky in the original principal amount of
$8,166,666.67.(7)
10.50 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and
Guaranty Federal Bank, F.S.B. in the original principal amount of
$7,000,000.00.(7)
10.51 - Revolving Credit Note dated December 1, 1997 between Kevco, Inc. and
The Sumitomo Bank, Limited in the original principal amount of
$8,166,666.67.(7)
10.52 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc.
and NationsBank of Texas, N.A. in the original principal amount of
$13,333,333.34.(7)
10.53 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc.
and National City Bank Kentucky in the original principal amount of
$9,333,333.33.(7)
10.54 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc.
and Guaranty Federal Bank, F.S.B. in the original principal amount of
$8,000,000.00.(7)
10.55 - Facility A Term Loan Note dated December 1, 1997 between Kevco, Inc.
and The Sumitomo Bank, Limited in the original principal amount of
$9,333,333.33.(7)
10.56 - Facility B Term Loan Note dated December 1, 1997 between Kevco, Inc.
and NationsBank of Texas, N.A. in the original principal amount of
$50,000,000.00.(7)
10.57 - Security Agreement dated December 1, 1997 between Kevco, Inc. and
NationsBank of Texas, N.A. as Administrative Agent.(7)
10.58 - Registration Rights Agreement dated December 1, 1997 by and among
Kevco, Inc., as Issuer, the Subsidiaries of Kevco, Inc. identified
therein as Subsidiary Guarantors and Donaldson, Lufkin & Jenrette
Securities Corporation and NationsBanc Montgomery Securities, Inc.,
as Initial Purchasers.(9)
10.59 - Indenture dated December 1, 1997 among Kevco, Inc., SCC Acquisition
Corp., Kevco Delaware, Inc., Sunbelt Wood Components, Inc.,
Consolidated Forest Products, Inc., Bowen Supply, Inc. and Encore
Industries, Inc., as Subsidiary Guarantors and United States Trust
Company of New York, as Trustee.(9)
10.60 - Supplemental Indenture between Shelter Components Corporation, a
Subsidiary of Kevco, Inc., and United States Trust Company of New
York, as Trustee.(9)
10.61 - Supplemental Indenture dated as of December 1, 1997 between Shelter
Distribution, L.P., a Subsidiary of Kevco, Inc., and United States
Trust Company of New York, as Trustee.(9)
10.62 - Supplemental Indenture dated as of December 1, 1997 between DCM,
Inc., a Subsidiary of Kevco, Inc., and United States Trust Company of
New York, as Trustee.(9)
10.63 - Supplemental Indenture dated as of December 1, 1997 between Duo-Form
of Michigan, Inc., a Subsidiary of Kevco, Inc., and United States
Trust Company of New York, as Trustee.(9)
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10.64 - Supplemental Indenture dated as of December 1, 1997 between Design
Components, Inc., a Subsidiary of Kevco, Inc., and United States
Trust Company of New York, as Trustee.(9)
10.65 - Supplemental Indenture dated as of December 1, 1997 between Shelter
Components of Indiana, Inc., a Subsidiary of Kevco, Inc., and United
States Trust Company of New York, as Trustee.(9)
10.66 - Supplemental Indenture dated as of December 1, 1997 between BPR
Holdings, Inc., a Subsidiary of Kevco, Inc., and United States Trust
Company of New York, as Trustee.(9)
10.67 - First Amendment to Credit Agreement dated February 12, 1998 between
Kevco, Inc., certain lenders and NationsBank of Texas, N.A.(10)
10.68 - Registered Global Note dated March 5, 1998 among Kevco, Inc., Kevco
Delaware, Inc., Sunbelt Wood Components, Inc., Bowen Supply, Inc.,
Encore Industries, Inc., Shelter Components Corporation, BPR
Holdings, Inc., Shelter Components of Indiana, Inc., Design
Components, Inc., Duo-Form of Michigan, Inc., DCM, Inc. and Shelter
Distribution, L.P., as Subsidiary Guarantors and United States Trust
Company of New York, as Trustee.(11)
10.69 - Second Amendment to Credit Agreement, dated as of October 27, 1998
(but effective as of September 30, 1998), entered into and among
Kevco, Inc., a Texas corporation, the banks listed on the signature
pages (collectively, the "Lenders"), and NationsBank, N.A. (successor
by merger to NationsBank of Texas, N.A.), as the Administrative
Agent.(12)
10.70 - Waiver entered into as of the 30th day of December 1998, by and among
the banks listed on the signature pages (the "Lenders"), Kevco, Inc.,
a Texas corporation (the "Borrower"), and NationsBank, N.A.
(successor by merger to NationsBank of Texas, N.A.), as
Administrative Agent for the Lenders to the extent and in the manner
provided for in the Credit Agreement.(12)
10.71 - Second Waiver entered into as of the 15th day of February, 1999, by
and among the banks listed on the signature pages (the "Lenders"),
Kevco, Inc.,a Texas corporation (the "Borrower"), and NationsBank,
N.A. (successor by merger to NationsBank of Texas, N.A.), as
Administrative Agent for the Lenders to the extent and in the manner
provided for in the Credit Agreement. (12)
10.72 - Third Amendment and Waiver entered into as of the 25th day of
February, 1999, by and among the banks listed on the signature pages
(the "Lenders"), Kevco, Inc., a Texas corporation, and NationsBank,
N.A. (successor by merger to NationsBank of Texas, N.A.), as
Administrative Agent for the Lenders to the extent and in the manner
provided for in the Credit Agreement.(12)
10.73 - Letter agreement waiver extension, dated March 22, 1999, between
Kevco, Inc., NationsBank, N.A., as Administrative Agent and Lender,
and the other parties thereto.(12)
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10.74 - Fourth Amendment and Waiver entered into as of the 6th day of April,
1999, by and among the banks listed on the signature pages
(the "Lenders"), Kevco, Inc., a Texas Corporation, and NationsBank,
N.A., as Administrative Agent for the Lenders.(12)
27.1 - Financial Data Schedule.(13)
- --------
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form S-1 (No. 333-11173) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated February 27, 1997, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's registration statement
on Form S-8 (No. 333-19959), and incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1997 and incorporated
herein by reference.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, for the quarter ended June 30, 1997 and incorporated herein
by reference.
(6) Previously filed as an exhibit to the Company's Tender Offer Statement
on Schedule 14D-1, filed October 28, 1997, and incorporated herein by
reference.
(7) Previously filed as an exhibit to the Company's Tender Offer Statement
on Schedule 14D-1/A, filed December 12, 1997, and incorporated herein
by reference.
(8) Schedules and similar attachments to this exhibit have not been
previously file herewith, but the nature of their contents is
described in the body of this exhibit. The Company agrees to furnish a
copy of any such omitted schedules and attachments to the Securities
and Exchange Commission upon request.
(9) Previously filed as an exhibit to the Company's registration statement
on Form S-4 (No. 333-43691), and incorporated herein by reference.
(10) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, for the year ended December 31, 1997 and incorporated herein by
reference.
(11) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1998 and incorporated
herein by reference.
(12) Previously filed as an exhibit to the Company's Annual Report on Form
10-K, as amended by Form 10-K/A, for the year ended December 31, 1998
and incorporated herein by reference.
(13) Filed herewith
(14) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated December 23, 1998, and incorporated herein by reference.
* Management contract or compensatory plan or arrangement.
(b) REPORTS ON FORM 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Commission Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KEVCO, INC.
Date: May 12, 1999
By: /s/ Jerry E. Kimmel
--------------------------------
Jerry E. Kimmel
Chairman of the Board, President
and Chief Executive Officer
Date: May 12, 1999
By: /s/ Ellis L. McKinley, Jr.
--------------------------------
Ellis L. McKinley, Jr.
Vice President, Chief Financial
Officer, Treasurer and Director
(Principal Financial Officer)
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KEVCO, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule.
24