FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED __________
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM OCTOBER 1, 1998 TO DECEMBER 31, 1998
COMMISSION FILE NUMBER: 001-13931
PENTACON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0531585
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10375 RICHMOND AVENUE, SUITE 700 HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-860-1000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT, PAR VALUE $.01 PER SHARE,
OUTSTANDING AT JANUARY 31, 1999 WAS 16,668,129.
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Historical Consolidated Balance Sheets - Pentacon, Inc. as of
December 31, 1998 and September 30, 1998.....................3
Consolidated Statements of Operations - Pentacon, Inc. Historical
for the Three Months ended December 31, 1998 and 1997
and Pro Forma for the Three Months ended
December 31, 1998 and 1997...................................4
Historical Consolidated Statements of Cash Flows - Pentacon, Inc.
for the Three Months ended December 31, 1998 and 1997........6
Notes to Consolidated Financial Statements.........................7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................12
Part II - Other Information
Item 6 - Exhibits and Reports...........................................18
Signature...............................................................18
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENTACON, INC.
HISTORICAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
(Unaudited)
(in thousands, except share data)
ASSETS
Cash and cash equivalents ........................... $ 744 $ 835
Accounts receivable ................................. 34,610 40,670
Inventories ......................................... 116,390 112,392
Deferred income taxes ............................... 4,216 4,430
Other current assets ................................ 897 923
-------- --------
Total current assets ....................... 156,857 159,250
Property and equipment, net of accumulated
depreciation ..................................... 7,404 7,077
Goodwill, net of accumulated amortization ........... 134,528 135,381
Deferred income taxes ............................... 672 670
Other assets ........................................ 1,892 2,013
-------- --------
Total assets ............................... $301,353 $304,391
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .................................... $ 33,895 $ 30,314
Accrued expenses .................................... 8,875 7,281
Income taxes payable ................................ 3,384 1,988
Current maturities of long-term debt ................ 31,957 51,513
-------- --------
Total current liabilities .................. 78,111 91,096
Long-term debt, net of current maturities ........... 106,632 98,381
-------- --------
Total liabilities .......................... 184,743 189,477
Preferred stock, $.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding ..... -- --
Common stock, $.01 par value, 51,000,000
shares authorized, 16,668,129 shares issued
and outstanding .................................. 167 167
Additional paid in capital .......................... 100,501 100,436
Retained earnings ................................... 15,942 14,311
-------- --------
Total stockholders' equity ................. 116,610 114,914
-------- --------
Total liabilities and stockholders' equity . $301,353 $304,391
======== ========
The accompanying notes are an integral part of these statements.
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------
December 31,
--------------------------
1998 1997
--------- ---------
(in thousands, except
per share data)
Revenues ................................... $ 66,720 $ 14,502
Cost of sales .............................. 45,021 8,555
-------- --------
Gross profit ..................... 21,699 5,947
Operating expenses ......................... 14,575 5,397
Goodwill amortization ...................... 853 20
-------- --------
Operating income ................. 6,271 530
Other (income) expense, net ................ (7) (13)
Interest expense ........................... 3,102 295
-------- --------
Income before taxes .............. 3,176 248
Income taxes ............................... 1,545 103
-------- --------
Net income ....................... $ 1,631 $ 145
======== ========
Net income per share:
Basic ............................ $ 0.10 $ 0.05
Diluted .......................... $ 0.10 $ 0.05
The accompanying notes are an integral part of these statements.
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------
December 31,
--------------------------
1998 1997
------- --------
(in thousands, except
per share data)
Revenues .................................... $ 66,720 $ 39,042
Cost of sales ............................... 45,021 25,367
-------- --------
Gross profit ...................... 21,699 13,675
Operating expenses .......................... 14,575 10,799
Goodwill amortization ....................... 853 374
-------- --------
Operating income .................. 6,271 2,502
Other (income) expense, net ................. (7) 8
Interest expense ............................ 3,102 246
-------- --------
Income before taxes ............... 3,176 2,248
Income taxes ................................ 1,590 1,075
-------- --------
Net income ........................ $ 1,586 $ 1,173
======== ========
Net income per share:
Basic ............................. $ 0.10 $ 0.08
Diluted ........................... $ 0.10 $ 0.08
The accompanying notes are an integral part of these statements.
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
----------------------
December 31,
----------------------
1998 1997
-------- --------
(in thousands)
Cash Flows From Operating Activities:
Net income .................................. $ 1,631 $ 145
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ............... 1,487 45
Deferred income taxes ....................... 212 1
Loss on disposal of assets .................. 5 --
Changes in operating assets and liabilities:
Accounts receivable ..................... 6,060 (715)
Inventories ............................. (3,998) (1,852)
Other current assets .................... 26 --
Accounts payable and accrued expenses ... 5,175 1,730
Income taxes payable .................... 1,396 (179)
Other assets and liabilities, net ....... (4) --
-------- --------
Net cash provided by (used in)
operating activities .................... 11,990 (825)
Cash Flows From Investing Activities:
Capital expenditures ........................ (795) (85)
Other ....................................... 1 (71)
-------- --------
Net cash used in investing activities ..... (794) (156)
Cash Flows From Financing Activities:
Principal payments on debt .................. (19,105) (52)
Borrowings of debt .......................... 7,800 300
Debt issuance costs ......................... 18 --
-------- --------
Net cash provided by (used in) financing
activities .............................. (11,287) 248
Decrease in cash and cash equivalents ................ (91) (733)
Cash and cash equivalents, beginning of period ....... 835 733
-------- --------
Cash and cash equivalents, end of period ............. $ 744 $ --
======== ========
The accompanying notes are an integral part of these statements.
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
Pentacon, Inc. ("Pentacon" or the "Company") was incorporated in March
1997. On March 10, 1998, Pentacon and separate wholly-owned subsidiaries
acquired in separate transactions, simultaneously with the closing of its
initial public offering (the "Offering") of its common stock, five businesses
(the "Initial Acquisitions"): Alatec Products, Inc. (Alatec), AXS Solutions,
Inc. (AXS), Capitol Bolt & Supply, Inc. (Capitol), Maumee Industries, Inc.
(Maumee), and Sales Systems, Limited (SSL), collectively referred to as the
"Founding Companies." The consideration for the Initial Acquisitions consisted
of a combination of cash and common stock. Because (i) the stockholders of the
Founding Companies owned a majority of the outstanding shares of Pentacon common
stock following the Offering and the Initial Acquisitions, and (ii) the
stockholders of Alatec received the greatest number of shares of Pentacon common
stock among the stockholders of the Founding Companies, for financial statement
presentation purposes, Alatec has been identified as the accounting acquiror.
The acquisitions of the remaining Founding Companies have been accounted for
using the purchase method of accounting. Therefore Alatec's historical financial
statements for all periods prior to March 10, 1998 are presented as the
historical financial statements of the registrant. Unless the context otherwise
requires, all references herein to the Company include Pentacon and the Founding
Companies. The allocations of the purchase price to the assets acquired and
liabilities assumed of the Founding Companies has been initially assigned and
recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available.
In October 1998, the Company changed its year end from September 30 to
December 31. This Transition Report on Form 10-Q is filed for the three-month
transition period. The accompanying unaudited financial statements are prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and footnotes required by generally accepted accounting
principles for complete financial statements are not included herein. The
Company believes all adjustments necessary for a fair presentation of these
statements have been included and are of a normal and recurring nature. The
statements should be read in conjunction with the financial statements and
related notes thereto included in the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998.
The pro forma financial information for the three months ended December
31, 1998 and 1997 includes the results of Pentacon combined with the Founding
Companies as if the Initial Acquisitions had occurred at the beginning of each
respective three-month period. The pro forma financial information includes the
effects of (i) the Initial Acquisitions (ii) the Offering (iii) certain
reductions in salaries and benefits to the former owners of the Founding
Companies to which they agreed prospectively (iv) certain reductions in lease
expense paid to the former owners of the Founding Companies to which they agreed
prospectively (v) elimination of non-recurring, non-cash compensation charges
related to common stock issued to management (vi) amortization of goodwill
resulting from the Initial Acquisitions and (vii) advances under the Credit
Facility (see Note 4) including decreases in interest expense resulting from the
repayment or refinancing of the Founding Companies' debt and (viii) adjustments
to the provisions for federal and state income taxes. Acquisitions subsequent to
the Offering ("Subsequent Acquisitions") are included in the Historical and Pro
Forma Consolidated Statements of
Operations only for those periods subsequent to the dates of acquisition. The
pro forma financial information may not be comparable to and may not be
indicative of the Company's post-acquisition results of operations because the
Founding Companies were not under common control or management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There has been no significant change in the accounting policies of the
Company during the periods presented. For a description of these policies, refer
to Note 1 of the Notes to Consolidated Financial Statements of Pentacon included
in the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1998.
3. ACQUISITIONS
During the year ended December 31, 1998, the Company completed four
acquisitions in addition to the acquisitions of the Founding Companies. In May
1998, the Company acquired Pace Products, Inc., a distributor of fasteners and
other small parts which also provides inventory procurement and management
services primarily to the telecommunications industry. In June 1998, the Company
acquired D-Bolt Company Inc., a distributor of fasteners and other small parts
primarily to the fabrication, construction and mining industries. In July 1998,
the Company acquired Texas International Aviation, Inc., a distributor of
fasteners and other small parts which provides inventory procurement and
management services primarily to the aerospace industry. In September 1998, the
Company acquired ASI Aerospace Group, Inc., a distributor of fasteners and other
small parts which provides inventory procurement and management services
primarily to the aerospace industry. The consideration paid consisted of an
aggregate of 1,134,010 shares of Common Stock and approximately $77.0 million in
cash. The acquisitions were accounted for using the purchase method of
accounting and the results of operations of the acquired companies are included
from the date of acquisition. The allocations of purchase price to the assets
acquired and liabilities assumed has been initially assigned and recorded based
on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available.
If all acquisitions completed during the year ended December 31, 1998,
including the Founding Companies, were effective on the first day of the period
being reported, the unaudited pro forma revenues, gross margin, operating income
and net income would have been:
Three Months Ended
December 31,
---------------------
1998 1997
--------- ---------
(in thousands, except
share data)
Revenues .................. $ 66,720 $ 65,345
Gross margin .............. 21,669 21,501
Operating income .......... 6,271 5,487
Net income ................ 1,586 1,335
Net income per share:
Basic ................... $ 0.10 $ 0.08
Diluted ................. $ 0.10 $ 0.08
4. CREDIT FACILITY
The Company has a credit agreement with a group of banks (the "Credit
Facility"). The Credit Facility provides the Company with a revolving line of
credit of up to $110 million ($90 million on or after March 15, 1999), which may
be used for general corporate purposes, future acquisitions, capital
expenditures and working capital and a revolving term loan of $40 million. The
Credit Facility is secured by Company stock and assets. Advances under the
Credit Facility bear interest at the banks' designated variable rate plus a
margin of 100 points. At the Company's option, the loans may bear interest based
on a designated London interbank offering rate plus a margin of 300 basis
points. Commitment fees of 50 basis points per annum are payable on the unused
portion of the line of credit. The Credit Facility contains a provision for
standby letters of credit up to $5.0 million. The Credit Facility prohibits the
payment of dividends by the Company, restricts the Company's incurring or
assuming other indebtedness and requires the Company to comply with certain
financial covenants including a minimum net worth and minimum fixed charge
ratio. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable December 31, 2001. At December 31,
1998, the Company has approximately $14.6 million available under the Credit
Facility.
The Credit Facility also contains provisions for quarterly reductions in
the ratio of the Company's interest-bearing debt to its pro forma trailing
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the previous four quarters. Based upon the Company's projections of the ensuing
year's pro forma trailing EBITDA, a portion of the borrowings under the Credit
Facility has been classified as current liabilities. Management is exploring
alternatives to obtain additional capital and/or debt, or refinance all or a
portion of its existing debt, in order to remain in compliance with these
covenants. Although management believes that it will be able to obtain such
additional capital or debt or will be able to refinance its existing debt, there
can be no assurances that sufficient funds will be available to the Company at
the time it is required or on terms acceptable to the Company. Failure of the
Company to obtain such additional capital or debt, or to refinance its existing
debt, would have a material and adverse effect on the Company.
5. CAPITAL STOCK
On March 10, 1998, the Company completed the Offering, which involved the
sale by the Company of 5,980,000 shares of common stock at a price to the public
of $10.00 per share, including 780,000 shares pursuant to an over-allotment
option granted by the Company to the underwriters in connection with the
Offering. The net proceeds to the Company from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$50.8 million. Of this amount, $21.9 million (net of cash acquired) was used to
pay the cash portion of the purchase price relating to the Initial Acquisitions
with the remainder being used to pay certain indebtedness of the Founding
Companies, make capital expenditures and fund working capital requirements.
On April 20, 1998, the Company's registration statement covering 3,350,000
additional shares of common stock for use in connection with future acquisitions
was declared effective.
6. EARNINGS PER SHARE
The historical period ended December 31, 1997 represents the results of
operations of Alatec under its historical capital and income tax structure.
Accordingly, the shares of common stock attributable to Alatec are presented to
calculate earnings per share for this period. Pro forma net income per share for
the period ended December 31, 1997 is computed based on the weighted average
shares of common stock outstanding assuming the Initial Acquisitions and
Offering occurred at the beginning of the period. The computation of historical
and pro forma net income per share for the three-month period ended December 31,
1998 is based on the weighted average shares of common stock outstanding, which
includes shares:
Issued in consideration for Initial Acquisitions.......... 6,720,000
Sold pursuant to the Offering and the over-allotment...... 5,980,000
Issued to McFarland, Grossman Capital Ventures II, L.C.... 2,295,000
Issued to management and directors........................ 539,119
Issued in connection with Subsequent Acquisitions......... 1,134,010
----------
16,668,129
Basic and diluted historical net income per share is computed based on
the following information:
Three Months Ended
-----------------------
December 31,
-----------------------
1998 1997
------- -------
BASIC: (in thousands)
Net income ..................................... $ 1,631 $ 145
======= =======
Average common shares .......................... 16,668 2,969
======= =======
DILUTED:
Net income ..................................... $ 1,631 $ 145
======= =======
Average common shares .......................... 16,668 2,969
Common share equivalents:
Warrants ................................... -- --
Options .................................... -- --
------- -------
Total common share equivalents ......... -- --
------- -------
Average common shares and
common share equivalents .................. 16,668 2,969
======= =======
Basic and diluted pro forma net income per share is computed based on the
following information:
Three Months Ended
-----------------------
December 31,
-----------------------
1998 1997
------- -------
(in thousands)
BASIC:
Net income ..................................... $ 1,586 $ 1,173
======= =======
Average common shares .......................... 16,668 15,530
======= =======
DILUTED:
Net income ..................................... $ 1,586 $ 1,173
======= =======
Average common shares .......................... 16,668 15,530
Common share equivalents:
Warrants ................................... -- 20
Options .................................... -- --
------- -------
Total common share equivalents ......... -- 20
------- -------
Average common shares and
common share equivalents .................. 16,668 15,550
======= =======
7. INCOME TAXES
The provision for income taxes included in the Historical Consolidated
Statement of Operations for the three-month period ended December 31, 1998
assumes the application of statutory federal and state income tax rates, the
non-deductibility of goodwill amortization and the non-deductibility of
compensation related to common stock sold to management. The provision for
income taxes included in the Historical Consolidated Statement of Operations for
the three-month period ended December 31, 1997 reflects the activity of the
accounting acquiror prior to the Initial Acquisitions. The provision for income
taxes included in the Pro Forma Consolidated Statements of Operations for the
three-month periods ended December 31, 1998 and 1997 assumes the application of
statutory federal and state income tax rates and the non-deductibility of
goodwill amortization.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. While it is not possible to predict the outcome
of such proceedings with certainty, in the opinion of the Company, all such
proceedings are either adequately covered by insurance or, if not so covered,
should not ultimately result in any liability which would have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
PENTACON, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the financial
statements of the Company and related notes thereto and management's discussion
and analysis of financial condition and results of operations related thereto
which are included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998. This discussion contains forward-looking
statements that are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. Key factors that could cause actual
results to differ materially from expectations include, but are not limited to
(i) estimates of costs or projected or anticipated changes to cost estimates
relating to entering new markets or expanding in existing markets (ii) changes
in economic and industry conditions (iii) changes in regulatory requirements
(iv) changes in interest rates (v) levels of borrowings under the Company's
Credit Facility (vi) accumulation of excess inventories by certain customers in
the aerospace industry and (vii) volume or price adjustments with respect to
sales to major customers. These and other risks and assumptions are described in
the Company's reports that are available from the United States Securities and
Exchange Commission.
RESULTS OF OPERATIONS
In October 1998, the Company changed its year end from September 30 to
December 31. This Transition Report on Form 10-Q is filed for the three month
transition period.
The pro forma financial information for the three months ended December
31, 1998 and 1997 includes the results of Pentacon combined with the Founding
Companies as if the Initial Acquisitions had occurred at the beginning of each
respective three-month period. The pro forma financial information includes the
effects of (i) the Initial Acquisitions (ii) the Offering (iii) certain
reductions in salaries and benefits to the former owners of the Founding
Companies to which they agreed prospectively (iv) certain reductions in lease
expense paid to the former owners of the Founding Companies to which they agreed
prospectively (v) elimination of non-recurring, non-cash compensation charges
related to common stock issued to management (vi) amortization of goodwill
resulting from the Initial Acquisitions and (vii) advances under the Credit
Facility (see Note 4 to the Financial Statements) including decreases in
interest expense resulting from the repayment or refinancing of the Founding
Companies' debt and (viii) adjustments to the provisions for federal and state
income taxes. Subsequent Acquisitions are included in the Pro Forma Consolidated
Statements of Operations only for those periods subsequent to the dates of
acquisition. The pro forma financial information may not be comparable to and
may not be indicative of the Company's post-acquisition results of operations
because the Founding Companies were not under common control or management.
Quarterly results may also be materially affected by the timing and
magnitude of acquisitions, assimilation costs, costs of opening new facilities,
gain or loss of a material customer and variation in product mix. Accordingly,
the operating results for any three-month period are not necessarily indicative
of the results that may be achieved for any subsequent three-month month period
or for a full year.
PRO FORMA THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
The following table sets forth certain selected pro forma financial data
as a percentage of pro forma revenues for the periods indicated:
Pro Forma
Three Month Period Ended
December 31,
-----------------------------------
1998 1997
---------------- -----------------
(dollar amounts in thousands)
Revenues ................................. $ 66,720 100.0% $ 39,042 100.0%
Cost of sales ........................... 45,021 67.5 25,367 65.0
------- ----- ------- -----
Gross profit .......... 21,699 32.5 13,675 35.0
Operating expenses ....................... 14,575 21.8 10,799 27.6
Goodwill amortization .................... 853 1.3 374 1.0
------- ----- ------- -----
Operating income ...... 6,271 9.4 2,502 6.4
REVENUES
Pro forma revenues increased 71.0% to $66.7 million for the three months
ended December 31, 1998 from $39.0 million for the three months ended December
31, 1997. The increase in pro forma revenues was attributable primarily to the
Subsequent Acquisitions and, to a lesser extent, internal revenue growth of the
Founding Companies. The increase in the Founding Companies' pro forma revenues
resulted primarily from increases in sales to existing customers. However, the
internal growth rate of the Founding Companies' revenues was adversely affected
during the three months ended December 31, 1998 due to reduced sales into the
agricultural equipment market and essentially no increase in sales to a large
aerospace customer.
COST OF SALES
Pro forma cost of sales increased $19.6 million, or 77.2%, to $45.0
million for the three months ended December 31, 1998 from $25.4 million for the
three months ended December 31, 1997. As a percentage of pro forma revenues, pro
forma cost of sales increased from 65.0% in the three months ended December 31,
1997 to 67.5% in the three months ended December 31, 1998. The increase in pro
forma cost of sales as a percentage of pro forma revenues was a result of an
increase at the Founding Companies and lower margins historically attained by
the Subsequent Acquisitions. The increase at the Founding Companies primarily
results from decreases in margins attained with an existing customer supplying
the agricultural equipment market and lower margins experienced with a new
customer.
OPERATING EXPENSES
Pro forma operating expenses increased $3.8 million, or 35.2%, to $14.6
million for the three months ended December 31, 1998 from $10.8 million for the
three months ended December 31, 1997. As a percentage of pro forma revenues, pro
forma operating expenses decreased to 21.8% for the three months ended December
31, 1998 from 27.6% for the three months ended December 31, 1997. Pro forma
operating expenses as a percentage of pro forma revenues for the Founding
Companies decreased from 27.6% for the three months ended December 31, 1997 to
25.7% for the three months ended December 31, 1998. The decrease was primarily
attributable to reductions in personnel and related costs while maintaining a
level volume of sales. In addition, the Company incurred lower sales commissions
as a result of decreased international
sales. The percentage of pro forma operating expenses compared to pro forma
revenues incurred by Subsequent Acquisitions caused the remainder of the
decrease.
OPERATING INCOME
Due to the factors discussed above, pro forma operating income increased
$3.8 million to $6.3 million for the three months ended December 31, 1998 from
$2.5 million for the three months ended December 31, 1997. As a percentage of
pro forma revenues, pro forma operating income increased to 9.4% for the three
months ended December 31, 1998 from 6.4% for the three months ended December 31,
1997.
HISTORICAL THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
The historical financial information represents the information of Alatec
prior to the Initial Acquisitions and the Offering and the consolidated results
of Pentacon subsequent to the Initial Acquisitions and the Offering on March 10,
1998. The following table sets forth certain selected historical financial data
as a percentage of historical revenues for the periods indicated:
Historical
Three Month Period Ended
December 31,
----------------------------------------
1998 1997
------------------- ------------------
(dollar amounts in thousands)
Revenues .......................... $ 66,720 100.0% $ 14,502 100.0%
Cost of sales ..................... 45,021 67.5 8,555 59.0
------- ------- ------- -------
Gross profit ............ 21,699 32.5 5,947 41.0
Operating expenses ................ 14,575 21.8 5,397 37.2
Goodwill amortization ............. 853 1.3 20 0.1
------- ------- ------- -------
Operating income ........ 6,271 9.4 530 3.7
REVENUES
Revenues increased $52.2 million, or 360.0%, from $14.5 million for the
three months ended December 31, 1997 to $66.7 million for the three months ended
December 31, 1998. The increase in revenues primarily results from the Initial
Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
COST OF SALES
Cost of sales increased $36.4 million, or 423.3%, from $8.6 million for
the three months ended December 31, 1997 to $45.0 million for the three months
ended December 31, 1998. The increase in cost of sales primarily results from
the Initial Acquisitions on March 10, 1998 and the Subsequent Acquisitions.
OPERATING EXPENSES
Operating expenses increased $9.2 million, or 170.4%, from $5.4 million
for the three months ended December 31, 1997 to $14.6 million for the three
months ended December 31,
1998. The increase in operating expenses primarily results from the Initial
Acquisitions and the Offering on March 10, 1998 and the Subsequent Acquisitions.
OPERATING INCOME
Operating income increased $5.8 million, or 1,160.0%, from $0.5 million
for the three months ended December 31, 1997 to $6.3 million for the three
months ended December 31, 1998 due to the factors noted above.
NON OPERATING COSTS AND EXPENSES
Interest expense for the three months ended December 31, 1998 totaled $3.1
million compared to $0.3 million for the three months ended December 31, 1997.
The increase in interest expense primarily results from the Initial Acquisitions
and the Offering on March 10, 1998 and the Subsequent Acquisitions.
PROVISION FOR INCOME TAXES
The provision for income taxes for the three months ended December 31,
1998 was $1.5 million (an effective rate of 48.6%) compared with $0.1 million
(an effective rate of 41.5%) for the three months ended December 31, 1997. The
higher effective tax rate for the year ended December 31, 1998 primarily related
to expenses of $3.8 million recorded for goodwill amortization and stock-based
compensation which are not deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company provided $12.0 million of net cash from operating activities
during the three months ended December 31, 1998, primarily from working capital
reductions. Net cash used in investing activities was $.8 million for capital
expenditures. Net cash used in financing activities was $11.3 million for the
three months ended December 31, 1998 and primarily consisted of $19.1 million
repayment of debt partially offset by $7.8 million of borrowings on debt. At
December 31, 1998, the Company had cash of $.8 million, working capital of $78.7
million and total debt of $138.6 million.
The Company has entered into a credit agreement with a group of banks (the
"Credit Facility"). The Credit Facility provides the Company with a revolving
line of credit of up to $110 million (90 million on or after March 15, 1999),
which may be used for general corporate purposes, future acquisitions, capital
expenditures and working capital and a revolving term loan of $40 million. The
Credit Facility is secured by Company stock and assets. Advances under the
Credit Facility bear interest at the banks' designated variable rate plus a
margin of 100 basis points. At the Company's option, the loans may bear interest
based on a designated London interbank offering rate plus a margin of 300 basis
points. Commitment fees of 50 basis points per annum are payable on the unused
portion of the line of credit. The Credit Facility contains a provision for
standby letters of credit up to $5.0 million. The Credit Facility prohibits the
payment of dividends by the Company, restricts the Company's incurring or
assuming other indebtedness and requires the Company to comply with certain
financial covenants including a minimum net worth and minimum fixed charge
ratio. The Credit Facility will terminate and all amounts outstanding
thereunder, if any, will be due and payable December 31, 2001. At December 31,
1998, the Company has approximately $14.6 million available under the Credit
Facility.
The Credit Facility also contains provisions for quarterly reductions in
the ratio of the Company's interest-bearing debt to its pro forma trailing
EBITDA. Based upon the Company's projections of the ensuing year's pro forma
trailing EBITDA, a portion of the borrowings under the Credit Facility has been
classified as current liabilities.
On March 10, 1998, the Company completed the Offering, which involved the
sale by the Company of 5,980,000 shares of common stock at a price to the public
of $10.00 per share, including 780,000 shares pursuant to an over-allotment
option granted by the Company to the underwriters in connection with the
Offering. The net proceeds to the Company from the Offering (after deducting
underwriting discounts, commissions and offering expenses) were approximately
$50.8 million. Of this amount, $21.9 million (net of cash acquired) was used to
pay the cash portion of the purchase price relating to the Initial Acquisitions
with the remainder being used to pay certain indebtedness of the Founding
Companies, make capital expenditures and fund working capital requirements.
The Company may require significant additional capital and/or debt. The
Company intends to seek additional capital as necessary to fund its operating
plans through one or more funding sources that may include borrowings under the
Credit Facility or offerings of debt and/or equity securities of the Company. As
noted above, the Company's Credit Facility anticipates certain reductions in the
line of credit made available under the Credit Facility. Management is exploring
alternatives to obtain additional capital and/or debt, or refinance all or a
portion of its existing debt, in order to remain in compliance with the
provisions of the Credit Facility. Although management believes that it will be
able to obtain such additional capital or debt or will be able to refinance its
existing debt, there can be no assurances that sufficient funds will be
available to the Company at the time it is required or on terms acceptable to
the Company. Failure of the Company to obtain such additional capital or debt,
or to refinance its existing debt, would have a material and adverse effect on
the Company.
On April 20, 1998, the Company's registration statement covering 3,350,000
additional shares of common stock for use in connection with future acquisitions
was declared effective. During the year ended December 31, 1998, 1,134,010
shares of common stock were issued in connection with acquisitions.
The Company currently operates in a decentralized information systems
environment and uses a variety of software, computer systems and related
technologies for accounting and reporting purposes and for revenue-generating
activities. The Pentacon companies which primarily serve the aerospace industry
are in the process of migrating to a common information system which will
facilitate product ordering, pricing and reporting among the companies. The
total expenditures for these information systems are expected to be
approximately $3.0 million, the majority of which will be capitalized as
computer hardware and software as it is installed and depreciated over the
estimated useful life of the assets. Funding for these expenditures will come
from operating cash flows and the Company's Credit Facility as necessary.
YEAR 2000
The Company is working to resolve the potential impact of the Year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and other infrastructure that contains embedded technology.
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date
using "00" as the Year 1900 rather than the Year 2000, which could result in
miscalculations or system failures.
The Company believes that substantially all of its computerized
information systems and other infrastructure that contains embedded technology
are Year 2000 compliant or will be modified so as to become Year 2000 compliant
by mid-1999. Costs of addressing potential problems are not currently expected
to have a material adverse impact on the Company's financial position, results
of operations or cash flows. However, if the Company, its customers or vendors
are unable to resolve such processing issues in a timely manner, it could have a
significant impact on the Company's ability to conduct its business and result
in a material financial risk.
In addition, the Company is continually attempting to assess the level of
Year 2000 preparedness of its key suppliers, distributors, customers and service
providers. The Company has sent, and will continue to send, letters,
questionnaires and surveys to its significant business partners inquiring about
their Year 2000 efforts. If a significant supplier or customer of the Company
fails to be Year 2000 compliant, the Company could suffer a material loss of
business or incur material expenses.
As of December 31, 1998, the Company has spent $0.1 million in costs that
are directly attributable to addressing Year 2000 issues. Management currently
estimates that the Company will incur $0.3 million in additional costs during
1999 relating to Year 2000 issues. The Company expects that it will spend
approximately $3.0 million to purchase software and hardware and on
implementation expenses associated with the migration to a common information
technology system in the Pentacon companies which primarily serve the aerospace
industry. The Company believes that these costs are not, for the most part,
directly related to Year 2000 issues, but are required for the implementation of
its new system in the Pentacon companies which primarily serve the aerospace
industry.
The Company is developing and evaluating contingency plans in the event
that the Company has not completed all of its remediation plans in a timely
manner or if third parties who provide goods or services to the Company fail to
address their Year 2000 issues appropriately. These plans include identification
of alternative suppliers and service providers, depletion of safety stocks of
inventory and identification of important areas of record retention.
PART II -OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
10.17 -- First Amendment to Amended and Restated Credit Agreement
10.18 -- Second Amendment to Amended and Restated Credit Agreement
27 -- Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated November 2, 1998 concerning a
change from a September 30 fiscal year to a December 31 calendar year.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PENTACON, INC.
Dated: February 16, 1999 By: /s/ BRIAN FONTANA
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BRIAN FONTANA
Senior Vice President
& Chief Financial Officer