10-Q 1 d10q.txt FORM 10-Q 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)

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)

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)

6 American Builders & Contractors Supply Co., Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 3. Guarantor Subsidiaries (continued)

7 American Builders & Contractors Supply Co., Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 3. Guarantor Subsidiaries (continued)

8 American Builders & Contractors Supply Co., Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 3. Guarantor Subsidiaries (continued)

9 American Builders & Contractors Supply Co., Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 3. Guarantor Subsidiaries (continued)

10 American Builders & Contractors Supply Co., Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 3. Guarantor Subsidiaries (continued)

11 American Builders & Contractors Supply Co., Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 3. Guarantor Subsidiaries (continued)

12 American Builders & Contractors Supply Co., Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) 3. Guarantor Subsidiaries (continued)

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):

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:

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

AMERICAN BUILDERS & CONTRACTORS SUPPLY CO INC 10-Q