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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, 2002
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.
-----------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 5033 39-1413708
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
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. [_] 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, $0.01 par value, 147.04 shares as of November 1, 2002
Index
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - September 30, 2002 and December 31,
2001
Condensed consolidated statements of income and retained earnings - Three
months ended September 30, 2002 and 2001; Nine months ended September 30,
2002 and 2001
Condensed consolidated statements of cash flows - Nine months ended
September 30, 2002 and 2001
Notes to condensed consolidated financial statements - September 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
1
Part I. Financial Information
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands)
September 30, December 31,
ASSETS 2002 2001
------------- ------------
Current assets:
Cash $ 3,286 $ 6,114
Accounts receivable 210,038 167,253
Inventories 196,409 157,810
Prepaid expenses and other 2,631 3,017
------------- ------------
Total current assets 412,364 334,194
Property and equipment, net 80,233 66,965
Net receivable from affiliates 13,845 4,907
Goodwill 36,551 36,551
Other intangible assets 4,679 4,875
Security deposits 873 796
Other assets 1,197 1,345
------------- ------------
$ 549,742 $ 449,633
============= ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 163,113 $ 99,646
Accrued payroll and benefits 11,234 12,569
Accrued liabilities 19,566 15,082
Current portion of long-term debt 7,509 10,245
------------- ------------
Total current liabilities 201,422 137,542
Long-term debt 258,619 236,929
Contingent liabilities (Note 2)
Stockholder's equity:
Common stock --- ---
Additional paid-in capital 3,779 3,779
Retained earnings 85,922 71,383
------------- ------------
Total stockholder's equity 89,701 75,162
------------- ------------
$ 549,742 $ 449,633
============= ============
See notes to unaudited condensed consolidated financial statements.
Note: The balance sheet at December 31, 2001 has been derived from the audited
balance sheet at that date but does not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
2
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Retained Earnings (Unaudited)
(in thousands)
Three months ended Nine months ended
September 30, September 30,
------------------------------ --------------------------------
2002 2001 2002 2001
------------ ------------- ------------ -------------
Net sales $ 416,397 $ 409,262 $ 1,073,072 $ 1,027,572
Cost of sales 309,317 307,740 801,741 777,174
------------ ------------- ------------ -------------
Gross profit 107,080 101,522 271,331 250,398
Operating expenses 82,012 75,598 230,679 207,465
Amortization of intangible assets 93 400 277 1,201
------------ ------------- ------------ -------------
82,105 75,998 230,956 208,666
------------ ------------- ------------ -------------
Operating income 24,975 25,524 40,375 41,732
Other income (expense):
Interest income 181 106 460 333
Interest expense (4,084) (4,785) (11,099) (15,455)
------------ ------------- ------------ -------------
(3,903) (4,679) (10,639) (15,122)
------------ ------------- ------------ -------------
Income before provision for income taxes 21,072 20,845 29,736 26,610
Provision for income taxes 229 272 597 454
------------ ------------- ------------ -------------
Net income 20,843 20,573 29,139 26,156
Retained earnings at beginning of period 72,879 36,530 71,383 35,399
Distributions to sole stockholder (7,800) (1,800) (14,600) (6,252)
------------ ------------- ------------ -------------
Retained earnings at end of period $ 85,922 $ 55,303 $ 85,922 $ 55,303
============ ============= ============ =============
See notes to unaudited condensed consolidated financial statements.
3
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine months ended September 30,
-------------------------------------------
2002 2001
----------------- ----------------
Operating activities
Net income $ 29,139 $ 26,156
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 11,315 11,085
Amortization 277 1,201
Amortization of deferred financing costs 231 554
Provision for doubtful accounts 8,805 6,702
Loss on disposal of property and equipment 201 258
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable (49,329) (69,140)
Inventories (35,543) (49,847)
Prepaid expenses 386 (786)
Other assets 78 54
Accounts payable 63,466 108,043
Accrued liabilities 3,118 5,790
----------------- ----------------
Cash provided by operating activities 32,144 40,070
Investing activities
Additions to property and equipment (20,078) (12,388)
Proceeds from disposal of property and equipment 463 629
Acquisitions of businesses (6,511) ---
----------------- ----------------
Cash used in investing activities (26,126) (11,759)
Financing activities
Net borrowings (payments) under line of credit 8,521 (4,859)
Proceeds from long term debt 10,000 ---
Payments on long-term debt (3,516) (17,092)
Increase in net receivable from affiliates (8,938) (1,792)
Distributions to stockholder (14,600) (6,252)
Payments of debt financing costs (313) ---
----------------- ----------------
Cash used in financing activities (8,846) (29,995)
----------------- ----------------
Net decrease in cash (2,828) (1,684)
Cash at beginning of period 6,114 5,009
----------------- ----------------
Cash at end of period $ 3,286 $ 3,325
================= ================
See notes to unaudited condensed consolidated financial statements.
4
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2002
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting primarily of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine months
ended September 30, 2002 are not indicative of the results that may be expected
for the year ending December 31, 2002 due to the seasonality of the business.
For further information, refer to the consolidated financial statements and
footnotes thereto included in American Builders & Contractors Supply Co., Inc.'s
(ABC, or together with its subsidiaries, the Company) Annual Report on Form 10-K
for the year ended December 31, 2001.
2. Contingent Liabilities
At September 30, 2002 and December 31, 2001, the Company had guaranteed
debt of the stockholder in the amounts of $1,282,000 and $1,602,000,
respectively. Certain assets owned by the Company serve as collateral as part of
an overall guaranty of this debt by the Company. The Company also had
outstanding letters of credit in the amount of $5,064,000 at September 30, 2002
and December 31, 2001, with respect to debt of the Company's stockholder and
affiliates.
3. Guarantor Subsidiaries
The following tables present condensed consolidating financial information
for the three months and nine months ended September 30, 2002 and 2001 for: (a)
ABC and (b) on a combined basis, the guarantors of the Senior Subordinated
Notes, which include all of the wholly owned subsidiaries of the Company
(Subsidiary Guarantors). Separate financial statements of the Subsidiary
Guarantors are not presented because the guarantors are jointly, severally and
unconditionally liable under the guarantees, and the Company believes separate
financial statements and other disclosures regarding the Subsidiary Guarantors
are not material to investors.
5
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheet
September 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
-----------------------------------------------------------------
Assets
Current assets:
Cash $ 3,086 $ 200 $ - $ 3,286
Accounts receivable 207,531 13,935 (11,428) 210,038
Inventories 196,525 2,727 (2,843) 196,409
Intercompany advances 2,467 (2,467) - -
Prepaid expenses and other 1,113 1,518 - 2,631
-----------------------------------------------------------------
Total current assets 410,722 15,913 (14,271) 412,364
Property and equipment, net 73,914 6,319 - 80,233
Investment in subsidiaries 4,803 - (4,803) -
Receivable from affiliates 13,845 - - 13,845
Goodwill 36,551 - - 36,551
Other intangible assets 4,188 491 - 4,679
Security deposits 1,373 (500) - 873
Other assets 1,007 190 - 1,197
-----------------------------------------------------------------
$ 546,403 $ 22,413 $ (19,074) $ 549,742
=================================================================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 167,044 $ 7,497 $ (11,428) $ 163,113
Accrued payroll and benefits 10,549 685 - 11,234
Accrued liabilities 17,826 1,740 - 19,566
Current portion of long-term debt 6,259 1,250 - 7,509
-----------------------------------------------------------------
Total current liabilities 201,678 11,172 (11,428) 201,422
Long-term debt 255,024 3,595 - 258,619
Contingent liabilities
Stockholder's equity:
Common stock - - - -
Additional paid-in capital 3,779 1 (1) 3,779
Retained earnings 85,922 7,645 (7,645) 85,922
-----------------------------------------------------------------
Total stockholder's equity 89,701 7,646 (7,646) 89,701
-----------------------------------------------------------------
$ 546,403 $ 22,413 $ (19,074) $ 549,742
=================================================================
6
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Balance Sheet
December 31, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
---------------------------------------------------------------
Assets
Current assets:
Cash $ 6,040 $ 74 $ - $ 6,114
Accounts receivable 166,746 8,337 (7,830) 167,253
Inventories 158,067 2,183 (2,440) 157,810
Intercompany advances (1,880) 1,880 - -
Prepaid expenses and other 2,042 975 - 3,017
---------------------------------------------------------------
Total current assets 331,015 13,449 (10,270) 334,194
Property and equipment, net 65,318 1,647 - 66,965
Investment in subsidiaries 4,186 - (4,186) -
Receivable from affiliates 4,907 - - 4,907
Goodwill 36,551 - - 36,551
Other intangible assets 4,336 539 - 4,875
Security deposits 796 - - 796
Other assets 1,310 35 - 1,345
---------------------------------------------------------------
$ 448,419 $ 15,670 $ (14,456) $ 449,633
===============================================================
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 100,908 $ 6,568 $ (7,830) $ 99,646
Accrued payroll and benefits 12,161 408 - 12,569
Accrued liabilities 14,014 1,068 - 15,082
Current portion of long-term debt 9,245 1,000 - 10,245
---------------------------------------------------------------
Total current liabilities 136,328 9,044 (7,830) 137,542
Long-term debt 236,929 - - 236,929
Commitments and contingent liabilities
Stockholder's equity:
Common stock - - - -
Additional paid-in capital 3,779 1 (1) 3,779
Retained earnings 71,383 6,625 (6,625) 71,383
---------------------------------------------------------------
Total stockholder's equity 75,162 6,626 (6,626) 75,162
---------------------------------------------------------------
$ 448,419 $ 15,670 $ (14,456) $ 449,633
===============================================================
7
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Three Months ended September 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
---------------------------------------------------------------------
Net sales $ 411,096 $ 23,929 $ (18,628) $ 416,397
Cost of sales 307,751 20,205 (18,639) 309,317
---------------------------------------------------------------------
Gross profit 103,345 3,724 11 107,080
Operating expenses 79,585 2,427 - 82,012
Amortization of intangible assets 77 16 - 93
---------------------------------------------------------------------
79,662 2,443 - 82,105
---------------------------------------------------------------------
Operating income 23,683 1,281 11 24,975
Other income (expense):
Interest income 181 - - 181
Interest expense (4,029) (55) - (4,084)
---------------------------------------------------------------------
(3,848) (55) - (3,903)
---------------------------------------------------------------------
Income before provision for income taxes and
equity in earnings of subsidiaries 19,835 1,226 11 21,072
Provision for income taxes 224 5 - 229
---------------------------------------------------------------------
19,611 1,221 11 20,843
Equity in earnings of subsidiaries 1,232 - (1,232) -
---------------------------------------------------------------------
Net income $ 20,843 $ 1,221 $ (1,221) $ 20,843
=====================================================================
8
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Three Months ended September 30, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
------------------------------------------------------------------
Net sales $ 408,629 $ 16,935 $ (16,302) $ 409,262
Cost of sales 309,942 14,013 (16,215) 307,740
------------------------------------------------------------------
Gross profit 96,687 2,922 (87) 101,522
Operating expenses 73,981 1,617 - 75,598
Amortization of intangible assets 400 - - 400
------------------------------------------------------------------
74,381 1,617 - 75,998
------------------------------------------------------------------
Operating income 24,306 1,305 (87) 25,524
Other income (expense):
Interest income 106 - - 106
Interest expense (4,785) - - (4,785)
------------------------------------------------------------------
(4,679) - - (4,679)
------------------------------------------------------------------
Income before provision for income
taxes and equity in earnings of subsidiaries 19,627 1,305 (87) 20,845
Provision for income taxes 270 2 - 272
------------------------------------------------------------------
19,357 1,303 (87) 20,573
Equity in earnings of subsidiaries 1,216 - (1,216) -
------------------------------------------------------------------
Net income $ 20,573 $ 1,303 $ (1,303) $ 20,573
==================================================================
9
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Nine Months ended September 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
------------------------------------------------------------------
Net sales $ 1,060,448 $ 63,679 $ (51,055) $ 1,073,072
Cost of sales 798,646 53,677 (50,582) 801,741
------------------------------------------------------------------
Gross profit 261,802 10,002 (473) 271,331
Operating expenses 223,449 7,300 (70) 230,679
Amortization of intangible assets 229 48 - 277
------------------------------------------------------------------
223,678 7,348 (70) 230,956
------------------------------------------------------------------
Operating income 38,124 2,654 (403) 40,375
Other income (expense):
Interest income 460 - - 460
Interest expense (10,980) (119) - (11,099)
------------------------------------------------------------------
(10,520) (119) - (10,639)
------------------------------------------------------------------
Income before provision for income taxes
and equity in earnings of subsidiaries 27,604 2,535 (403) 29,736
Provision for income taxes 591 6 - 597
------------------------------------------------------------------
27,013 2,529 (403) 29,139
Equity in earnings of subsidiaries 2,126 - (2,126) -
------------------------------------------------------------------
Net income $ 29,139 $ 2,529 $ (2,529) $ 29,139
==================================================================
10
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Income
for the Nine Months ended September 30, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
------------------------------------------------------------
Net sales $ 1,025,276 $ 47,704 $ (45,408) $ 1,027,572
Cost of sales 782,472 39,418 (44,716) 777,174
------------------------------------------------------------
Gross profit 242,804 8,286 (692) 250,398
Operating expenses 202,568 4,897 - 207,465
Amortization of intangible assets 1,201 - - 1,201
------------------------------------------------------------
203,769 4,897 - 208,666
------------------------------------------------------------
Operating income 39,035 3,389 (692) 41,732
Other income (expense):
Interest income 333 - - 333
Interest expense (15,455) - - (15,455)
------------------------------------------------------------
(15,122) - - (15,122)
------------------------------------------------------------
Income before provision for income taxes
and equity in earnings of subsidiaries 23,913 3,389 (692) 26,610
Provision for income taxes 448 6 - 454
------------------------------------------------------------
23,465 3,383 (692) 26,156
Equity in earnings of subsidiaries 2,691 - (2,691) -
------------------------------------------------------------
Net income $ 26,156 $ 3,383 $ (3,383) $ 26,156
============================================================
11
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Cash Flows
for the Nine Months ended September 30, 2002
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
-------------------------------------------------------------
Operating activities
Net income $ 29,139 $ 2,529 $ (2,529) $ 29,139
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 10,894 421 - 11,315
Amortization 229 48 - 277
Amortization of deferred financing costs 231 - - 231
Provision for doubtful accounts 8,805 - - 8,805
Loss on disposal of property and equipment 195 6 - 201
Changes in operating assets and liabilities:
Accounts receivable (47,329) (5,598) 3,598 (49,329)
Inventories (35,402) (544) 403 (35,543)
Prepaid expenses 929 (543) - 386
Other assets (4,614) 4,692 - 78
Accounts payable 66,136 928 (3,598) 63,466
Accrued liabilities 2,168 950 - 3,118
-------------------------------------------------------------
Cash provided by operating activities 31,381 2,889 (2,126) 32,144
Investing activities
Additions to property and equipment (18,896) (1,182) - (20,078)
Proceeds from disposal of property and equipment 430 33 - 463
Acquisitions of businesses (6,511) - - (6,511)
Investment in subsidiaries (2,126) - 2,126 -
-------------------------------------------------------------
Cash used in investing activities (27,103) (1,149) 2,126 (26,126)
Financing activities
Net borrowings under line of credit 8,521 - - 8,521
Proceeds from long term debt 10,000 - - 10,000
Payments on long-term debt (3,411) (105) - (3,516)
Increase in net receivable from affiliates (8,938) - - (8,938)
Distributions to sole stockholder (13,091) (1,509) - (14,600)
Payments of debt financing costs (313) - - (313)
-------------------------------------------------------------
Cash used in financing activities (7,232) (1,614) - (8,846)
-------------------------------------------------------------
Net increase (decrease) in cash (2,954) 126 - (2,828)
Cash at beginning of period 6,040 74 - 6,114
-------------------------------------------------------------
Cash at end of period $ 3,086 $ 200 $ - $ 3,286
=============================================================
12
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
3. Guarantor Subsidiaries (continued)
Condensed Consolidating Statement of Cash Flows
for the Nine Months ended September 30, 2001
(in thousands) Subsidiary
ABC Guarantors Eliminations Consolidated
-------------------------------------------------------------
Operating activities
Net income $ 26,156 $ 3,383 $ (3,383) $ 26,156
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 10,923 162 - 11,085
Amortization 1,201 - - 1,201
Amortization of deferred financing costs 554 - - 554
Provision for doubtful accounts 6,691 11 - 6,702
(Gain) loss on disposal of property and equipment 259 (1) - 258
Changes in operating assets and liabilities:
Accounts receivable (69,011) (4,376) 4,247 (69,140)
Inventories (50,741) 202 692 (49,847)
Prepaid expenses (834) 48 - (786)
Other assets (1,855) 1,909 - 54
Accounts payable 109,225 3,065 (4,247) 108,043
Accrued liabilities 5,791 (1) - 5,790
-------------------------------------------------------------
Cash provided by operating activities 38,359 4,402 (2,691) 40,070
Investing activities
Additions to property and equipment (12,128) (260) - (12,388)
Proceeds from disposal of property and equipment 614 15 - 629
Investment in subsidiaries (2,691) - 2,691 -
-------------------------------------------------------------
Cash used in investing activities (14,205) (245) 2,691 (11,759)
Financing activities
Net payments under line of credit (4,859) - - (4,859)
Payments on long-term debt (17,092) - - (17,092)
Change in net receivable from affiliates (1,792) - - (1,792)
Distributions to sole stockholder (1,974) (4,278) - (6,252)
-------------------------------------------------------------
Cash used in financing activities (25,717) (4,278) - (29,995)
-------------------------------------------------------------
Net decrease in cash (1,563) (121) - (1,684)
Cash at beginning of period 4,651 358 - 5,009
-------------------------------------------------------------
Cash at end of period $ 3,088 $ 237 $ - $ 3,325
=============================================================
13
American Builders & Contractors Supply Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(continued)
4. Comprehensive Income
The Company's comprehensive income for the three and nine month periods
ended September 30, 2002 and 2001, as required to be reported by Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 130, was identical to the actual income reported for those periods.
5. Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company has adopted the new rules on accounting for goodwill and other
intangible assets as of January 1, 2002. As required by SFAS No. 142, the
results of operations for periods prior to its adoption have not been restated.
Had these provisions been adopted effective January 1, 2001, the proforma net
income would have been $20,897,000 and $27,128,000 for the three and nine month
periods ended September 30, 2001, respectively.
In connection with the adoption of SFAS No. 142, the Company completed the
first step of the transitional goodwill impairment test, which requires the
Company to compare the fair value of its reporting units to the carrying value
of the net assets of the respective reporting units as of January 1, 2002. Based
on this analysis, the Company has concluded that no impairment existed at the
time of adoption, and, accordingly, no impairment charge is necessary.
The gross carrying value and accumulated amortization by major class of
other intangible assets are as follows (in thousands):
September 30, 2002 December 31, 2001
----------------------------------------- ------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------- ------------------------------------------
Non-compete agreements $ 4,650 $ 1,667 $ 4,650 $ 1,410
Deferred financing costs 4,245 2,925 3,933 2,694
Other 400 24 400 4
----------------------------------------- ------------------------------------------
$ 9,295 $ 4,616 $ 8,983 $ 4,108
========================================= ==========================================
The Company does not have any intangible assets deemed to have indefinite
lives. Amortization expense expected to be recognized for each of the next five
years ending December 31, is as follows (in thousands):
2002 $ 682
2003 695
2004 695
2005 639
2006 558
6. Subsequent Events
On November 8, 2002, the Company entered into a definitive agreement with a
national building products distributor to acquire certain assets from
twenty-nine of their distribution center locations. This agreement provides for
the purchase of selected inventory, receivables, vehicles and warehouse
equipment similar to that already sold and used by the Company, with an
estimated purchase price of between $50 and $60 million. The Company anticipates
the closing to occur prior to December 31, 2002.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company. ABC is a distributor of exterior building products and is the
largest wholesale distributor of roofing products and one of the largest
wholesale distributors of vinyl siding materials in the United States, operating
239 distribution centers located in 44 states as of September 30, 2002. Since
January 1, 2002, the Company has completed five acquisitions with twelve
locations net of consolidations, opened thirteen distribution centers and closed
one distribution center.
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
This Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended. Such
forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently
available to the Company at the time such statements were made. When used in
this MD&A, the words "anticipate," "believe," "estimate," "expect," "intends"
and similar expressions, as they relate to the Company are intended to
identify forward-looking statements, which include statements relating to,
among other things: (i) the ability of the Company to continue to successfully
compete in the roofing and vinyl siding products market; (ii) the continued
effectiveness of the Company's sales and marketing strategy; and (iii) the
ability of the Company to continue to successfully develop and launch new
distribution centers. Actual results could differ materially from those
projected in the forward-looking statements as a result of the matters
discussed herein and certain economic and business factors, some of which may
be beyond the control of the Company.
Results of Operations
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the three and nine months ended
September 30, 2002 and 2001:
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ----------- ----------- -----------
Income statement data:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.3 75.2 74.7 75.6
------------ ----------- ----------- -----------
Gross profit 25.7 24.8 25.3 24.4
Operating expenses 19.7 18.5 21.5 20.2
Amortization of intangible assets 0.0 0.1 0.0 0.1
------------ ----------- ----------- -----------
Total operating expenses 19.7 18.6 21.5 20.3
------------ ----------- ----------- -----------
Operating income 6.0% 6.2% 3.8% 4.1%
============ =========== =========== ===========
15
Comparison of the Three and Nine Month Periods Ended September 30, 2002 to the
Three and Nine Month Periods Ended September 30, 2001
The Company's results of operations are affected by the seasonal nature of
the roofing and siding business. See "Seasonality."
Net sales for the three months ended September 30, 2002 increased by 1.7%
to $416.4 million from $409.3 million for the three months ended September 30,
2001. Net sales for the nine months ended September 30, 2002 increased by 4.4%
to $1,073.1 million from $1,027.6 million for the nine months ended September
30, 2001. Comparable distribution center sales decreased 3.2% for the three
months ended September 30, and decreased 0.2% for the nine months ended
September 30. The decreases in comparable distribution center sales for the
three and nine month periods is due to an overall economic slowdown in the
building products industry primarily in the commercial, low slope, roofing
market and not a loss of market share.
Gross profit for the three months ended September 30, 2002 increased by
5.5%, to $107.1 million from $101.5 million for the three months ended September
30, 2001. Gross profit, as a percent of net sales, for the three months ended
September 30, increased to 25.7% in 2002, from 24.8% in 2001. Gross profit for
the nine months ended September 30, 2002 increased by 8.4% to $271.3 million
from $250.4 million for the nine months ended September 30, 2001. Gross profit,
as a percent of net sales, for the nine months ended September 30, increased to
25.3% in 2002 from 24.4% in 2001. For both the three and nine month periods,
gross profit, as a percentage of net sales, increased primarily due to a higher
percentage of distribution center warehouse sales versus "direct" sales (product
shipped from the vendor directly to the customer's job site), which have
significantly lower gross profit margins.
Operating expenses increased by $6.4 million to $82.0 million from $75.6
million for the three months ended September 30, 2002 and 2001, respectively. As
a percent of net sales, distribution center operating expenses for the three
months ended September 30, increased to 19.7% in 2002 from 18.5% in 2001. For
the nine months ended September 30, distribution center operating expenses
increased by $23.2 million to $230.7 million in 2002, from $207.5 million in
2001. As a percent of net sales, distribution center operating expenses for the
nine months ended September 30, increased to 21.5% in 2002 from 20.3% in 2001.
The increase in operating expenses for both the three and nine month periods is
primarily due to the higher percentage of distribution center warehouse sales,
which require greater operating expenses.
Operating income for the three months ended September 30, 2002 decreased by
$0.5 million to $25.0 million from $25.5 million for the same period in 2001.
Operating income for the nine months ended September 30, decreased by $1.3
million to $40.4 million in 2002 from $41.7 million in 2001. The decrease for
the three and nine months ended September 30, is a result of the factors
discussed above.
Interest expense for the three months ended September 30, 2002 decreased by
$0.7 million or 14.6% to $4.1 million from $4.8 million for the three months
ended September 30, 2001. For the nine months ended September 30, interest
expense decreased by $4.4 million or 28.2% to $11.1 million in 2002 from $15.5
million in 2001. The decrease for the three month period is due to decreased
rates on the Company's LIBOR and prime rate borrowings, partially offset by an
increase in the Company's average borrowing levels. The decrease for the nine
month period is due primarily to decreased rates on the Company's LIBOR and
prime rate borrowings, as well as a reduction in the Company's average borrowing
levels.
16
Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash provided by operating
activities was $32.1 million and $40.1 million for the nine months ended
September 30, 2002 and 2001, respectively. The decrease was due primarily to
decreases in accounts payable, partially offset by the decreases in accounts
receivable and inventory due to slower sales growth during the second and third
quarters of 2002 as compared to 2001.
Cash Flows from Investing Activities. Net cash used in investing activities
increased to $26.1 million from $11.8 million for the nine months ended
September 30, 2002 and 2001, respectively, due to the acquisitions of businesses
as well as an increase in additions to property and equipment.
Cash Flows from Financing Activities. Net cash used in financing activities
was $8.8 million and $30.0 million for the nine months ended September 30, 2002
and 2001, respectively. This decrease is primarily due to increased borrowings
made under the line of credit and new equipment financing being partially offset
by the increases in receivables from affiliates and distributions made to the
stockholder, under the tax allocation agreement.
Liquidity. The Company's principal sources of funds are anticipated to be
cash flows from operating activities and borrowings under its revolving credit
agreement. Effective September 30, 2002, the Company increased the maximum
amount it may borrow under its revolving credit agreement from $250 million to
$275 million under terms similar to those previously in place. The Company
believes that these funds will provide the Company with sufficient liquidity and
capital resources for the Company to meet its financial obligations, as well as
to provide funds for the Company's working capital, capital expenditures, and
other needs for the foreseeable future. No assurances can be given, however,
that this will be the case.
Seasonality
Because of cold weather conditions 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 throughout the year, with
its lowest revenues typically occurring in the months of December through
February.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's quantitative and qualitative disclosures about market risk
are incorporated by reference from Item 7A of the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, and have not materially changed
since that report was filed.
Item 4.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and the
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Exchange act Rules
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 First Amendment to Third Amended and Restated Loan and Security
Agreement among American Builders & Contractors Supply Co., Inc. as
Borrower, Bank of America, National Association as Agent and a Lender,
and American National Bank and Trust Company of Chicago, as Co-Agent
and a Lender and the Other Lenders Party Hereto dated as of September
30, 2002.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 2002.
18
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 & Contractors Supply
Co., Inc.
November 12, 2002 /s/ Kendra A. Story
- ---------------------- ------------------------------------------
Date: Kendra A. Story
Chief Financial Officer and Director
19
Section 302 Certification Requirements
CERTIFICATIONS
I, Kenneth A. Hendricks, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Builders &
Contractors Supply Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
----------------------
/s/ Kenneth A. Hendricks
- ---------------------------
[Signature]
Chief Executive Officer
20
Section 302 Certification Requirements
CERTIFICATIONS
I, Kendra A. Story, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Builders &
Contractors Supply Co., Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
-----------------------
/s/ Kendra A. Story
- ----------------------------
[Signature]
Chief Financial Officer
21