SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
- - of 1934
For the quarterly period ended June 30, 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 0-19335
BUILDING MATERIALS HOLDING CORPORATION
(Parent of BMC West Corporation)
Delaware 91-1834269
(State of other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
Building Materials Holding Corporation
One Market Plaza, Steuart Tower, Ste 2650, San Francisco, CA 94105
Telephone: (208)331-4410 or (415)227-1650
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 month (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
----- -----
Class Shares Outstanding as
----- of July 26, 1999:
Common stock $.001 par value 12,666,900
BUILDING MATERIALS HOLDING CORPORATION
INDEX
Page
Number
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PART I -- FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Income for the three and six months ended June 30,
1999 and 1998 3
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999
and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
PART II -- OTHER INFORMATION
Item 1 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURES 21
INDEX TO EXHIBITS 22
EXHIBITS 23
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------- ----------- ----------- ----------
Net sales $256,005 $226,017 $471,630 $409,648
Cost of sales 191,840 171,413 353,354 311,079
----------- ----------- ----------- ----------
Gross profit 64,165 54,604 118,276 98,569
Selling, general
and administrative
expense 51,241 44,523 99,195 84,959
Other income, net 1,520 451 2,007 824
----------- ----------- ----------- ----------
Income from operations 14,444 10,532 21,088 14,434
Interest expense 2,999 2,674 5,543 5,171
----------- ----------- ----------- ----------
Income before income taxes 11,445 7,858 15,545 9,263
Income taxes 4,406 3,104 5,985 3,659
----------- ----------- ----------- ----------
Net income $7,039 $4,754 $ 9,560 $ 5,604
------ ------ ------- -------
------ ------ ------- -------
Net income per common share:
Basic $0.56 $0.38 $0.75 $0.45
----- ----- ----- -----
----- ----- ----- -----
Diluted $0.55 $0.38 $0.75 $0.45
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(UNAUDITED)
June 30, December 31,
1999 1998
------------- ------------
ASSETS
Current assets
Cash $6,333 $ 8,264
Receivables, net 117,688 92,113
Inventories 92,533 78,746
Deferred income tax benefit 3,491 2,488
Prepaid expenses 2,450 2,355
-------- --------
Total current assets 222,495 183,966
Property, plant and equipment, net 149,273 139,585
Investment in unconsolidated subsidiary 29,432 0
Goodwill, net 43,986 43,903
Other 4,982 6,527
-------- --------
Total assets $450,168 $373,981
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 57,076 $ 45,509
Accrued compensation 9,659 8,937
Sales tax payable 5,538 3,734
Other accrued expenses 9,068 9,042
-------- --------
Total current liabilities 81,341 67,222
Long-term debt 168,497 117,805
Deferred income taxes 6,880 5,404
Other long-term liabilities 3,593 3,300
Stockholders' equity
Common stock, $.001 par value, 20,000,000 shares
authorized; 12,666,900 and 12,652,298 shares
outstanding at June 30, 1999 and December 31, 1998, respectively 13 13
Additional paid-in capital 108,303 108,256
Retained earnings 81,541 71,981
-------- --------
Total stockholders' equity 189,857 180,250
-------- --------
Total liabilities and stockholders' equity $450,168 $373,981
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
BUILDING MATERIALS HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in Thousands)
Six Months Ended
------------------------------------
June 30, June 30,
1999 1998
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $9,560 $5,604
Adjustments to reconcile net income to cash flows from
operating activities:
Depreciation and amortization 7,027 6,576
Gain on sale of assets (171) (60)
Stock option compensation 0 16
Provision for other long-term liabilities 766 (227)
Equity in earnings of unconsolidated subsidiary (1,033) 0
Changes in working capital items net of effects of
acquisitions (23,719) (2,569)
Other 945 (55)
---------- ----------
Net cash flows from operating activities (6,625) 9,285
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (12,654) (10,327)
Acquisitions/investments in unconsolidated subsidiary (34,331) (11,536)
Sale of property, plant and equipment 942 534
----------- -----------
Net cash flows from investing activities (46,043) (21,329)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving
credit agreement 55,715 13,220
Principal payments on long-term debt (5,023) (1,124)
Other 45 5
----------- ----------
Net cash flows from financing activities 50,737 12,101
----------- ----------
Net change in cash (1,931) 57
Cash, beginning of period 8,264 8,177
---------- ----------
Cash, end of period $6,333 $8,234
------ ------
------ ------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
BUILDING MATERIALS HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Building Materials Holding Corporation ("BMHC" or the "Company")on a
consolidated basis, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments necessary to present fairly the results for the periods presented
have been included. The adjustments made were of a normal, recurring nature.
Certain information and footnote disclosures normally included in the
consolidated financial statements have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's 1998 Annual
Report.
Due to the seasonal nature of BMHC's business, the condensed consolidated
results of operations and resulting cash flows for the periods presented are not
necessarily indicative of the results that might be expected for the fiscal
year.
To provide a more meaningful comparison with the six month period ended
June 30, 1999 financial statements, certain reclassifications have been made
to amounts reported in prior periods, none of which affect the Company's
financial results of operations and cash flows.
2. NET SALES BY PRODUCT (in thousands)
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1999 1998 1999 1998
-------------------------------------------------------------------
Wood Products $115,270 $101,711 $205,969 $179,774
Value-added 85,840 68,589 163,376 127,167
Building Materials 35,564 36,485 65,358 65,707
Other 19,331 19,232 36,927 37,000
---------------------------------------------------------------------
$256,005 $226,017 $471,630 $409,648
-------- -------- -------- --------
-------- -------- -------- --------
3. EARNINGS PER SHARE
Earnings per share was determined as follows:
Three Months Ended Six Months Ended
-------------------------- -------------------------
June 30, June 30, June 30, June 30
1999 1998 1999 1998
----------- ---------- ---------- ---------
COMPUTATION OF BASIC
EARNINGS PER SHARE:
Net income available to common
stockholders $7,039,000 $4,754,000 $9,560,000 $5,604,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 12,664,587 12,408,238 12,663,321 12,372,560
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
BASIC EARNINGS PER SHARE $0.56 $0.38 $0.75 $0.45
----- ----- ----- -----
----- ----- ----- -----
COMPUTATION OF DILUTED
EARNINGS PER SHARE:
Net income available to common
stockholders $7,039,000 $4,754,000 $9,560,000 $5,604,000
---------- ---------- ---------- ----------
Weighted average shares outstanding 12,664,587 12,408,238 12,663,321 12,372,560
Net effect of dilutive stock options based
on the treasury stock method using
average market price 122,069 163,636 128,781 147,775
---------- ---------- ---------- ----------
Weighted average diluted shares
outstanding 12,786,655 12,571,874 12,792,103 12,520,335
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED EARNINGS PER SHARE $0.55 $0.38 $0.75 $0.45
----- ----- ----- -----
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4. ACQUISITIONS AND INVESTMENT IN UNCONSOLIDATED SUBSIDIARY
On May 3, 1999, the Company completed the investment of a 49% interest
in Knipp Brothers Industries, LLC, ("KBI") a framing company with
operations in Phoenix and Tuscon, Arizona, and Las Vegas, Nevada. The
total consideration given was $28 million consisting of $25.8 million in
cash and $2.2 million from various assets of its Phoenix operation. BMHC
has the right to acquire the remaining 51% interest in KBI. The 51% owner
has a corresponding right to require BMHC to purchase KBI's 51% after five
years.
The Company accounts for its investment in KBI using the equity method
of accounting. The Company's recorded equity in income from KBI, included
in other income, differed from its prorata share of KBI earnings due to
amortization of goodwill associated with the Company's equity investment.
The Company completed three acquisitions for the six months ended
June 30, 1999, including the acquisition of Western Door, a distributor of
wood and metal doors and millwork on June 7, 1999. Western Door has
facilities in Missoula and Kalispell, Montana. The Company paid aggregate
cash consideration of $8.5 million, which the Company financed through
borrowings under its existing senior credit facility.
Proforma net sales and net income giving effect to these acquisitions
as if they had occurred at the beginning of 1998 and 1999 is not presented
because the effect of the acquisitions to the Company's net sales and net
income is not material.
BUILDING MATERIALS HOLDING CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CAUTION
Certain statements made in this Form 10-Q may constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors are
discussed in detail in Building Materials Holding Corporation's Form 10-K for
the fiscal year ended December 31, 1998. Given these uncertainties, investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained in the Annual Report on Form 10-K or this Form 10-Q except as required
by law.
The following table sets forth for the periods indicated the percentage
relationship to net sales of certain costs, expenses and income items. The table
and subsequent discussion should be read in conjunction with the consolidated
financial statements and the notes thereto appearing elsewhere herein and in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
For The Three Months Ended For The Six Months Ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 25.1 24.2 25.1 24.1
Selling, general and
administrative expense 20.0 19.7 21.0 20.7
Other income .6 .2 .4 .2
Income from operations 5.6 4.7 4.5 3.5
Interest expense 1.2 1.2 1.2 1.3
Income taxes 1.7 1.4 1.3 .9
Net income 2.8 2.1 2.0 1.4
SECOND QUARTER OF 1999 COMPARED TO THE SECOND QUARTER OF 1998
Net sales for the three months ended June 30, 1999 were $256.0 million up 13.3%
from the second quarter of 1998 when sales were $226.0 million. The largest
portion of this increase was due to acquisitions contributing $17.5 million. The
increase in net sales also resulted from a 8.8% increase over the second quarter
of 1998 in sales at facilities that operated for at least two months in both the
second quarter of 1998 and the second quarter of 1999.
Gross profit as a percentage of sales increased to 25.1% in the second quarter
of 1999 from 24.2% in the second quarter of 1998, primarily as a result of
increased sales of higher margin value-added products, such as roof trusses,
pre-hung doors, millwork, and pre-assembled windows. These value-added products
accounted for $85.8 million, or 33.5% of net sales for the second quarter of
1999, an increase from $68.6 million, or 30.3% of net sales for the second
quarter of 1998.
Selling, general and administrative (SG&A) expense was $51.2 million in the
second quarter of 1999 as compared to $44.5 million in the second quarter of
1998, and increased as a percentage of net sales from 19.7% in 1998 to 20.0% in
1999. The Company attributes this increase to more value-added sales that carry
higher SG&A expenses and the cost of integrating new operating locations in the
second quarter of 1999 that were not included in the second quarter of 1998.
Other income of $1.5 million in the second quarter of 1999 increased from
$451,000 in the same period in 1998 primarily due to the investment in an
unconsolidated subsidiary in May 1999 which is accounted for under the equity
method.
Interest expense of $3.0 million in the second quarter of 1999 increased from
$2.7 million in the same period of 1998, primarily due to increased borrowings
under the Company's revolving line of credit to support higher working capital
as a result of increased sales and acquisitions made during the previous 12
months.
Income taxes were provided at estimated annual effective tax rates of 38.5% and
39.5% for the quarter ended June 30, 1999 and June 30, 1998, respectively.
As a result of the foregoing factors, net income increased by $2.3 million, or
48.1% to $7.0 million, or 2.8% of net sales in the second quarter of 1999, as
compared to $4.8 million, or 2.1% of net sales, in the second quarter of 1998.
FIRST SIX MONTHS OF 1999 COMPARED WITH THE FIRST SIX MONTHS OF 1998
Net sales for the six months ended June 30, 1999 were $471.6 million up 15.1%
from the first half of 1998 when sales were $409.6 million. The largest portion
of this increase was due to acquisitions contributing $31.3 million. The
increase in net sales also resulted from an increase of 10.6% in sales at
facilities that operated for at least four months in the six month period of
1998 and the six month period of 1999.
Gross profit as a percentage of sales improved to 25.1% in the first half of
1999 from 24.1% in the first six months of 1998, primarily as a result of the
Company's on going efforts to improve margins through an increased focus on
value-added products, such as roof and floor trusses, pre-hung doors, millwork,
and pre-assembled windows. These value-added products accounted for $163.4
million, or 34.6% of net sales for the first half of 1999, an increase from
$127.2 million, or 31.0% of net sales for the first half of 1998.
Selling, general and administrative (SG&A) expense was $99.2 million in the
first six months of 1999 as compared to $85.0 million in 1998, and increased as
a percentage of net sales to 21.0% in 1999 from 20.7% in 1998. The Company
attributes this increase to more value-added sales that carry higher SG&A
expenses and the cost of integrating new operating locations in the first half
of 1999 that were not included in the first half of 1998.
Other income of $2.0 million in the six months of 1999 increased from $824,000
in the same period in 1998 primarily due to the investment in an unconsolidated
subsidiary in May 1999 which is accounted for under the equity method.
Interest expense increased to $5.5 million in the first six months of 1999 from
$5.2 million in the same period of 1998, primarily due to increased borrowings
under the Company's revolving line of credit to support higher working capital
as a result of increased sales and acquisitions made during the previous 12
months.
Income taxes were provided at estimated annual effective tax rates of 38.5% and
39.5% for the six month periods ended June 30, 1999 and June 30, 1998,
respectively.
As a result of the foregoing factors, net income increased by $4.0 million, or
70.6% to $9.6 million, or 2.0% of net sales in the first half of 1999, as
compared to $5.6 million, or 1.4% of net sales, in the first six months of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for capital resources is to fund future growth and
capital expenditures, as well as to finance working capital needs which have
been increasing as BMHC has grown in recent years. Capital resources have
primarily consisted of cash flows from operations, incurrence of debt and the
sale of common stock.
OPERATIONS
In the first half of 1999, net cash used in operations was $6.6 million compared
to net cash provided by operations of $9.3 million in the first half of 1998.
Net working capital increased to $141.2 million at June 30, 1999 compared to
$128.3 million at June 30, 1998.
Working capital typically increases in the second and third quarters of the year
because of higher inventory and receivables due to higher sales during the peak
building and construction season. These increases have historically resulted in
negative cash flows from operations in these quarters which are subsequently
offset as receivables are collected and inventories reduced following the peak
building and construction season.
CAPITAL INVESTMENT AND ACQUISITIONS
Capital expenditures, exclusive of acquisitions, were $12.7 million in the first
half of 1999. Capital expenditures included purchases of additional property and
expansion and remodeling of existing building materials centers and value-added
facilities.
In the first half of 1999, cash used for acquisitions and investments totaled
$34.3 million, including the investment of a 49% equity interest in KBI and the
acquisition of Western Door.
FINANCING
At June 30, 1999 the Company's existing senior credit facility provided for
borrowings of up to $125 million. Borrowings under this facility bear interest
at prime plus 0% to 1.25%, or LIBOR plus 1.0% to 2.25%. The agreement expires in
2000, except that after August 31, 1999, the aggregate principal amount
available for borrowing will be reduced to $70 million. Borrowings under the
existing senior credit facility were $98.1 million at June 30, 1999.
In addition, as of June 30, 1999, the Company had $70.4 million of fixed rate
borrowings under various other debt instruments, consisting of $16.7 million
principal amount of 8.10% Notes, $50.0 million principal amount of 9.18% Notes
and $3.7 million principal amount of a promissory note.
The Company is planning to offer approximately $150 million principal amount of
senior subordinated notes due 2009 in a private placement. BMHC intends to use
the net proceeds of the offering, together with borrowings under a proposed new
senior credit facility, to repay all amounts borrowed under the existing senior
credit facility, two outstanding series of senior notes and the promissory note.
Upon termination of the existing senior credit facility, the Company will enter
into a new senior credit facility. The new senior credit facility will provide
for a five-year unsecured revolving credit facility with an aggregate principal
amount of up to $125 million, which may be increased to up to $150 million,
subject to certain conditions. The Company plans to use this
facility for working capital and general corporate purposes, including
investments in, and acquisitions of, other companies. The new senior credit
facility will bear interest at a variable rate based on LIBOR.
In connection with the planned refinancing of the company's debt, BMHC would
pay a premium to the holders of senior notes being paid which is based on the
market interest rates at the date of payment and write-off the unamortized
amount of deferred financing costs. At June 30, 1999, the premium would be
approximately $6.4 million and the unamortized deferred finance costs would
be approximately $800,000. The aggregate of these charges would be reflected
as an extraordinary one-time charge, net of income tax of approximately $4.4
million in the period of payment (expected to be third quarter of 1999) or
approximately $0.36 per share based on July 22, 1999 amounts and average
shares outstanding at that date. The Company expects that these refinancings
will give it increased flexibility to fund its future growth.
The Company believes that cash, funds generated from operations and funds
available under its revolving credit agreement at June 30, 1999 of $26.9 million
(availability of which is subject to the satisfaction of certain customary
borrowing conditions), will provide sufficient funds to meet its currently
anticipated requirements.
In the third quarter of 1998, the Company filed a shelf registration with the
Securities and Exchange Commission to register 2,000,000 shares of common stock.
The Company may issue these shares from time to time in connection with future
business combinations, mergers and/or acquisitions.
DISCLOSURES OF CERTAIN MARKET RISKS
As of June 30, 1999, approximately two thirds of the Company's debt was
fixed-rate. Therefore, BMHC has historically experienced only modest changes in
interest expense when market interest rates change. Changes in the Company's
debt could increase these risks. Previously, the Company has managed its
exposure to market interest rate changes through periodic refinancing of its
variable rate debt with fixed rate term debt obligations.
Commodity wood products, including lumber and panel products, accounted for
approximately 44% of net sales in the first six months of 1999 and 1998.
Commodity wood products carry lower gross margins than value-added products. The
volatility of commodity wood product prices may also affect margins because the
Company may be unable to immediately pass through the increases to its
customers. The Company does not use derivative financial instruments to hedge
commodity wood products.
YEAR 2000 SYSTEM ISSUE
As is the case with most other companies, the Year 2000 computer problem creates
risks for BMHC. However, the Company believes that the risks of the Year 2000
computer problem are not as severe for the building materials industry as
compared to other more technology dependent industries, because the building
materials industry, in general, and the Company and its professional contractor
customers, in particular, are not as heavily dependent upon computerized
systems. Except for millwork and truss operations, the Company is primarily a
distributor of building materials to its customers and is dependent upon rail
and truck transportation for timely receipt and delivery of inventory. The
Company could be affected if its transportation suppliers are materially and
adversely affected by Year 2000 related issues.
The following discussion summarizes management's present analyses and proposed
plans with respect to the anticipated material impacts of the Year 2000 computer
problem on the Company's primary operations. The discussion focuses on "mission
critical" systems, which management believes are important to the Company's day
to day functional operations. The Year 2000 problem may also impact systems that
are not mission critical or information technology related. These systems, which
may include telephone, electronic mail, elevators, heating and air conditioning
equipment, and security will be tested and any problems addressed on a
case-by-case basis, but none are expected to be material to the Company's
results of operations or financial condition. It is expected that assessment,
remediation and contingency planning activities will be on-going throughout 1999
with the goal of appropriately resolving all significant internal systems and
third party issues.
State of Readiness
BMHC has evaluated the impact of the Year 2000 computer problem on its mission
critical systems. The mission critical systems that have been identified are:
- - retail system software used in each of the operations for sales
transactions, inventory and in-store accounting
- - corporate financial and accounting system
- - millwork configuration and order entry system
- - truss production and engineering system
- - payroll system, which is operated by a third party vendor
Each of the five mission critical systems is in the process of becoming Year
2000 compliant, or management is verifying with the original vendor that the
existing systems are Year 2000 compliant. The current status of the readiness
effort with respect to the five mission critical systems is as follows:
The retail system is being upgraded in a two-step process that involves hardware
and operating system improvements that were originally scheduled for 1998. The
first phase of the process has been successfully completed. The final phase of
the upgrade process is also completed. The final software upgrade for Year 2000
compliance, as warranteed by the vendor, has been received and is fully
implemented throughout the Company. The remainder of the year will be used to
thoroughly test the system, with preliminary testing yielding very positive
results.
The corporate financial and accounting system has been upgraded to the Year 2000
compliant version as warranteed by the vendor. This upgrade was successfully
completed in December 1998, and the system is fully compliant. Extensive testing
to verify the vendor's level of compliance will occur in the latter part of
1999. Preliminary testing shows no remaining Year 2000 issues to date.
It has been determined that the current millwork software will not meet the long
term needs of the Company, and a decision to replace this software package has
been made. However, due to the complexity of implementing a new system, it has
also been decided to bring the current system to a Year 2000 compliant state.
This project will be performed by the original vendor of the software. The Year
2000 compliant version of the current software is scheduled for delivery in the
third quarter of 1999. Additionally, a replacement software package has been
identified that is warranteed by the vendor as Year
2000 compliant. The new system has been successfully implemented in three
locations. The update of the current millwork software is nearing completion,
and preliminary testing has begun. In both cases, testing of the software will
occur during the latter half of 1999.
The vendors for the truss production system and outsourced payroll system have
advised the Company that the systems are currently Year 2000 compliant.
Verification and testing of these systems for compliance is currently underway,
and will be completed during the latter half of 1999. To date, no Year 2000
issues have been discovered in these systems.
Cost to Address Year 2000 Issues
Much of the cost to address Year 2000 issues was budgeted and scheduled as part
of routine maintenance of the Company's systems. Since these costs were
identified and planned for in the budget cycle, the financial impact on the
Company is not expected to be material in any one year. However, it is
anticipated that the total cost of becoming Year 2000 compliant for all systems
currently in use by the Company will be approximately $1.5 million. To date
approximately $850,000 has been spent in remediation of Year 2000 issues. These
costs include consulting, hardware upgrades and employee time.
Risks of Year 2000 Issues for BMHC
Even in a most likely worst case scenario for BMHC, the risks due to failure to
accomplish Year 2000 remediations are not expected to have a material adverse
effect on the results of operations or financial condition of the Company. Each
of the Company's operating locations currently has procedures in place to deal
with the failure of the retail system. In this instance, the increased amount of
hand processing of accounting and inventory tracking would result in higher
overtime and payroll expense. However, it is not anticipated that there will be
a material impact on the ability of the Company to deliver products to
customers. In order to reduce the risks of delays in transportation of inventory
either to the Company or its customers, the Company intends to monitor Year 2000
compliance by its transportation suppliers and will consider a build-up of
certain inventories in the fourth quarter of 1999, if appropriate. The Company
does not expect that the cost of
a short-term increase in its inventory levels to reduce Year 2000 risks will
be material to the Company's financial condition or operating results.
Since each of the systems independently perform specified functions that are
well understood by staff personnel in the operating locations and at the
corporate office, complete failure of all of the systems could be worked around
to perform the necessary functions of the systems. It is extremely unlikely that
this would occur due to the independent nature of the systems architecture
employed at BMHC. However, steps to avoid this possibility are being taken.
Contingency Plans
The Company believes that temporary solutions to most failures are readily and
economically available. For example, the dates on the systems could be set to
dates prior to 2000 that have the same days of the week, such as the year 1972.
This would involve a data conversion and hand correcting of dates on printed
documents, but could be accomplished in just a few days. Also, personal
computers with spreadsheets could be used to maintain accounting and inventory
information as well as corporate financial data. Millwork configuration is
unaffected by the date change, but dates would need to be changed for order
tracking if the system were not capable of dealing with dates after December 31,
1999. Processing of payroll could be done with personal computers. Truss
engineering would need validation by the plate manufacturer to ensure structural
integrity. Finally, the Company can increase inventory levels to mitigate risks
of Year 2000 transportation problems. All of these plans could be put in place
in a short time frame, and would mitigate nearly all the material risks to the
Company. Further evaluation of contingency plans will be made, if necessary, as
test results from the various systems become available.
Summary
BMHC has proactively identified and is in the process of correcting the Year
2000 issues that it believes could have a material impact on the Company. It is
anticipated that all systems will be capable of functioning in a normal fashion
upon the change of the millennium. It is not anticipated that BMHC
will suffer any loss of revenue due to Year 2000 issues. The Company is also
in the process of requesting from all of its significant vendors a statement
regarding their preparations for the Year 2000 date change. Since the Year
2000 issue was anticipated in the budget cycle over the last two years, no
material impact is expected on the results of operations or cash flows in any
period or on the overall financial condition of the Company. Also, no projects
were canceled or delayed as a result of Year 2000 remediation activities.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation and other legal matters
arising in the normal course of business. In the opinion of
management, the Company's recovery or liability, if any,
under any of these matters will not have a material effect on
the Company's financial position, liquidity or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual stockholder meeting on May 5, 1999. A
total of 12,656,109 shares of common stock were outstanding at the
date of record and entitled to vote at the meeting. Of the total
outstanding, 10,401,370 shares were represented at the meeting and
2,254,739 shares were not voted.
Stockholders cast votes for the election of the following directors
whose terms expire in 2000:
For Against
--- -------
George E. McCown 10,261,316 140,054
Robert E. Mellor 10,261,362 140,008
Alec F. Beck 10,259,941 141,429
H. James Brown 10,261,369 140,001
Wilbur J. Fix 10,260,730 140,640
Robert V. Hansberger 10,260,730 140,640
Donald S. Hendrickson 10,261,132 140,238
Guy O. Mabry 10,260,730 140,640
Peter S. O'Neill 10,260,730 140,640
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
On May 6, 1999, Building Materials Holding Corporation,
Registrant filed a Form 8-K with the Securities and Exchange
Commission dismissing its independent accountants, Arthur Andersen
LLP and engaging PricewaterhouseCoopers LLP as its new independent
accountants.
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.
BUILDING MATERIALS HOLDING CORPORATION
Date: July 26, 1999 /s/ Robert E. Mellor
-------------------------------------------------
Robert E. Mellor
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: July 26, 1999 /s/ Ellis C. Goebel
-------------------------------------------------
Ellis C. Goebel
Senior Vice President - Finance and Treasurer
(Principal Financial Officer)
INDEX TO EXHIBITS
BUILDING MATERIALS HOLDING CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 1999
Page
Exhibit Description Number
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27 Financial Data Schedule 23