ITEM 1. BUSINESS
GENERAL
Cameron Ashley Building Products, Inc., (together with its principal operating subsidiaries Wm. Cameron & Co. ("Cameron"), Ashley Aluminum, LLC ("Ashley"), and Cameron Ashley Canada, Inc. ("CA Canada"), (collectively the "Company") is a leading North American distributor of a broad line of building products that are used principally in home improvement, remodeling and repair work and in new residential and commercial construction. The Company's product lines include roofing, millwork, pool and patio enclosure materials, insulation, vinyl siding, industrial metals and a variety of other building materials. The Company distributes its products through its extensive 167-branch network to independent building materials dealers, professional builders, large contractors and mass merchandisers and national co-ops in all 50 U.S. states and throughout Canada.
COMPANY OVERVIEW
In 1999, the Company increased its ownership in Field Marketing, Inc., ("FMI") to 70%. FMI provides various merchandising services to retailers, including: managing shelf space, conducting in-store audits, and providing promotional product introductions. The Company offers FMI services as a complementary value-added service to its customers.
RECENT DEVELOPMENTS - PENDING SALE
On January 18, 2000, the Company announced that it has entered into a definitive agreement whereby an investment group consisting of CGW Southeast Partners IV, L.P. and an affiliate of Citicorp Venture Capital, Ltd., a subsidiary of Citigroup Inc., along with senior management of the Company will acquire all the outstanding shares of the Company's common stock at a price of $15.10 per share in cash. The total consideration of the proposed merger transaction is approximately $320 million including the assumption of debt. Financing commitments, subject to customary conditions, are in place with both senior and subordinated debt sources, and the transaction is expected to close in the second calendar quarter of 2000. The Company entered into the agreement following the unanimous recommendation by a special committee comprised of independent directors of the Company. Credit Suisse First Boston advised the special committee in this transaction. CGW Southeast Partners I, L.P., an affiliate of CGW Southeast Partners IV, L.P., currently owns approximately 11% of the Company's outstanding shares. CGW Southeast Partners IV, L.P., is a private equity fund which supports management teams in middle-market acquisitions and recapitalizations, and is managed by Atlanta, Georgia based Cravey, Green & Wahlen, Inc. Richard L. Cravey and Edwin A. Wahlen, Jr., both directors of the Company, are affiliated with the CGW-related entities.
The closing of the merger is subject to regulatory and stockholder approval and customary conditions to closing. The agreement includes a $5 million breakup fee. The Company will file for review by the Securities and Exchange Commission a proxy statement to be mailed to stockholders in connection with a stockholder meeting that will be called to consider the merger.
FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K, including statements in Item 1. Business, Item 3. Legal Proceedings, Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters, and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, are "forward-looking statements" that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be indicated by phrases such as "believes", "anticipates", "expects", "intends", "foresees", "projects", "predicts", "forecasts", "will" or similar words and are subject to known or unknown risks and uncertainties which may cause actual results in the future to differ materially from forecasted results. Among the key factors that could cause results to differ materially are: (i) the inability of the parties to the definitive merger agreement to complete the proposed buy-out; (ii) actions by competitors, suppliers, customers, shareholders, regulators and others following the announcement of the proposed buy-out; (iii) stock market and financing market conditions; (iv) business and economic conditions in North America and in the regional markets in which the Company operates; (v) adverse
homebuilding conditions including those related to weather and interest rates; (vi) reliable and cost-effective supply of products from manufacturers; and (vii) technology risks in implementing new and/or converting existing information systems and other risks more fully described in this Annual Report on Form 10-K or in other Company filings with the Securities and Exchange Commission.
Since its formation in 1991, the Company has pursued a strategy of establishing a national building products distribution network through the acquisition of independent building products distributors. As a result of acquisitions and internal growth, the Company grew from $134.8 million in revenue in fiscal 1991 to $1,138.4 million in fiscal 1999, representing a compound annual growth rate of 30.6%. Over the same period, the Company completed 43 acquisitions and added 125 distribution facilities.
According to the Home Improvement Research Institute, building products sales to contractors in the new housing and home repair and remodeling markets grew from approximately $70.5 billion in 1991 to approximately $115.2 billion in 1998, representing a compound annual growth rate of 7.3%. The wholesale building products distribution industry, which distributes to these markets, is highly fragmented. According to the National Home Center News, sales by the 100 largest building materials wholesale distributors were approximately $30.8 billion in 1998, representing only 26.7% of the $115.2 billion in total sales to building contractors. Many distributors in the building materials industry are small, privately-held companies which generally lack the purchasing power of a larger entity and may also lack the broad lines of products and sophisticated inventory management and control systems typically needed to operate a multi-branch distribution network. The increasingly competitive environment faced by smaller distributors has prompted a trend toward industry consolidation which management believes offers significant opportunities for the Company.
The Company has established a presence in a substantial portion of North America and as a result, the Company's financial performance is not significantly dependent upon a single geographic region's economy. The diversity of the Company's customer base and the wide variety of applications for the Company's products also decrease the impact of a downturn in demand in any particular market segment. The risks posed by the cyclical new residential construction market are somewhat mitigated by the Company's significant participation in the less cyclical residential remodeling and home improvement market.
INDUSTRY OVERVIEW
Prior to the 1970's, building materials were sold in both rural and metropolitan markets largely by local dealers, such as lumberyards and hardware stores. These dealers, who generally purchased their products from wholesale distributors, sold building products directly to homeowners, contractors and homebuilders. In the late 1970's and 1980's, the advent of mass merchandisers such as The Home Depot and Lowe's altered this distribution channel dramatically in metropolitan markets as these retailers displaced many local dealers. A core strength of these mass merchandisers was their ability to market a broad range of competitively priced home improvement and do-it-yourself products to the homeowner and small contractor. Accordingly, most wholesale distributors redirected their efforts and worked to sell directly to large contractors and homebuilders in metropolitan markets and provide mass merchandisers with fill-in and specialty products that mass merchandisers would not typically stock in their retail inventory. This distribution structure remains in place today.
In metropolitan areas, mass merchandisers primarily sell products to retail customers such as homeowners and small contractors. In rural areas, dealers such as lumberyards and hardware stores sell products to homeowners, contractors and homebuilders. Wholesale building products distributors, such as the Company, and major manufacturers, such as Georgia Pacific and Weyerhaeuser, do not sell directly to retail customers. Instead, they distribute products to (i) professional homebuilders and contractors in metropolitan markets, (ii) dealers in rural markets and (iii) mass merchandisers in metropolitan areas. Despite the emergence of the mass merchandisers during the past two decades, the wholesale building products distribution industry has experienced solid growth in the 1990s.
STRATEGY
The Company's primary strategic objective is to be a leading wholesale building products distributor in North America. Since 1991, the Company has pursued a strategy of aggressive growth through acquisitions and development of the management and operational expertise required to be a leader in the industry. As the Company moves into the next phase of its development, management plans to (i) continue to expand through selective acquisitions, (ii) accelerate
internal growth and (iii) capitalize on the economies of scale of its North American network. By pursuing these initiatives, the Company seeks to achieve superior sales and profit growth relative to its competitors, provide building products manufacturers with a unified North American distribution network and increase its market share with national account retailers, developers, large contractors, builders and manufactured housing companies.
CONTINUE TO EXPAND THROUGH SELECTIVE ACQUISITIONS Over the past several years, the Company's acquisition strategy has resulted in the expansion of its operations from branch locations in two states to 39 states and the District of Columbia and nine provinces in Canada. Going forward, the Company intends to continue to expand through a disciplined acquisition program in order to achieve its growth objectives and strengthen its North American distribution network. In evaluating future acquisition candidates, the Company will target well-established distributors which will allow the Company to enter new markets or to expand its product lines in existing markets. The Company seeks acquisition candidates that have complementary management teams and product lines. The Company typically retains the existing management team of the acquired distributor to benefit from local market knowledge and customer relationships and provides incentive compensation tied to the profitability and return on investment of the acquired operation. After acquiring a new distributor, the Company concentrates on expanding product lines at the location and improving its operational efficiency through purchasing economies, inventory management and administrative savings.
Accelerate Internal Growth The Company is pursuing several strategies designed to accelerate internal growth. These strategies include:
Broadening Product Lines. The Company seeks to broaden the product lines offered by its branches in order to improve the overall product mix available to its customers, assist customers in managing their specialized inventory needs and enable branches to provide "one-stop shopping" to their customers. The distribution of a wider variety of products enhances gross profit margins by adding higher margin specialty products to the Company's branches and reduces unit shipping costs by allowing delivery of more products per truckload. Current product lines the Company is seeking to broaden across the branch network include exterior siding systems, commercial roofing and millwork. Management continually seeks opportunities to enhance the Company's product offerings through the acquisition of distributors offering complementary product lines and the establishment of relationships with additional suppliers.
Enhancing Relationships with National and Regional Accounts. The Company is expanding its sales to national and regional home center chains and hardware co-ops by establishing programs with national vendors which enable these vendors to rapidly replenish the special inventory needs of their large national accounts. In addition, the Company has also developed services which provide special order capabilities for niche products and in-store merchandising services to its customers. Management believes that its extensive North American network uniquely positions the Company to provide these services to national and regional accounts.
Expanding Presence in Large Builder, Developer and Manufactured Housing Segments. Management believes that its distribution and service network also provides it with significant growth opportunities in the large national and regional builder, developer and manufactured housing market segments where the Company currently has a limited presence. The Company is seeking to expand existing programs with several major builders to which the Company provides specialized millwork packages and roofing products. Management believes additional expansion of the Company's geographic network through acquisitions will improve its ability to service these market segments.
Offering Value-Added Services. The Company is developing complementary value-added services to offer its customers. The Company's subsidiary, FMI, offers third party outsourced field services to fulfill several of the retailers' traditional merchandising tasks, including managing shelf space and position, providing inventory management, conducting in-store audits and promotional introductions and implementing major department resets. Other retailers such as food and drug stores have found they can take cost out of the logistical supply chain by using a third party for such in-store merchandising needs instead of higher-cost, permanent sales and marketing employees. Third party servicers such as FMI allow suppliers to share the merchandising personnel through syndication, at a lower cost, for valuable in-store representation. The Company offers certain FMI resources as a complementary service to its strategic vendor relationships and to the national and regional home center chains. In fiscal 1999, services to building materials/hardware retailers represented 21% of FMI's total revenues.
Enhancing Branch Management Capability. A key aspect of the Company's strategy is an entrepreneurial operating philosophy which seeks to maximize the Company's responsiveness to customers' needs and to give branch managers a sense of responsibility and accountability for the performance of their own operations. Selling and operational capabilities at the branch level are critical to achieving the Company's overall sales and profit objectives. To enhance branch management capabilities, the Company has implemented a number of initiatives which include (i) providing two weeks of intensive classroom training at one of the country's leading distribution management programs, (ii) investing in training courses focusing on professional selling skills and time and territory management and (iii) providing ongoing training in standardized branch processes and procedures.
CAPITALIZE ON ECONOMIES OF SCALE
Capturing Purchasing Economies. As a significant customer to many of its vendors, the Company is able to obtain competitive pricing and purchasing terms, ensure timely delivery of products and maintain appropriate inventory availability. While individual branch managers are responsible for selecting and ordering inventory tailored to the varied needs of customers in their local markets, the Company generally negotiates with its major vendors on a company-wide basis to obtain favorable pricing, volume discounts and other beneficial purchase terms. Branch or regional managers are responsible for inventory selection and ordering on terms negotiated centrally, so that the Company remains responsive to local market demand, while still maximizing purchasing leverage through volume orders. To help strengthen the Company's overall purchasing economics, management initiated a preferred vendor program that maintains regional flexibility, but reduces the number of vendors in several major product categories. Management believes that further opportunities to realize purchasing economies exist within all product categories and operating expense areas and intends to pursue such opportunities to enhance profitability.
Upgrading Business Information Systems. Management believes that information technology to support organization- wide decision making is critical to achieving the Company's sales and profit objectives. Each of the Company's branches is equipped with on-line, real time information systems, which enable branch management to control and monitor inventory levels, perform invoicing and order entry and establish delivery routes and schedules. Corporate management is also able to monitor branch and regional sales, profitability, asset management and working capital performance by utilizing the same system. The Company is in the process of implementing a new information system in its Cameron division to allow it to improve operations, customer service, pricing management and inventory and logistics management. See "Information Technology".
Increasing Operating Efficiencies. The Company centralizes many administrative functions such as accounting and finance, information technology, employee benefits, insurance, human resources, legal, and national account sales efforts both to achieve economies of scale and to help branch management remain focused on maximizing sales and profitability of their locations. Management intends to continue its efforts to increase operating productivity throughout the Company. In an effort to reduce operating expenses, the Company recently launched cost reduction efforts across many administrative functions and management believes there will continue to be opportunities to eliminate redundant functions and facilities from time to time, particularly through operating synergies resulting from additional acquisitions.
ACQUISITION HISTORY
Since its formation in 1991, the Company has completed 43 acquisitions and has grown from 40 branches at the end of 1991 to 167 branches as of October 31, 1999. Set forth in the table below is a description of the Company's acquisitions during each of the calendar years indicated:
PRODUCTS
The Company distributes a broad range of building products as shown in the following table and as described below.
* Includes those product lines which individually constitute less than three percent (3%) of the Company's net sales in fiscal 1999.
Roofing Products. Shingles, felt, roof tile, commercial roll roofing, coatings, asphalt, flashings, vents and other roofing products are distributed to residential and commercial roofing contractors and dealers, including lumberyards and, to a lesser extent, mass merchandisers. Principal brands of roofing products include CertainTeed, Elk, GAF, Genstar, Monier/Lifetile, Owens Corning and Tamko. Management believes the Company is one of the largest roofing products wholesalers in the United States.
Millwork. Millwork includes doors, door units and component parts, molding, windows, stair parts, blinds, shutters and screens, which are distributed to dealers, mass merchandisers, contractors and builders in the residential construction industry. The Company's major millwork lines include ABTCo. (prefinished moldings, shutters and architectural work), Premdor and Steves & Sons (flush doors), ThermaTru (residential entry doors) and a variety of other regional suppliers. The Company also pre-hangs door units for large residential builders such as D. R. Horton and Perry Homes, mass merchandisers and independent dealers.
Pool and Patio Enclosure Products. Pool and patio enclosure products include aluminum extrusions, roof panels, gutters, coil, screen, awnings, handrails and various other exterior aluminum building products. These products are sold by the Company to residential contractors and installers, who use them in the construction of pool enclosures, screen rooms, mobile home improvement projects, carports and roof-over applications. A majority of the pool and patio enclosure product line is purchased from a variety of suppliers for redistribution by the Company. The remainder consists of roll-formed roof panels, gutters and fold-down window awnings fabricated by the Company. The Company's fabrication capability allows it to produce a variety of sizes and styles on an as-needed basis to control inventory costs or fill custom orders.
Insulation. The Company distributes a broad line of insulation materials to contractors and dealers. Principal brands distributed by the Company include CertainTeed and Owens Corning products that are used in both residential and commercial applications.
Vinyl Siding. Vinyl siding consists of siding, soffit and accessories. The Company purchases vinyl siding from several industry leaders, including CertainTeed, Rollex and Owens Corning, and distributes the product to builders, contractors and mass merchandisers.
Industrial Metals. Industrial aluminum and stainless steel products fall primarily into two categories, extrusions and sheet. These products are purchased by sheet metal businesses, fabricators and manufacturers for use in a variety of products. The Company purchases extruded products for distribution, while third party processors and the Company cut sheet products from coils to standard specifications. In addition, the Company has the ability to cut sheet products to individual specifications.
Other Building Products. The Company distributes a variety of building materials such as stucco, aluminum siding, sheathing, fireplaces, ceiling tiles, grids, skylights, gutters, sheet rock, nails and fasteners, rebar, mesh, corrugated metal, wood products, fencing and pneumatics. The product mix offered by each branch is tailored to the demands of its local market.
BRANCH OPERATIONS
The Company distributes products through its network of 167 branches which are strategically located to provide prompt delivery and responsive customer service. The Company emphasizes individual branch profit-and-loss and working capital responsibility and seeks to maximize the benefits of its local market presence. A branch is typically comprised of warehouse and receiving space, secure outdoor holding space, office space and product display areas. Local sales efforts are coordinated and supported at the branches. The bulk of the remaining branch activities relate to receiving, storing and delivering building products.
Each branch is responsible for selecting and ordering inventory to meet the needs of its customers and for creating its own localized sales, marketing and promotional programs, supplemented by coordinated national and regional programs at the corporate level. All branches are equipped with on-line information systems that allow managers to control and monitor inventory levels, perform invoicing and order entry, and establish delivery routes and schedules. Corporate management also uses the Company's information systems to monitor sales, profitability and working capital
management by branch. The Company employs electronic data interchange ("EDI") to enhance its ability to serve the needs of major national accounts and national manufacturers.
Some of the Company's branches are organized into a formal "hub and spoke" system, with large branches supporting smaller branches or mini-branches. Even where a formal "hub and spoke" system has not been implemented, full-line metropolitan branches typically provide fill-in service to smaller and rural branches. Metropolitan branches are typically larger in square footage and generally stock a full line of products, while the product mix at rural branches is typically more limited and market specific.
The Company establishes and maintains overall credit policy and terms at the corporate level. Branch managers are generally responsible, within the Company's policy, for overseeing the extension of credit and the collection of accounts receivable. The Company's central credit function assists branches with major accounts, collects delinquent accounts and determines overall credit lines and credit approval. In certain instances, the Company obtains lien rights and security interests where appropriate to provide security for larger accounts.
PURCHASING
The Company generally negotiates with its major vendors on a company-wide basis to obtain favorable pricing, volume discounts and other beneficial purchase terms. The Company negotiates large block purchases of roofing, insulation, millwork, pool and patio and commodity products centrally to capture purchasing economies. Branch or regional managers are responsible for inventory selection and ordering on terms negotiated centrally, so that the Company remains responsive to local market demand, while still maximizing purchasing leverage through volume orders. Branch managers are also responsible for inventory management at their respective locations.
Payment, discount and volume purchase programs are negotiated directly by the Company with its major suppliers, with a majority of the Company's purchases made from suppliers offering these programs. The Company is a party to distribution agreements with certain vendors, including CertainTeed and Owens Corning, on an exclusive or non- exclusive basis, depending on the product and the territory involved. The agreements also provide certain price protections for products purchased by the Company from these suppliers.
SALES AND MARKETING
The Company's marketing programs center on fostering strong customer relationships and providing superior service. The Company focuses its marketing efforts primarily on the residential remodeling and new housing segments and, to a lesser extent, on the commercial and industrial segments. The Company has a national accounts sales and marketing staff that is responsible for negotiating programs and standards for relationships with mass merchandisers, purchasing cooperatives, national home builders and developers and manufacturers. The Company's marketing team also has dedicated executives focused on product lines targeted for growth, such as vinyl siding.
The Company's sales organization consists of outside field sales personnel who report directly to their local branch manager and are supported by inside customer service representatives at the branch. Bonus and commission payments constitute a substantial portion of the compensation for salespersons, and in fiscal 1999 branch managers could earn up to 50% of their base salary in bonus if branch performance goals were achieved or exceeded.
CUSTOMERS
The Company distributes products to a large number and variety of building material dealers, large home builders, contractors, mass merchandisers and national co-ops, and others.
Contractors represent the Company's single largest customer group. Management believes that prospects of increased sales to this group are strong, based on projected growth in home repair and remodeling work. In addition, with the emergence and continued growth of retail mass merchandisers such as The Home Depot and Lowe's, the Company has begun to target those merchandisers to satisfy their fill-in and specialty product needs.
The percentages of the Company's revenue attributable to the Company's various types of customers are as follows:
INFORMATION TECHNOLOGY
In late 1997, the Company initiated a major business process re-engineering project aimed at improving and standardizing processes and using a "best practices" approach to reduce operating costs in the Cameron division. This re-engineering effort centers around a new information system using J.D. Edwards software and IBM AS/400 hardware. The system has been successfully implemented in Canada and in parts of the U.S. and management expects the system to be fully implemented in early fiscal 2000. The new information system and re-engineered processes are expected to enhance the Company's competitive position by reducing operating and administrative costs and improving customer service, pricing management and inventory and logistics management.
COMPETITION
The Company's competition varies by product line, customer classification and geographic market. The Company competes with many local and regional building products distributors, and, in certain markets and product categories, with other national building products distributors, such as ABC Supply, Allied Building Products, and Huttig Building Products. The Company also competes with major corporations with national distribution capability, such as Georgia- Pacific, Weyerhaeuser and other product manufacturers that engage in direct sales; however, the Company also acts as a distributor for certain products of these manufacturers. The Company sells products to and, to a lesser extent, competes with large home center chains such as The Home Depot and Lowe's for business from smaller contractors. Competition from such large home center chains may, in the future, include more competition for the business of larger contractors.
Management believes that the Company's target customers generally select building products distributors on the basis of product availability, relationships, service and delivery, geographic coverage, responsiveness and credit availability. The Company utilizes its purchasing power with major suppliers to obtain products at prices generally more favorable than its smaller competitors. The Company's relative size also permits it to attract experienced sales and service personnel and gives the Company the resources to provide company-wide sales, product and service training programs. By working closely with its customers and utilizing the Company's information technology, the Company's branches are able to maintain appropriate inventory levels and are well positioned to deliver completed orders on time.
ENVIRONMENTAL
The Company is subject to federal, state and local environmental laws and regulations. A number of roofing materials are considered environmentally hazardous. The Company typically handles and stores a variety of these materials at its distribution center locations. The Company maintains appropriate environmental compliance programs at each of its distribution centers and has never been the subject of any material enforcement action by any governmental agency.
Many of the Company's distribution centers are located in areas of current or former industrial activity, where environmental contamination may have occurred. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and remediate releases or threatened releases of hazardous or toxic substances or petroleum products located at such property, and may be held liable for property damage and for investigation and remediation costs in connection with the contamination.
Management believes the Company is in material compliance with applicable laws and regulations governing the discharge of hazardous waste into the environment; moreover, management does not believe there are any material environmental liabilities at any of its distribution center locations. Nevertheless, there can be no assurance that the Company's knowledge is complete with regard to all material environmental liabilities and it could subsequently discover potential environmental liabilities arising from its sites or from neighboring facilities.
EMPLOYEES
As of October 31, 1999, the Company had 2,669 employees, including 195 corporate and administrative personnel and 2,474 branch employees. At the branch level, a total of 1,936 people were employed as warehouse and manufacturing personnel, truck drivers, office staff and labor supervisors; and 538 were employed as branch managers and sales personnel. Unions represent a total of approximately 134 hourly workers at the Company's Chicago, Detroit, San Antonio, New York City, Hauppauge (Long Island), Linden, New Jersey and Houston facilities. The Company has not experienced any work stoppages. The remainder of the Company's employees are not represented by a union or a collective bargaining unit. Management considers the Company's employee relations to be satisfactory.
TRADENAMES
Historically, the Company operated under various tradenames in the markets it served, retaining the name of an acquired business to preserve local identification. To capitalize on its increasing national presence, the Company has converted most branch operations to the primary tradename "Cameron Ashley Building Products." New acquisitions typically convert to the primary tradename within 6 to 12 months after the purchase date. Some local branches continue to use historical trade names as secondary tradenames to maintain goodwill.
SEASONALITY
The Company's first quarter and, to a lesser extent, its second quarter are typically adversely affected by winter construction cycles and weather patterns as the level of activity in both the home improvement and new construction markets decreases. Management closely monitors operating expenses and inventory levels during seasonally affected periods and to the extent possible, controls variable operating costs to minimize seasonal effects on profitability.
EXECUTIVE OFFICERS OF THE REGISTRANT
Ronald R. Ross (age 47) has been a director of the Company since 1994. Mr. Ross has served as Chief Executive Officer since September 1996, as Chairman of the Board of the Company since February 1994 and as Chairman of the Board and Chief Executive Officer of Cameron since November 1996. From December 1991 to June 1997, he served as President of Cameron. Mr. Ross was Vice President, Operations of the Cameron Wholesale division of CertainTeed Corporation, a building products manufacturer, from September 1987 to September 1991 and served as Vice President and General Manager of the division until its sale to Cameron in December 1991.
Walter J. Muratori (age 56) has been a director of the Company since 1994. Mr. Muratori has served as Vice Chairman and Chief Operating Officer of the Company since March 1998, as President of the Company since February 1994, and as President of Cameron since June 1997. He also served as Chairman of the Board of Ashley from June 1997 until its conversion to limited liability company in November 1998. He previously served as President of Ashley from October 1991 to June 1997. From 1989 to 1991, Mr. Muratori served as President of Talquin Building Products, Inc., a division of Florida Progress Corporation and the former parent of Ashley. From 1970 to 1986, Mr. Muratori held various sales and management positions at Ashley.
Garold E. Swan (age 46) has served as Executive Vice President and Chief Financial Officer of the Company and Cameron since April 1999. During 1998, Mr. Swan was Senior Vice President and Chief Financial Officer of PC Service Source, Inc., a Dallas, Texas, based personal computer service logistics provider. From 1988 to 1997, Mr. Swan was with Fibreboard Corporation, serving as Vice President and Controller from 1988 to 1996 and as Vice President of Finance from 1996 through the company's acquisition by Owens Corning in 1997. Mr. Swan was employed by Arthur Andersen, LLP from 1977 to 1988.
Kirk W. Black (age 38) has served as Executive Vice President and Chief Information Officer of the Company and Cameron since June 1999. Mr. Black was a Senior Consultant with IBM Corporation from 1997 to 1999 focusing on ERP and E-Commerce implementation initiatives. He served as Director of Supply Chain Systems for Paging Network, Inc., a paging and wireless service company, from 1995 to 1997. Mr. Black was employed by Andersen Consulting, LLP from 1983 to 1995.
C. Steven Gaffney (age 51) has served as Executive Vice President of the Company and as President and Chief Executive Officer of Ashley since June 1997. Mr. Gaffney was Vice President of the Company from 1994 to June 1997. Mr. Gaffney was Executive Vice President of Ashley from 1991 to June 1997. He previously served as President of Ashley from 1989 to 1991 and as its Vice President from 1986 to 1989.
John S. Davis (age 43) has served as Vice President - General Counsel and Secretary of the Company since August 1994. Prior to joining the Company, he was employed as Associate Counsel - Mergers and Acquisitions of Electronic Data Systems Corporation (EDS) from 1990 to August 1994. Mr. Davis was engaged in private legal practice prior to 1990.
Thomas R. Miller (age 50) has served as Vice President - Human Resources of the Company since December 1994. From 1980 until December 1994, Mr. Miller served as Managing Director of Employee Relations for American Airlines, Inc.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates both owned and leased branches in 39 states and the District of Columbia; of the 167 Company branches, 35 are owned and 132 are leased. The Company's facilities range in size from approximately 15,000 to 150,000 square feet. This building space is used for warehousing and distribution purposes and, to a lesser extent, for sales, manufacturing and administrative purposes. The Company owns a 24,000 square foot corporate office building located in Dallas, Texas. The Company believes its facilities are adequately maintained and utilized and are suitable for the purposes for which they are used. None of the Company's owned real property is subject to any major encumbrances.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 24, 2000 a stockholder of the Company filed suit in the Superior Court of Fulton County, Georgia against the Company and its individual directors alleging, among other things, breach of fiduciary duties and unfair dealing in connection with the proposed merger transaction and seeking to enjoin the merger and, alternatively, damages. The stockholder is also seeking class action status and to be certified as the class representative. The Company believes that this cause of action is without merit and will contest the plaintiff's claims by all available means.
On November 3, 1997, Bradco Supply Corporation ("Bradco") of Avenel, New Jersey filed suit against the Company in the Superior Court of New Jersey, alleging various contractual claims arising out of the terms of a letter of intent dated October 2, 1997 executed by Bradco and the Company pertaining to the acquisition of Bradco by the Company. Bradco has alleged, among other things, a breach and unilateral termination of the letter of intent by the Company and seeks to recover as damages a $3 million "walk-away" fee under the terms of the letter of intent. In December 1997, the Company removed the Bradco lawsuit to the United States District Court, New Jersey District. Thereafter, the Company filed a counterclaim for fraud, among other claims, seeking to recover its out of pocket transaction expenses. Management believes the Bradco action is without merit and has maintained a vigorous defense and counterclaim to date. However, an adverse resolution could result in an after-tax charge to income of up to $2 million. In September 1998, the Company filed an alternate motion to dismiss or for judgment on the pleadings, which was denied by the Court in early 1999. Thereafter, each of the Company and Bradco have filed motions for summary judgment on the merits of the lawsuit and the counterclaim, respectively. The Court has yet to rule on the motions for summary judgment. Discovery in the case is substantially complete. The Court has ruled on certain pretrial motions, but has not yet set a date for trial, pending its ruling on summary judgment. There is no indication from the Court when this will occur.
In January 1998, a subsidiary of the Company and three of its employees were subpoenaed to provide information to a grand jury of the United States District Court, Northern District of Texas, in connection with an investigation of possible violations of federal antitrust laws in the aluminum building products industry, including possible violations of Section 1 of the Sherman Act. No allegations of wrongdoing have been made against the subsidiary, the employees or the Company. In February 1998, information was provided in response to the subpoenas and the grand jury appearance was postponed indefinitely. In November 1998, the Company's three employees were again notified to appear before a federal grand jury in Ft. Worth, Texas. Such appearance was again postponed indefinitely. Thereafter, the U.S. Attorney's office agreed to an informal interview with an officer of the Company in lieu of formal grand jury testimony. The interview was conducted in June 1999. After the interview, the U.S. Attorney requested additional information from the subsidiary. There has been no further activity since the Company provided these materials to the government in August 1999.
From time to time, the Company is also involved in litigation and proceedings in the ordinary course of its business. Management believes that such ordinary course of business litigation will not have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted for a vote of security holders during the fourth fiscal quarter ended October 31, 1999.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the New York Stock Exchange under the symbol "CAB". Prior to June 17, 1998 the Common Stock was traded on the Nasdaq National Market System. The following table sets forth, for the Company's fiscal periods indicated, the high and low closing price per share for the Common Stock, as reported on the New York Stock Exchange and the Nasdaq National Market System.
HIGH LOW ------- ------- FISCAL 1999 First Quarter $13.375 $10.875 Second Quarter 13.375 8.750 Third Quarter 12.750 10.000 Fourth Quarter 12.250 8.125
HIGH LOW ------- ------- FISCAL 1998 First Quarter $19.000 $13.750 Second Quarter 20.500 14.750 Third Quarter 22.375 14.875 Fourth Quarter 16.375 9.563
As of January 10, 2000, there were approximately 64 holders of record of the Common Stock. The Company has never declared or paid a cash dividend on its Common Stock and does not intend to pay any cash dividends on its Common Stock in the foreseeable future. The current policy of the Company's Board of Directors is to retain all earnings to support operations and finance expansion. The Credit Agreement restricts the payment of cash dividends without the prior notice of Bank of America. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Future declaration and payment of dividends, if any, will be determined in light of then current conditions, including the Company's earnings, operations, capital requirements, financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors.
In June 1998, the Company issued warrants to purchase 200,000 shares of the Company's Common Stock at $20.00 per share to Lee R. Anderson, Sr. as partial consideration for a covenant-not-to-compete entered into by Anderson in connection with the sale of substantially all of the assets and business of APi Supply Company to the Company. The warrants are for a term of five years, commencing on the grant date of June 16, 1998, and are exercisable during the four year period commencing one year from the date of grant. Because the transaction involved a single, sophisticated investor, the warrants were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act. The warrants were part of the bargained consideration for the purchase of the APi Supply Company business. The market price for the Common Stock on the date of grant was $15.50 as compared to the strike price of $20.00 for the warrants.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
The selected financial data presented below as of October 31, 1999, 1998, 1997, 1996 and 1995 and for each of the five fiscal years ended October 31, 1999, have been derived from audited consolidated financial statements of the Company. The historical data set forth below should be read in conjunction with the consolidated financial statements of the Company, together with the notes thereto, included elsewhere herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS - PENDING SALE
Please see Item 1. Business- recent Developments for information about the pending acquisition of the Company's outstanding common stock by an investment group consisting of CGW Southeast Partners IV, L.P., an affiliate of Citicorp Venture Capital, LTD. and senior management of the Company. The information contained in this Item 7 including, any "forward-looking statements" is qualified by reference to the information set forth in Item 1. Business - Recent Developments; and Forward Looking Statements.
GENERAL
The building products industry is affected by various factors including general economic conditions, the level of building activity, weather conditions, the rate of new home construction, interest rates and the availability of credit. A significant portion of the Company's products are sold for use in the home improvement, remodeling and repair market, which is relatively less affected by these factors than the new residential construction market.
The Company has experienced substantial improvement in its results of operations since its formation in 1991. The Company's revenue has more than doubled from $504 million in fiscal 1995 to $1,138 million in fiscal 1999. This revenue growth has been accomplished largely due to 43 acquisitions completed since October 1992, and increased sales in existing branches. Further, the Company's income from operations has increased from $19.2 million in 1995 to $39.3 million in 1999, a compound annual growth rate of 19.6%.
Gross profit as a percentage of revenue increased from 18.9% in fiscal 1995 to 19.9% in fiscal 1999 which resulted primarily from the product and sales mix of acquired businesses. The businesses acquired by the Company since October 1992 typically either have had product lines consisting of narrow assortments of commodity products or have had a relatively high proportion of products distributed through direct shipments from manufacturers. Both of these characteristics result in lower selling margins and a lower gross profit as a percentage of revenue. In implementing its operating strategy for acquired businesses, management focuses on improving gross profit as a percentage of revenue, which requires the integration of additional higher margin product lines. This process takes time to implement because of market conditions, suppliers' territorial restrictions and conversion of customers' buying requirements and habits. The Company historically has been able to improve the gross profit margins of acquired businesses and anticipates further improvements as additional product mix, pricing and sales mix changes are implemented. The growth of the Company through its acquisition strategy since 1991 has reduced the contribution of its Ashley subsidiary as a percentage of the total operation. Ashley is a specialty products distributor and operates with significantly higher gross profit margins.
The net effect of these various factors has been a significant increase in the Company's income from operations from $19.2 million in fiscal 1995 to $39.3 million in fiscal 1999. However, the increased gross profit margin discussed previously was offset by an increase in operating expenses, which resulted in a decrease in income from operations as a percentage of revenue from 3.9% in fiscal 1995 to 3.5% in 1999. The operating margin decrease is primarily the result of operating expenses associated with the software/systems development and business process re-engineering project in the Cameron division which was $2.6 million in fiscal 1999. While unable to accurately calculate the impact, management believes the Company's operating expense levels were also adversely affected by the disruption to operations by the business process re-engineering project. Implementation of the new system requires significant changes in the day-to-day handling of normal transactions and results in inefficiencies and increased costs in the months following initial implementation. Management expects that operating costs as a percent of sales will improve as branch personnel become more experienced in operating the new system.
Management had previously budgeted $23 million for the new information system and related re-engineering effort in its Cameron division and expects the project to be completed near that cost estimate during 2000. The project will require approximately $5.3 million in cost that will be expensed, with the balance being capitalized. Total project pre- tax expenses were $1.5 million and $2.6 million in fiscal years 1998 and 1999, respectively. Management expects $1.1 million of project expenses in fiscal 2000. Management expects the new information system, after its implementation,
to begin to produce productivity savings beginning in the third quarter of fiscal 2000 and provide the necessary technology infrastructure to allow the Company to continue its growth strategy.
The following table sets forth information regarding certain components of revenue for the periods presented in "Selected Financial Data."
(1) Includes the effect of charges of 0.7% of revenue, as discussed below.
RESULTS OF OPERATIONS
Fiscal 1999 Compared to Fiscal 1998
The comparability of operating results between fiscal year 1999 and fiscal year 1998 is affected by several events which occurred during those periods (collectively referred to as the "Net Acquisition Activity"). These events include: 1) the discontinuation of the Company's financing subsidiary, Cameron Ashley Financial Services ("CAFS") in 1998, 2) the acquisition of seven businesses during fiscal 1998 at a total cost of $48.8 million, 3) the acquisition of four businesses during fiscal 1999 at a total price of approximately $20.0 million, and 4) the increase in ownership of Field Marketing, Inc., from 33% to 70.17% during 1999.
Revenues increased 26.6% from $899.2 million in 1998, to $1,138.4 million in 1999, an increase of $239.2 million. Of the increase in revenues, $56.1 million resulted from an 6.4% increase in same store revenues. The remaining increase in revenues is from the Net Acquisition Activity, specifically the acquisitions done during 1998, which were only partially reflected in the 1998 numbers, while revenues for the full period are shown in the 1999 results.
Gross profit increased from $177.9 million in 1998 to $226.8 million in 1999, an increase of 27.5%. Gross profit as a percentage of net sales increased to 19.9% in 1999 as compared to 19.8% in 1998, due primarily to changes in overall product mix.
Operating expense increased from $143.8 million in 1998, to $184.9 million in 1999. Operating expenses include both expenses directly attributable to branch operations and corporate expenses. The increase is primarily a result of the increased operations as a result from the Net Acquisition Activity mentioned above. As a percentage of net sales, operating expenses increased from 16.0% in 1998, to 16.2% in 1999. A portion of the increase is a result of increased employee costs and increased vehicle and transportation costs. Other operating expenses incurred for re-engineering and system conversion costs totaled $2.6 million in 1999, compared to $1.5 million a year ago. As a percent of revenue these expenses remained flat at 0.2% for both 1998 and 1999. The full impact of the business process re-engineering project on operating expenses cannot be accurately calculated. However, Management believes operating expenses were adversely affected and expects operating costs as a percentage of sales to improve following full implementation of the new system.
Total operating expenses, including those associated with re-engineering and the system conversion, increased from $145.4 million in 1998, to $187.5 million in 1999. Included in the operating expenses in 1998 is a charge of $2.5 million for pre-tax costs associated with the termination of issuing customer loans by CAFS. There were no charges in 1999 related to CAFS.
Income from operations increased 20.7% from $32.5 million to $39.3 million in 1999, due to the reasons previously discussed. The direct re-engineering and system conversion costs effectively reduced income from operations by 6.2% in 1999 and 4.5% in 1998. Including all activity, the income from operations as a percentage of revenues dropped slightly from 3.6% in 1998 to 3.5% in 1999.
Interest expense increased from $8.0 million in 1998 to $11.7 million in 1999. The increase is in conjunction with the increase in long-term debt, which was the result of the Net Acquisitions Activity mentioned previously. Total long-term debt, including current maturities, was $137.4 million on October 31, 1998, and $170.1 million on October 31, 1999.
As a result of the above factors, income before income taxes increased 13.2% from $24.5 million in 1998 to $27.8 million in 1999. Net income increased 11.6% from $15.3 million in 1998 to $17.1 million in 1999, an increase of $1.8 million. Net income as a percentage of revenue decreased from 1.7% in 1998 to 1.6% in 1999. Diluted EPS increased from $1.61 per share in 1998 to $1.94 per share in 1999.
The aggregate tax rate net of minority interest increased from 37.6% in fiscal 1998 to 38.7% in fiscal 1999. During 1998, the Company recorded a deferred tax benefit attributable to prior year acquisitions.
Fiscal 1998 Compared to Fiscal 1997
When comparing 1998 with 1997, the following significant items should be considered:
o In fiscal 1998, the Company incurred $1.5 million of operating expenses associated with the software/systems development and business process re-engineering project in the Cameron division. These expenses were 0.2% of revenue for the year and effectively reduced income from operations by 4.5% in fiscal 1998.
o Also in fiscal 1998, the Company terminated its CAFS U.S. operations. CAFS reported $2.5 million of pre-tax losses.
o In the fourth quarter of fiscal 1997, the Company recorded pre-tax charges to operations of $5.6 million. These charges consisted primarily of $3.6 million for the merger of four branches in Oregon and Texas and the closure of a small mill operation in Arizona and a $2.0 million writeoff of unamortized costs related to the Company's management information system and certain costs associated with the evaluation of the new system. These charges increased cost of sales by $0.5 million and operating expenses by $5.1 million.
Revenue increased 18.1% from $761.6 million in 1997 to $899.2 million in 1998. This increase was due primarily to the 1998 year containing a full 12 months of sales from the 38 branches acquired or opened in fiscal 1997, as well as the incremental sales from the 17 branches acquired or opened in fiscal 1998. Same-branch sales growth of 2.4%, compared to zero same-branch sales growth in 1997, also contributed to the revenue increase. The 1998 same-branch sales growth was driven by a 3.6% increase at the Cameron division.
Gross profit as a percentage of revenue increased slightly to 19.8% in 1998 compared to 19.7% in 1997, with an overall increase of $28.1 million or 18.7% in 1998, compared to 1997. The revenue growth is due to acquisitions and internal growth, while the slight increase in gross profit percentage was due primarily to product mix.
Total operating expenses increased 15.7% from $125.7 million in 1997 to $145.4 million in 1998. These expenses decreased as a percentage of revenue from 16.5% to 16.2%. Operating expenses include both expenses directly attributable to branch operations and corporate expenses and increased primarily as a result of acquisitions, new branch openings, CAFS, and the systems and business process re-engineering costs. Higher revenue and gross profit allowed for absorption of the overall expense increases without a negative impact to earnings. Operating expenses excluding the significant items summarized above, remained level at 15.7% of revenue in fiscal 1998 compared to 1997. These expenses were 0.4% of revenue for the year and effectively reduced income from operations 10.5% in fiscal 1998.
Income from operations increased 34.7% from $24.2 million in 1997 to $32.5 million in 1998 and increased as a percentage of revenue from 3.2% to 3.6% for the reasons indicated above.
Interest expense increased $2.3 million in 1998 compared to 1997 as a result of higher borrowings required for 1998 acquisitions, working capital requirements, and a corporate share repurchase program.
As a result of the above factors, income before taxes increased 33.2% from $18.4 million in 1997 to $24.5 million in 1998. Net income increased 35.1% from $11.3 million in 1997 to $15.3 million in 1998, and net income as a percentage of revenue increased 0.2% from 1.5% in 1997 to 1.7% in 1998. Diluted earnings per share increased from $1.20 per share in the 1997 period to $1.61 per share in the 1998 period, a 34.2% increase.
The aggregate tax rate decreased from 38.5% in fiscal 1997 to 37.6% in fiscal 1998. During 1998, the Company recorded a deferred tax benefit attributable to prior year acquisitions.
EFFECTS OF INFLATION
Management does not believe that inflation has had a material impact on results of operations for the periods presented. Substantial increases in costs, however, could have an impact on the Company and the industry. Management believes that, to the extent inflation affects its costs in the future, the Company can generally offset inflation by increasing prices if competitive conditions permit.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary needs for capital resources have been to finance acquisitions, working capital and capital expenditures. Borrowings for working capital typically increase during periods of sales expansion when higher levels of inventory and receivables are needed and decrease as inventories and receivables are converted to cash and are subsequently used to pay down debt. During the fourth quarter of fiscal 1997, the Company initiated a business process re-engineering project that includes the implementation of a new computer system and is estimated to cost approximately $23 million. Management expects this system to be fully implemented during second calendar quarter 2000 and has incurred $21 million through October 31, 1999, on this project. The Company had $155.2 million of long- term debt, less current maturities, outstanding as of October 31, 1999.
Under the terms of the Senior Notes and the Revolver, the Company is subject to various restrictive covenants regarding, among other things, payment of any dividends, capital expenditures limitations, incurrence of indebtedness from others in excess of certain amounts and consummation of any merger or acquisitions of an entity that is not engaged in the building materials distribution business without the consent of the lenders. Financial covenants include, but are not limited to, maintaining current ratios, minimum net worth ratios, fixed charges ratios and debt to cash flow ratios. The Company was in compliance with the restrictive covenants contained in its various credit agreements at October 31, 1999. It is anticipated that the Senior Notes and the Revolver will be refinanced pursuant to commitments obtained by the investment group which as agreed to acquire the Company's outstanding common stock in the pending sale transaction. Otherwise, the consent of the various lenders under the Company's current credit agreements would be required to complete the pending transaction.
Net cash generated from operating activities was $14.4 million and $19.3 million for the year ended October 31, 1999 and 1998, respectively. In 1998, $4.3 million increase in operating cash flow was due to the termination of CAFS and the sale of its loan properties. Capital expenditures were $19.4 million and $10.1 million for the year ended October 31, 1999 and 1998, respectively. Four acquisitions were made in fiscal 1999 for $20.0 million, and seven acquisitions were made in fiscal 1998 for $48.8 million.
Except as affected by the pending sale transaction, the Company believes that its current cash position, funds from operations and the availability of funds under its credit agreements will be sufficient to meet anticipated liquidity requirements for the next twelve months.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued certain new pronouncements during 1999 that have various disclosure or reporting requirements. See Note 2 to the Consolidated Financial Statements of the Company for a discussion of the new standards.
SEASONALITY AND QUARTERLY FINANCIAL INFORMATION
The business of the Company is, to a significant degree, seasonal. Because a substantial portion of the building products distributed by the Company are intended for exterior use, sales by the Company tend to be lower during periods of inclement weather; this is particularly true with respect to the Company's Canadian and Northern United States operations. Accordingly, weather conditions occurring during the first and second quarters (November-April) of the Company's fiscal year usually result in the generation of lower sales revenues during those time periods than in other periods of the Company's fiscal year. The Company anticipates that these seasonal fluctuations will continue in the future.
The following table sets forth selected quarterly financial information. This information is derived from unaudited financial statements of the Company and includes, in the opinion of management, only normal and recurring adjustments that management considers necessary for a fair statement of the results for such periods. The operating results for any quarter are not necessarily indicative of results for any future period. Quarterly results have been adjusted to reflect change in method of accounting for the Company's investment in Field Marketing, Inc., which increased to a 70% ownership during 1999, (see Note 3 to the consolidated financial statements of the Company). This adjustment had no effect on net income or diluted earnings per share.
YEAR 2000 COMPLIANCE
The Company utilizes a significant number of computer software programs and information systems in its internal operations, including applications used in financial business systems and various administration functions ("IT systems"). The Company also makes use of a variety of machinery and equipment in its business which are operated by or reliant upon non-information technology systems ("non-IT systems"), for example equipment or mechanical systems which contain embedded technology such as microcontrollers. To the extent that the source code of the software applications of these IT systems or the embedded technologies of these non-IT systems are unable to appropriately interpret and process the calendar year 2000 ("Year 2000"), some level of modification or possible replacement of such applications could be necessary for proper continuous performance. This potential problem is commonly referred to as the Year 2000 compliance issue.
During 1998 and 1999 the management of the Company completed evaluation of the status of the Company's internal IT and non-IT systems for compliance with the Year 2000 issue. The Company has experienced no material adverse effects from Year 2000 issues to date. All computer systems, telephone, facsimile systems, and security systems are functioning normally. Management does not anticipate any significant Year 2000 issues to occur.
Major IT Systems. The Company initiated a major re-engineering project in late 1997, centered around a new information system for the Cameron division. The new system is operational and is being implemented on a gradual rollout basis in all of the Company's branch locations. The implementation is scheduled to be completed by second calendar quarter 2000.
Costs to Address Year 2000 Issues. It is important to note that, although Year 2000 compliance was a necessary byproduct of the Cameron division system re-engineering project, it is only one portion of the benefit to be derived by the Company from the new system conversion. While cost of the project constitutes the vast majority of the Company's IT budget for the relevant periods, such cost is not confined solely to the Year 2000 issue and is not displacing other critical IT projects. It is not possible to segregate the total expense to the Company strictly for Year 2000 compliance from the total system conversion project budget.
As of October 31, 1999, the costs of the new information system and related re-engineering project in the Cameron division were approximately $21.0 million. The Company currently expects that the final project cost to be approximately $23 million. The Company's results of operations reflect the amount of re-engineering and system conversion costs that have been expensed and not capitalized. The Company's source of funds for the system re- engineering project is cash generated by operations and borrowings under existing bank facilities.
The costs of Year 2000 compliance verification and testing in the Company, and the costs for making other IT systems and non-IT systems Year 2000 compliant, have not been material.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any material exposure to market risk associated with trading or other market risk sensitive instruments. The majority of the Company's debt is at a fixed rate and, thus, is not exposed to interest rate risk.
In February 1998, the Company's Canadian subsidiary entered into a cross currency swap on $7.0 million of its U.S. dollar denominated unsecured senior notes to reduce its exposure to foreign currency fluctuations. The Company initially paid $7.0 million in exchange for Canadian $10.1 million which amounts will be repaid at the termination date of September 16, 2004. The Company will pay at a fixed rate of 6.45% and receive a fixed rate of 6.71%.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS OF REGISTRANT:
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cameron Ashley Building Products, Inc.:
We have audited the accompanying consolidated balance sheets of Cameron Ashley Building Products, Inc. and subsidiaries (the "Company") as of October 31, 1999 and 1998 and the related consolidated statements of income and comprehensive income, stockholders' equity and of cash flows for each of the three years in the period ended October 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, such consolidated financial statements present fairly, in all material respects, the financial position of Cameron Ashley Building Products, Inc. and subsidiaries at October 31, 1999 and 1998 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP Dallas, Texas December 22, 1999, (January 24, 2000, as to Note 16)
CAMERON ASHLEY BUILDING PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
CAMERON ASHLEY BUILDING PRODUCTS, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
See notes to consolidated financial statements.
CAMERON ASHLEY BUILDING PRODUCTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See notes to consolidated financial statements.
CAMERON ASHLEY BUILDING PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
CAMERON ASHLEY BUILDING PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN TABLES ARE IN THOUSANDS, EXCEPT PER SHARE)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Cameron Ashley Building Products, Inc., and its majority owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated.
The Company distributes building products to independent dealers (lumberyards and hardware stores), professional builders, contractors and mass merchandisers throughout the United States and in Mexico and Canada. Products distributed by the Company are used primarily in new residential construction and home improvement, remodeling and repair work, as well as in commercial and industrial applications.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS. All highly liquid debt instruments with a maturity of three months or less when purchased are classified as cash equivalents.
INVENTORIES. Inventories are stated at the lower of last-in, first-out ("LIFO") cost or market. Included in inventory cost are costs directly associated with the fabrication of the Company's products. Substantially all of the Company's inventory is finished goods.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is recorded at cost. Costs associated with major additions are capitalized and depreciated. Upon disposal, the cost of properties and related accumulated depreciation are removed from the accounts, with gains and losses reflected in earnings. Assets are generally depreciated on the straight-line method over the estimated service lives of the related assets, which range from 1 to 25 years. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the term of the related lease. Management routinely evaluates its recorded investments for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets to the Disposed Of," based on projected undiscounted cash flows and other methods when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management believes the investments to be recoverable.
RE-ENGINEERING AND SYSTEM CONVERSION COSTS. All costs incurred in connection with re-engineering, training, and business process improvement activities are expensed as incurred including all related internal and third party costs. System conversion costs and the costs of new hardware and software are accounted for in accordance with the Financial Accounting Standards Board's Emerging Issue Task Force Issue No. 97-13 and the American Institute of Certified Public Accountants' Statement of Position 98-1.
INTANGIBLE ASSETS. Intangible assets consist primarily of noncompete agreements, which are recorded at cost and are amortized over periods of three to five years, the contractual term of the agreements, and goodwill, which is primarily amortized over 25 years. Goodwill relates primarily to market entry and the earnings potential of acquired branches. If branches were closed, sold, or had sustained poor performance, goodwill related to such market would be evaluated for impairment based upon undiscounted cash flows from the specific geographic area. During fiscal 1999, there was no change in estimated useful life or recoverability of any intangible assets.
FOREIGN CURRENCY TRANSLATION ADJUSTMENT. Included in other comprehensive income is the unrealized adjustments resulting from translating the financial statements of the Company's foreign subsidiary. The functional currency of the Company's foreign subsidiary is the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiary are translated to U.S. dollars at year-end exchange rates. Income and expense items are translated at the average rates prevailing during the year.
REVENUE RECOGNITION. Sales are recorded at the time merchandise is delivered and are reported net of estimated payment discounts and returns and allowances.
INCOME TAXES. Income taxes are provided for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Company periodically evaluates the collectibility of deferred tax assets and provides a valuation allowance for the portion of such assets not considered realizable.
CONCENTRATION OF CREDIT RISK. The Company is engaged in the distribution of building products throughout the United States. The Company grants credit to customers, substantially all of whom are dependent upon the construction economic sector. The Company continuously evaluates its customers' financial condition but does not generally require collateral. The concentration of credit risk with respect to trade accounts receivable is limited due to the Company's large customer base located throughout the United States. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of its accounts receivable.
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimated.
INCOME PER SHARE. The computation of basic and diluted income per share is computed by dividing net income by the weighted average shares outstanding during the period (see Note 10). Common stock equivalents are included in the computation if they are dilutive.
DERIVATIVE FINANCIAL INSTRUMENTS. Derivative financial instruments are utilized by the Company to reduce foreign currency exchange rate risks. Derivative financial instruments include foreign currency swaps. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. Gains and losses resulting from the termination of derivative financial instruments are recognized over the shorter of the remaining original contract lives of the derivative financial instruments or the lives of the related hedged positions or, if the hedged positions are terminated, are recognized in the current period as gain or loss.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did not have a significant impact on the Company's financial position or results of operations.
The FASB also issued in June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" which establishes standards for the way public companies disclose information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. Prior periods have been restated to reflect the adoption of SFAS No. 131, which has no impact on the Company's financial position or results of operations. (See Note 14)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for accounting and reporting for derivative instruments. It requires entities to record all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The portion of all hedges not effective in achieving offsetting changes in fair value is recognized in earnings. In June 1999, the FASB issued SFAS No. 137 which defers the implemenation date of SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management has not completed an evaluation of the impact of the provisions of this statement on the Company's financial statements.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform to current-year presentation.
3. ACQUISITIONS
Over the past three years, the Company has acquired certain net assets and operations of various building materials distributors. All of these transactions were accounted for as purchases; therefore, results of operations of the Company include the operations of the businesses subsequent to their acquisitions.
During fiscal 1997, eight businesses were acquired at a total cost of $41.9 million. During fiscal 1998, seven businesses were acquired at a total cost of $48.8 million, including the purchase of certain assets and liabilities of APi Supply Company ("APi") as of June 15, 1998, for $35.3 million cash and $.8 million in debt assumed. Additionally, the company issued warrants to purchase 200,000 shares of the Company's common stock at $20.00 per share as consideration for a noncompete agreement with APi's previous owner. These warrants are fully vested on the first anniversary and expire on the fifth anniversary of the acquisition date. During fiscal 1999, four businesses were acquired at a total cost of $20.0 million. Pro forma revenue as if the 1999 acquisitions had occurred at the beginning of the year would have been $1,155.6 million and $1,004.7 million for 1999 and 1998, respectively. Pro forma results of operations and income per share for these acquisitions are not presented due to the immaterial effect on historical results.
On October 31, 1997, the Company acquired a one-third interest in Field Marketing, Inc., ("FMI") for $2.6 million. During 1999, the Company increased its interest in FMI to approximately 70% through additional stock purchases totaling $3.5 million. The seller may put the remaining stock and the Company may call such stock under certain conditions at prices based upon future performance. FMI provides certain marketing services to the Company. FMI was paid $225,000 in 1999 and $9,000 in 1998 for marketing services. Concurrent with attaining majority ownership, the Company changed from the equity method of accounting to consolidation. Pro forma revenue as if the change in interest had occurred at the beginning of the year would increase by $7.8 million.
4. INVENTORIES
The Company values its inventories using the LIFO method. Had the Company used the first-in, first-out ("FIFO") method, inventories would have been approximately $2,315,000 and $1,936,000 higher at October 31, 1999 and 1998, respectively. Under FIFO, income from operations for the year ended October 31, 1999 would have been higher by approximately $369,000, for the year ended October 31, 1998 would have been lower by approximately $691,000, and for the year ended October 31, 1997 would have been higher by approximately $400,000.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at October 31:
Included in property and equipment at October 31, 1999 and 1998, is $9,959,000 and $7,798,000, respectively, of equipment under capital leases.
Intangible assets consist of the following at October 31:
7. DEBT
Debt consists of the following at October 31:
In February 1999, the Company's Canadian subsidiary entered into a cross currency swap on $7.0 million of its U.S. dollar denominated unsecured senior notes to reduce its exposure to foreign currency exchange rate fluctuations. The Company initially paid $7.0 million in exchange for Canadian $10.1 million which amounts will be repaid at the termination date of September 16, 2004. The Company will pay at a fixed rate of 6.45% and receive a fixed rate of 6.71%. The swap agreement did not have a material effect on the Company's operations during 1999.
The seller notes payable are subordinated to the obligations under the Bank of America agreement.
In March 1999, the Company amended the credit facility with Bank of America and other banks (collectively referred to as "Bank of America"). The financing agreement with Bank of America covers a revolving line of credit up to $80 million U.S. dollars and $25 million Canadian dollars. The financing agreement restricts distributions to stockholders to 50% of net income, issuance of stock by the Company's subsidiaries, the assumption of debt and liens by the Company's subsidiaries, and requires compliance with certain financial ratios and covenants. The obligations of the
Company to Bank of America are unsecured. The Bank of America revolving credit note also requires the Company to pay a quarterly commitment fee on the unused balance ranging from 0.2% to 0.5% on the difference between the revolving commitment and revolving advances outstanding. At October 31, 1999 and 1998, the Company had letters of credit of $1.3 million and $2.3 million issued under this credit facility.
Aggregate maturities of long-term debt during the fiscal years subsequent to October 31, 1999 are as follows:
8. INCOME TAXES
The provision for income taxes computed by applying the federal statutory tax rate to income before income taxes and minority interest differs from the actual provision for income taxes as set forth below for the years ended October 31:
The provision for income taxes consists of the following:
The components of the deferred tax assets (liabilities) consist of the following at October 31:
Management believes that no valuation allowance against net deferred tax benefits is necessary. Deferred U.S. federal income taxes are not provided on certain undistributed earnings of foreign subsidiaries as management plans to continue
reinvesting these earnings outside the United States. Determination of such tax amounts is not practical because potential offset by U.S. foreign tax credits would be available under various assumptions involving the tax calculation.
9. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under noncancellable lease agreements during the years subsequent to October 31, 1999 are as follows:
During the years ended October 31, 1999, 1998, and 1997, the Company incurred rent expense of approximately $12,684,000, $8,642,000, and $8,468,000 respectively.
On November 3, 1997, Bradco Supply Corporation ("Bradco") of Avenel, New Jersey filed suit against the Company in the Superior Court of New Jersey, alleging various contractual claims arising out of the terms of a letter of intent dated October 2, 1997 executed by Bradco and the Company pertaining to the acquisition of Bradco by the Company. Bradco has alleged, among other things, a breach and unilateral termination of the letter of intent by the Company and seeks to recover as damages a $3 million "walk-away" fee under the terms of the letter of intent. In December 1997, the Company removed the Bradco lawsuit to the United States District Court, New Jersey District. Thereafter, the Company filed a counterclaim for fraud, among other claims, seeking to recover its out of pocket transaction expenses. Management believes the Bradco action is without merit and has maintained a vigorous defense and counterclaim to date. However, an adverse resolution could result in an after-tax charge to income of up to $2 million. In September 1998, the Company filed an alternate motion to dismiss or for judgment on the pleadings, which was denied by the Court in early 1999. Thereafter, each of the Company and Bradco have filed motions for summary judgment on the merits of the lawsuit and the counterclaim, respectively. The Court has yet to rule on the motions for summary judgment. Discovery in the case is substantially complete. The Court has ruled on certain pretrial motions, but has not yet set a date for trial, pending its ruling on summary judgment. There is no indication from the Court when this will occur.
In January 1998, a subsidiary of the Company and three of its employees were subpoenaed to provide information to a grand jury of the United States District Court, Northern District of Texas, in connection with an investigation of possible violations of federal antitrust laws in the aluminum building products industry, including possible violations of Section 1 of the Sherman Act. No allegations of wrongdoing have been made against the subsidiary, the employees or the Company. In February 1998, information was provided in response to the subpoenas and the grand jury appearance was postponed indefinitely. In November 1998, the Company's three employees were again notified to appear before a federal grand jury in Ft. Worth, Texas. Such appearance was again postponed indefinitely. Thereafter, the U.S. Attorney's office agreed to an informal interview with an officer of the Company in lieu of formal grand jury testimony. The interview was conducted in June 1999. After the interview, the U.S. Attorney requested additional information from the subsidiary. There has been no further activity since the Company provided these materials to the government in August 1999.
From time to time, the Company is also involved in litigation and proceedings in the ordinary course of its business. Management believes that such ordinary course of business litigation will not have a material adverse effect on the Company's financial condition or results of operations.
10. CAPITAL STOCK AND NET INCOME PER SHARE
During fiscal 1995, the Company's board of directors authorized the repurchase of up to 750,000 shares of the Company's common stock. During fiscal 1998, the Company's board of directors authorized the repurchase of an additional 750,000 shares of the Company's common stock. Through October 31, 1998, the Company had repurchased 1,189,911 shares of the Company's common stock at an average price per share of $11.46. No shares were repurchased during fiscal 1999.
A reconciliation of the numerators and denominators of the basic and diluted EPS computations is as follows:
11. EMPLOYEE AND DIRECTOR STOCK OPTION AND PURCHASE PLANS
The Company's Stock Incentive Plan and 1996 Stock Incentive Plan (collectively referred to as the "Incentive Plans") provide for the issuance of options, phantom shares, stock awards, stock appreciation rights, performance unit awards or dividend equivalent rights. Options, which constitute the only issuances under the Incentive Plans, have generally been granted at fair market value of the Company's common stock on the date of grant.
Summary of Stock Options Outstanding at October 31, 1999:
STOCK OPTIONS OUTSTANDING
The following table summarizes the Company's Incentive Plans stock option activity:
During 1997, 9,000 options were granted under the incentive plan to nonmanagement directors at less than fair market value of the Company's common stock and $63,000 in compensation expenses was recorded. None were granted to nonmanagement directors in 1999 or 1998. These options generally vest over six-month to three-year periods and expire within ten years of grant date. Such options are included in the tables above.
On December 1, 1998, the Company canceled 120,000 stock options with a weighted average exercise price of $19.00 and reissued 120,000 stock options with a weighted average exercised price of $13.00 for three executive officers of the Company. Approximately 40,000 of such repriced options were canceled and not reissued in May 1999 upon the resignation of one of these executive officers.
A NonManagement Directors Plan (the "Directors Plan") provides for the issuance of up to 25,000 options to purchase shares at an exercise price equal to fair market value of the Company's common stock on date of grant. The following table summarizes the Company's Directors Plan stock option activity:
At October 31, 1999, 529,626 and 12,000 additional options were available for future grant under the Incentive and Directors' Plans, respectively, and 2,180,244 shares of common stock were reserved for issuance upon the exercise of outstanding options or future option grants under all plans.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for its stock option plans. Accordingly, compensation expense is recognized for
the Company's stock option plans, except as noted above, since the exercise price of the Company's stock option grants was the fair market value of the underlying stock on the date of grant only for those grants of stock options share the exercise price is lower than the fair market value on the grant date.
The Company has adopted the pro forma disclosure features of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). As required by SFAS No. 123, pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options granted subsequent to November 1, 1995, using the fair value method prescribed by SFAS No. 123. Pro forma disclosures for 1999, 1998 and 1997 are presented below. Because the SFAS No. 123 method of accounting has not been applied to options granted prior to November 1, 1995, the pro forma effect will not be fully reflected until 2000.
The estimated fair value of options granted during 1999, 1998 and 1997 was $5.64, $8.15 and $7.38 per share, respectively. For the purpose of determining fair value of each option, the Company used the Black-Scholes model with the following assumptions:
During fiscal 1995, the Company adopted an Employee Stock Purchase Plan under which employees are granted a right to purchase shares of the Company's common stock. The purchase price is 85% of the fair market value of the stock at the end of the quarter. Shares were purchased at prices ranging from $9.00 to $13.06 during fiscal 1999 and $11.19 to $18.63 during fiscal 1998. At October 31, 1999 and 1998, there were 112,587 and 150,930 shares of common stock reserved for purchase under the plan.
On August 19, 1997, the Board of Directors of the Company adopted a shareholders rights plan and declared a dividend distribution of one Right for each outstanding share of the Company's common stock to stockholders of record at the close of business on September 10, 1997. Each Right entitles the registered holder to purchase from the Company 1/10,000 of a share of Series A Preferred Stock (the "Preferred Stock") at a purchase price of $72 per 1/10,000 of a share, subject to adjustment. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. The Rights will separate from the Common Stock upon the earlier of (i) ten business days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired or obtained the right to acquire beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date") or (ii) ten business days (or such later date as the Board of Directors determines) following the commencement of a tender or exchange offer that would result in a person or group beneficially owning 15% or more of such outstanding shares of Common Stock. The date the Rights separate is referred to as the "Distribution Date".
In the event that any person or group becomes an Acquiring Person, each holder of a Right (other than the Acquiring Person and certain related parties) will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the Purchase Price of the Right. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such
person or group of 50% or more of the outstanding shares of Common Stock, the Board of Directors of the Company may, without payment of the Purchase Price by the holder, exchange the rights (other than Rights owned by such person or group, which will become void), in whole or in part, for shares of Common Stock at an exchange ratio of one-half the number of shares of Common Stock (or in certain circumstances, Preferred Stock) for which a Right is exercisable immediately prior to the time of the Company's decision to exchange the Rights (subject to adjustment). At any time until ten business days following the Stock Acquisition Date, the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (payable in cash, shares of Common Stock or other considerations deemed appropriate by the Board of Directors). Immediately upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $0.001 redemption price. The rights expire on September 10, 2007.
12. EMPLOYEE BENEFITS
The Company has 401(k) plans that cover substantially all employees. The Company's funding target is to match the employee's contributions up to 4% of the employee's base salary, not to exceed certain allowable limits. Employees vest in Company contributions evenly over four years. The Company's contributions for the years ended October 31, 1999, 1998 and 1997 were $1,257,000, $1,183,000 and $916,000.
13. FINANCIAL INSTRUMENTS
The Company is, from time to time, a party to financial instruments with off-balance sheet risk in the normal course of business to hedge against changes in interest and foreign currency exchange rates. The Company may reduce its exposure to fluctuations in interest and foreign currency exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company party to highly leveraged derivatives. These financial instruments include interest rate and foreign currency swap agreements. The instruments involve, to varying degrees, elements of interest and foreign currency exchange rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Company controls the risk of its hedging agreements, interest rate and foreign currency swaps through approvals, limits and monitoring procedures.
The following disclosure of the estimated fair value of financial instruments is made in accordance with Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company, using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts.
The carrying amount and fair value of certain financial instruments consist of the following at October 31:
Cash and cash equivalents, accounts receivable, accounts payable and current maturities of debt . The carrying amounts of these items approximate their fair value due to their short-term nature or are the amounts payable on demand.
Line of credit; long-term debt and foreign currency swap. Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value of debt. The fair value of the foreign currency swap was estimated using market quotes.
The fair value estimates presented herein are based on pertinent information available to management as of October 31, 1999 and 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the date presented, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.
14. SEGMENT INFORMATION
In 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." The Company adopted this statement at November 1, 1998. Adoption of the standard has no impact on net income.
The Company operates its business using four reportable segments. These segments represent distinct operating subsidiaries of the Company. The segments include Wm. Cameron & Co., CA Canada, Inc., Ashley Aluminum, L.L.C., and all other. The segments are managed separately because of their geographical locations and their differing products and services. Each of these businesses requires distinct operating and marketing strategies. Management reviews the performance of the Company based on these operating segments.
The Wm. Cameron & Co. segment is engaged in distribution, marketing, selling and manufacturing of building products within the continental United States. The CA Canada, Inc. segment is engaged in distribution, marketing, selling and manufacturing of building products within Canada. The Ashley Aluminum, L.L.C., segment manufactures, markets, and distributes various building material products, including pool and patio enclosure materials. The corporate and other segment includes Field Marketing, Inc. and corporate support staff services.
The segments are measured on operating profits before interest expense, income taxes and minority interest. Certain expenses are allocated to the operating segments. For some of these allocated expenses, the related assets and liabilities remain in the corporate and other segment. The segments follow the same accounting principles described in the Summary of Significant Accounting Policies. Sales between the segments are recorded primarily at market prices.
No single customer accounts for 10% or more of consolidated trade sales. An analysis of operations by segment for the years ended October 31, 1999 and October 31, 1998, is as follows:
15. CONSULTING AGREEMENTS
The Company had an agreement which expired in December 1998 with an affiliate of a major shareholder for financial and management consulting services to be provided to the Company. This agreement, executed in November 1996, amended and superseded prior consulting agreements with the Company's operating subsidiaries. Fees under these agreements with the Company and its operating subsidiaries paid during the fiscal years ended October 31, 1999, 1998 and 1997, totaled $72,000, $180,000 and $280,000, respectively.
16. SUBSEQUENT EVENTS
On January 18, 2000, the Company announced that it has entered into a definitive agreement whereby an investment group consisting of CGW Southeast Partners IV, L.P. and an affiliate of Citicorp Venture Capital, Ltd., a subsidiary of Citigroup Inc., along with senior management of the Company will acquire all the outstanding shares of Cameron Ashley's common stock at a price of $15.10 per share in cash. The total consideration of the proposed transaction is approximately $320 million including the assumption of debt. Financing commitments, subject to customary conditions, are in place with both senior and subordinated debt sources, and the transaction is expected to close in the second calendar quarter of 2000. The Company entered into the agreement following the unanimous recommendation by the
Special Committee, comprised of independent directors of the Company. Credit Suisse First Boston advised the Special Committee in this transaction. CGW Southeast Partners I, L.P., an affiliate of CGW Southeast Partners IV, L.P., currently owns approximately 11% of the Company's outstanding shares. CGW Southeast Partners IV, L.P., is a private equity fund which supports management teams in middle-market acquisitions and recapitalizations, and is managed by Atlanta, Georgia, based Cravey, Green & Wahlen, Inc. Two directors of the Company are affiliated with the CGW-related entities.
The closing of the merger is subject to regulatory and stockholder approval and customary conditions to closing. The agreement includes a $5 million breakup fee. The Company will file for review by the Securities and Exchange Commission a proxy statement to be mailed to stockholders in connection with a stockholder meeting that will be called to consider the merger.
On January 24, 2000 a stockholder of the Company filed suit in the Superior Court of Fulton County, Georgia against the Company and its individual directors alleging, among other things, breach of fiduciary duties and unfair dealing in connection with the proposed merger transaction and seeking to enjoin the merger and, alternatively, damages. The stockholder is also seeking class action status and to be certified as the class representative. The Company believes that this cause of action is without merit and will contest the plaintiff's claims by all available means.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Director and Nominee Information", "Executive Officers of the Company" and "Section 16(a) Beneficial Owner Reporting Compliance" appearing in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders sets forth certain information with respect to the directors and executive officers of the Company and is incorporated herein by reference. Certain information with respect to the executive officers of the Registrant is included elsewhere in Part I hereof under the caption "Executive Officers of the Registrant".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders sets forth certain information with respect to the compensation of management of the Registrant and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Principal Shareholders of the Company" and "Election of Directors" appearing in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders set forth certain information with respect to the ownership of the Registrant's Common Stock and are incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Compensation Committee Interlocks and Insider Participation" appearing in the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders sets forth certain information with respect to these matters and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS INCORPORATED BY REFERENCE OR FILED WITH THIS REPORT;
The exhibits listed below are filed with or incorporated by reference into this Annual Report on Form 10-K. The exhibits which are denominated with an asterisk (*) were previously filed as part of, and are hereby incorporated by reference from, the Company's Registration Statement on Form S-1 (No. 33-75054) filed with the Commission on February 8, 1994 and effective on March 24, 1994. Other exhibits denominated with numbered footnotes are incorporated by reference to the other filings with the Commission set forth below. Unless otherwise indicated, the exhibit number corresponds to the exhibit number incorporated by reference. ITEMS LISTED IN ALL CAPS AND BOLDFACE CONSTITUTE MANAGEMENT CONTRACTS OR COMPENSATORY PLANS OR ARRANGEMENTS.
(1) Incorporated by reference to the exhibit filed with the Company's Registration Statement on Form S-1, (No. 33- 88778) filed with the Commission on January 26, 1995 and effective on March 2, 1995.
(2) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 1995, filed with the Commission on March 17, 1995.
(3) Incorporated by reference to Exhibit 4.2 filed with the Company's Registration Statement on Form S-8 (No. 33- 90782) filed with the Commission on March 30, 1995.
(4) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1996 filed with the Commission on June 7, 1996.
(5) Incorporated by reference to the exhibited filed with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 filed with the Commission on January 29, 1997.
(6) Incorporated by reference to the exhibit filed with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997 filed with the Commission on January 29, 1998.
(7) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1998 filed with the Commission on June 2, 1998.
(8) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 1998 filed with the Commission on September 14, 1998.
(9) Incorporated by reference to the exhibit filed with the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998.
(10) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 1999.
(11) Incorporated by reference to the exhibit filed with the Company's Quarterly Report on Form 10-Q/A for the fiscal quarter ended July 31, 1999.
(12) Incorporated by reference to the exhibit filed with the Company's current report on Form 8-K dated August 19, 1997 filed with the Commission on August 25, 1997.
(13) Incorporated by reference to the exhibit filed with the Company's Amended Quarterly Report on Form 10-Q/A for the fiscal quarter ended July 31, 1999.
(14) Incorporated by reference to the exhibit filed with the Company's current report on Form 8-K dated January 20, 2000.
(b) Current Reports on Form 8-K: No Current Reports on Form 8-K were filed by the Registrant during the fourth quarter of the fiscal year ended October 31, 1999.
(c) Exhibits: The Index to Exhibits filed or incorporated by reference pursuant Item 601 of Regulation S-K and the Exhibits being filed with this Report are included following the signature pages to this Form 10-K.
(d) Financial Statements of Subsidiaries or Affiliates: Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on January 25, 2000.
CAMERON ASHLEY BUILDING PRODUCTS, INC.
By: /s/ Garold E. Swan ------------------ Garold E. Swan Executive Vice President and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Garold E. Swan and John S. Davis, jointly and severally, his attorney-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits there to and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following person on behalf of the Registrant and in the capacities indicated on January 25, 2000.
SIGNATURE TITLE
/s/ Ronald R. Ross Chairman of the Board and Chief Executive Officer - ------------------- (Principal Executive Officer) Ronald R. Ross
/s/ Walter J. Muratori President and Director - ----------------------- Walter J. Muratori
/s/ Garold E. Swan Executive Vice President and Chief Financial Officer - ----------------------- (Principal Financial and Accounting Officer) Garold E. Swan
/s/ J. Veronica Biggins Director - ------------------------ J. Veronica Biggins
/s/ Richard L. Cravey Director - ---------------------- Richard L. Cravey
/s/ Harry K. Hornish Director - --------------------- Harry K. Hornish
/s/ Lawrence P. Klamon Director - ----------------------- Lawrence P. Klamon
/s/ Alan K. Swift Director - ------------------ Alan K. Swift
/s/ Edwin A. Wahlen, Jr. Director - ------------------------ Edwin A. Wahlen, Jr.
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of Cameron Ashley Building Products, Inc.:
We have audited the consolidated financial statements of Cameron Ashley Building Products, Inc. and subsidiaries as of October 31, 1999 and 1998 and for each of the three years in the period ended October 31, 1999 and have issued our report thereon dated December 22, 1999, (January 24, 2000, as to Note 16). Our audits also included the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP Dallas, Texas, December 22, 1999
SCHEDULE II
(1) Amount represents the allowance for doubtful accounts of acquired businesses as of the date of acquisition.
INDEX TO EXHIBITS
(Includes only exhibits not incorporated by reference. See item 14 for incorporated exhibits.)