- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 8-K/A
AMENDING THE
CURRENT REPORT OF FORM 8-K
FILED ON JULY 31, 1998
Pursuant to Section 13 or 15(d)
of Securities Exchange Act of 1934
-----------------
DATE OF EARLIEST EVENT REPORTED: JULY 17, 1998
PENTACON, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 001-13931 76-0531585
(State or other (Commission File No.) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
9432 OLD KATY ROAD, SUITE 222
HOUSTON, TEXAS 77055
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 463-8850
- --------------------------------------------------------------------------------
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired
This Form 8-K/A is being filed to include in the Current Report on Form
8-K filed by the Registrant with the Securities and Exchange Commission on July
31, 1998 the financial statements and pro forma financial information required
by Item 7.
The required financial statements of the businesses acquired by the
Registrant are included as exhibits to this Form 8-K/A.
(b) Pro Forma Financial Information
The required pro forma financial information of the Registrant is included
as an exhibit to this Form 8-K/A.
(c) Exhibits
PAGE
--------
Pentacon, Inc. Pro Forma
Introduction to Unaudited Pro Forma Financial Statements............ F-1
Pro Forma Combined Balance Sheet-Unaudited.......................... F-3
Pro Forma Combined Statements of Operations-Unaudited
Nine Months Ended June 30, 1998................................ F-4
Twelve Months Ended September 30, 1997......................... F-5
Notes to Unaudited Pro Forma Financial Statements................... F-6
Texas International Aviation, Inc. and Subsidiary
Report of Independent Certified Public Accountants.................. F-8
Consolidated Balance Sheets......................................... F-9
Consolidated Statements of Earnings................................. F-10
Consolidated Statement of Stockholders' Equity...................... F-11
Consolidated Statements of Cash Flows............................... F-12
Notes to Consolidated Financial Statements.......................... F-13
23.1 Consent of Grant Thornton LLP
2
<PAGE>
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.
By: /s/ BRUCE M. TATEN
Bruce M. Taten
Senior Vice President, Chief
Administrative Officer and
General Counsel
Dated: September 29, 1998
3
<PAGE>
PENTACON, INC. AND SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
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 (the "Acquisitions"), simultaneously with the
closing of its initial public offering (the "Offering") of its common stock (the
"Common Stock"), five businesses: 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 Acquisitions of the Founding
Companies 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 Common Stock following the Offering and the Acquisitions, and (ii) the
stockholders of Alatec received the greatest number of shares of 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 as of September 30, 1997 and 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 pro forma combined financial statements should be read in conjunction
with the Unaudited Pro Forma Combined Financial Statements of the Company and
the related notes thereto, the Financial Statements of Pentacon, Alatec, AXS,
Maumee and SSL and related notes thereto, and management's discussion and
analysis of financial condition and results of operations related thereto, all
of which are included in the Company's Registration Statement on Form S-1 (No.
333-41383), as amended (the "Registration Statement"), filed with the United
States Securities and Exchange Commission in connection with the Offering.
In May 1998, the Company acquired Pace Products, Inc. ("Pace"), 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. ("D-Bolt"), 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. ("TIA"), a distributor of fasteners and other small
parts which provides inventory procurement and management services primarily to
the aerospace industry. 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.
The following unaudited pro forma financial statements of Pentacon,
Inc. and Subsidiaries give effect to: (i) the Acquisitions of the Founding
Companies and (ii) the acquisitions of Pace, D-Bolt and TIA for the periods
prior to the consummation of the acquisitions.
The pro forma combined balance sheet-unaudited is based upon:
(i) the unaudited consolidated balance sheet of Pentacon, Inc.
as of June 30, 1998; and
(ii) the unaudited consolidated balance sheet of TIA as if the
acquisition occurred on June 30, 1998.
F-1
<PAGE>
The pro forma combined statement of operations-unaudited for the nine
months ended June 30, 1998 is based upon:
(i) the unaudited historical consolidated statement of operations
of Pentacon, Inc. for the nine months ended June 30, 1998;
(ii) the unaudited historical consolidated statements of operations
of AXS, Capitol, Maumee, SSL and Pentacon for the period
October 1, 1997 through March 10, 1998 (the date of the
Acquisitions);
(iii) the unaudited statement of operations of TIA for the nine
months ended June 30, 1998; and
(iv) the unaudited statements of operations of Pace and D-Bolt
include results of operations from October 1, 1997 through the
respective acquisition date.
The pro forma combined statement of operations-unaudited for the twelve
months ended September 30, 1997 is based upon:
(i) the unaudited statements of operations of the Founding
Companies for the twelve months ended September 30, 1997;
(ii) the unaudited statements of operations of Pace and D-Bolt for
the twelve months ended September 30, 1997; and
(iii) the unaudited statement of operations of TIA for the year
ended December 31, 1997.
The pro forma financial statements have been prepared based upon certain
assumptions and include all adjustments as detailed in the Notes to Unaudited
Pro Forma Financial Statements. The pro forma financial data does not purport to
represent what the Company's financial position or results of operations would
actually have been if the transactions had occurred on those dates or to project
the Company's financial position or results of operations for any future period.
F-2
<PAGE>
PENTACON, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET - UNAUDITED
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEXAS
HISTORICAL INTERNATIONAL PRO
PENTACON, AVIATION, PRO FORMA FORMA
INC. INC. ADJUSTMENTS COMBINED
----------- ------------- ------------- -----------
(NOTE 2)
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents .............. $ 1,080 $ 20 $ -- $ 1,100
Accounts receivable .................... 25,124 4,627 -- 29,751
Inventories ............................ 50,447 20,861 -- 71,308
Deferred income taxes .................. 2,194 15 260 (A) 2,469
Other current assets ................... 248 25 -- 273
-------- ------- -------- --------
Total current assets .............. 79,093 25,548 260 104,901
Property, plant and equipment, net of
accumulated depreciation ............. 5,636 270 (270)(A) 5,636
Goodwill, net of accumulated
amortization ......................... 66,407 -- 13,504 (B) 79,911
Deferred income taxes .................. 943 -- 70 (A) 1,013
Other assets ........................... 1,043 575 (575)(C) 1,043
-------- ------- -------- --------
Total assets ...................... $153,122 $26,393 $ 12,989 $192,504
======== ======= ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable ....................... $ 17,433 $ 5,215 $ -- $ 22,648
Accrued expenses and other current
liabilities .......................... 5,064 324 1,393 (A) 6,781
Income taxes payable ................... 590 93 -- 683
Current maturities of long-term debt
and capital lease obligations ........ 401 13,876 (13,876)(D) 401
-------- ------- -------- --------
Total current liabilities ......... 23,488 19,508 (12,483) 30,513
Long-term debt and capital lease
obligations, less current maturities . 23,642 173 25,838 (D) 49,653
-------- ------- -------- --------
Total liabilities ................. 47,130 19,681 13,355 80,166
Common stock ........................... 161 7 (1)(E) 167
Paid-in capital ........................ 94,032 2,516 3,824 (E) 100,372
Retained earnings ...................... 11,799 4,189 (4,189)(A) 11,799
-------- ------- -------- --------
Total stockholders' equity ........ 105,992 6,712 (366) 112,338
-------- ------- -------- --------
Total liabilities and stockholders'
equity .......................... $153,122 $26,393 $ 12,989 $192,504
======== ======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS - UNAUDITED
NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OCTOBER 1, 1997 TO MARCH 10, 1998
----------------------------------------------------------------------
HISTORICAL
PENTACON, INC. PENTACON, INC. AXS CAPITOL MAUMEE SSL TIA
-------------- -------------- --------- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ............... $ 80,786 $ -- $13,521 $ 5,346 $ 20,061 $7,053 $ 21,885
Cost of sales .......... 51,322 -- 9,002 3,652 14,316 4,625 15,701
-------- ------- ------- ------- -------- ------ --------
Gross profit ...... 29,464 -- 4,519 1,694 5,745 2,428 6,184
Operating expenses ..... 23,547 4,900 3,149 1,636 3,868 2,204 3,572
Goodwill amortization .. 489 -- 53 -- -- -- --
-------- ------- ------- ------- -------- ------ --------
Operating income .. 5,428 (4,900) 1,317 58 1,877 224 2,612
Other (income)/expense . (67) -- 33 (25) (13) -- (45)
Interest expense ....... 976 -- 53 13 349 46 739
-------- ------- ------- ------- -------- ------ --------
Income before taxes 4,519 (4,900) 1,231 70 1,541 178 1,918
Income taxes ........... 2,344 (95) 1 55 639 -- 742
-------- ------- ------- ------- -------- ------ --------
Net income ........ $ 2,175 $(4,805) $ 1,230 $ 15 $ 902 $ 178 $ 1,176
======== ======= ======= ======= ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
OTHER MERGER PRO FORMA OFFERING AS
ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
-------------- ----------- ----------- ----------- -----------
(Note 3) (Note 3)
<S> <C> <C> <C> <C> <C>
Revenues ............... $ 9,643 $ -- $ 158,295 $ -- $ 158,295
Cost of sales .......... 6,134 -- 104,752 -- 104,752
------- ------- --------- ------- ---------
Gross profit ...... 3,509 -- 53,543 -- 53,543
Operating expenses ..... 2,365 (1,830)(A) 43,411 (6,480)(E) 36,931
Goodwill amortization .. -- 951 (B) 1,493 -- 1,493
------- ------- --------- ------- ---------
Operating income .. 1,144 879 8,639 6,480 15,119
Other (income)/expense . (3) -- (120) -- (120)
Interest expense ....... 1 1,427 (C) 3,604 (1,301)(C) 2,303
------- ------- --------- ------- ---------
Income before taxes 1,146 (548) 5,155 7,781 12,936
Income taxes ........... 79 (1,040)(D) 2,725 3,191 (D) 5,916
------- ------- --------- ------- ---------
Net income ........ $ 1,067 $ 492 $ 2,430 $ 4,590 $ 7,020
======= ======= ========= ======= =========
Diluted net income per share $ 0.42
=========
Shares used in computing diluted net income per share (Note 3-F) 16,772
=========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PENTACON, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS - UNAUDITED
TWELVE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TIA
HISTORICAL YEAR ENDED
PENTACON, INC. PENTACON, INC. AXS CAPITOL MAUMEE SSL DEC. 31, 1997
-------------- -------------- ------- --------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues ............... $ 53,755 $-- $30,569 $ 11,537 $34,545 $ 15,712 $ 21,976
Cost of sales .......... 32,084 -- 20,883 8,023 25,080 10,589 16,274
-------- ---- ------- -------- ------- -------- --------
Gross profit ...... 21,671 -- 9,686 3,514 9,465 5,123 5,702
Operating expenses ..... 15,145 18 6,796 3,250 8,139 4,658 4,304
Goodwill amortization .. -- -- 80 -- -- -- --
-------- ---- ------- -------- ------- -------- --------
Operating income .. 6,526 (18) 2,810 264 1,326 465 1,398
Other (income)/expense . (41) -- 103 (41) 19 (18) (75)
Interest expense ....... 1,245 -- 278 37 749 123 664
-------- ---- ------- -------- ------- -------- --------
Income before taxes 5,322 (18) 2,429 268 558 360 809
Income taxes ........... 2,176 -- -- 87 232 -- 368
-------- ---- ------- -------- ------- -------- --------
Net income ........ $ 3,146 $(18) $ 2,429 $ 181 $ 326 $ 360 $ 441
======== ==== ======= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
OTHER MERGER PRO FORMA OFFERING AS
ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------ ----------- ------------ ------------- ----------
(NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
Revenues ............... $ 14,268 $ -- $ 182,362 $ -- $ 182,362
Cost of sales .......... 9,166 -- 122,099 -- 122,099
-------- ------- --------- ------- ---------
Gross profit ...... 5,102 -- 60,263 -- 60,263
Operating expenses ..... 3,959 (3,025)(A) 43,244 -- 43,244
Goodwill amortization .. -- 1,912 (B) 1,992 -- 1,992
-------- ------- --------- ------- ---------
Operating income .. 1,143 1,113 15,027 -- 15,027
Other (income)/expense . (8) -- (61) -- (61)
Interest expense ....... 333 1,622 (C) 5,051 (2,419)(C) 2,632
-------- ------- --------- ------- ---------
Income before taxes 818 (509) 10,037 2,419 12,456
Income taxes ........... 244 1,826 (D) 4,933 992 (D) 5,925
-------- ------- --------- ------- ---------
Net income ........ $ 574 $(2,335) $ 5,104 $ 1,427 $ 6,531
======== ======= ========= ======= =========
Diluted net income per share $ 0.39
=========
Shares used in computing diluted net income per share (Note 3-F) 16,686
=========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PENTACON, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
In May 1998, the Company acquired Pace, 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, a distributor of fasteners and other small parts primarily to
the fabrication, construction and mining industries. In July 1998, the Company
acquired TIA, a distributor of fasteners and other small parts which provides
inventory procurement and management services primarily to the aerospace
industry. 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.
1. HISTORICAL FINANCIAL STATEMENTS
The historical financial statements represent the financial position and
results of operations of Pentacon and the Founding Companies and were derived
from their respective financial statements. The Company has a fiscal year-end of
September 30. The Founding Companies have been presented for the twelve months
ended September 30, 1997, except for Capitol, which has been presented for the
twelve months ended August 31, 1997. The historical financial statements of TIA
are presented for the twelve months ended December 31, 1997. The historical
financial statements of the other acquisitions are presented for the twelve
months ended September 30, 1997.
2. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS
The pro forma adjustments include:
(A) Records the fair value of assets and liabilities acquired and the
related tax effect.
(B) Records the goodwill associated with the acquisition.
(C) Records the estimated direct costs of the acquisition.
(D) Reflects the repayment of TIA debt and the disbursement of
approximately $10.6 million in cash.
(E) Reflects the issuance of 566,858 shares of Common Stock.
F-6
<PAGE>
3. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS
Nine months ended June 30, 1998 and twelve months ended September 30,
1997:
(A) Adjusts salaries, bonuses, benefits, and lease expense amounts to
reflect those established in contractual agreements between the
Company and certain owners and key employees of the Founding
Companies and the subsequently acquired companies.
(B) Records pro forma goodwill amortization using a 40-year estimated
life.
(C) Reflects the increase or (decrease) in interest expense attributed
to obligations incurred to make acquisitions or retired with
proceeds from the Offering.
(D) Adjusts the provision for federal and state income taxes to the
effective tax rate for the Company.
(E) Reflects the elimination of the non-recurring, non-cash compensation
charge of $4.7 million recorded by Pentacon, Inc. during the three
months ended December 31, 1997 related to Common Stock issued to
management of the Company. Contemporaneously with the Offering, a
non-cash, non-recurring charge of approximately $1.8 million was
recorded to reflect compensation related to the revaluation of
225,000 of the 450,000 shares of Common Stock issued to management
in November 1997.
(F) Includes (i) 2,830,000 shares issued by Pentacon, Inc. prior to the
Offering (including 535,000 shares issued to management and
directors), (ii) 6,720,000 shares issued to the stockholders of the
Founding Companies in connection with the Acquisitions, (iii)
5,980,000 shares issued in connection with the Offering (including
the over-allotment), (iv) the effect of the 50,000 warrants
outstanding with an assumed exercise price of $6.00 per share using
the treasury stock method, (v) 1,134,010 shares issued in connection
with the acquisitions of Pace, D-Bolt and TIA, and (vi) the dilutive
effect of stock options in the nine months ended June 30, 1998.
F-7
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Texas International Aviation, Inc.
We have audited the accompanying consolidated balance sheet of Texas
International Aviation, Inc. and Subsidiary (a Texas corporation) as of December
31, 1997 and March 31, 1997, and the related consolidated statements of
earnings, changes in retained earnings and cash flows for the nine months ended
December 31, 1997 and the year ended March 31, 1997. 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, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Texas
International Aviation, Inc. and Subsidiary as of December 31, 1997 and March
31, 1997, and the consolidated results of their operations and their
consolidated cash flows for the nine months ended December 31, 1997 and the year
ended March 31, 1997, in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Dallas Texas
April 3, 1998
F-8
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1998
------------- ------------- -----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ....................... $ 8,593 $ 20,093 $ 20,467
Trade accounts receivable, net of allowance for
doubtful accounts of $15,259 at March 31, 1997
and December 31, 1997 and $946 at June 30, 1998 2,716,444 4,533,895 4,626,526
Inventories ..................................... 9,393,408 15,885,605 20,861,277
Prepaid expenses ................................ 43,254 43,014 25,443
Deferred income taxes ........................... -- 15,358 15,358
----------- ----------- -----------
Total current assets ................... 12,161,699 20,497,965 25,549,071
PROPERTY, PLANT AND EQUIPMENT - AT COST
Property, plant and equipment ................... 635,723 883,561 930,605
Less accumulated depreciation ................. 434,542 565,018 660,571
----------- ----------- -----------
201,181 318,543 270,034
OTHER ASSETS
Receivables from stockholders ................... 362,334 486,599 565,852
Other ........................................... 9,500 9,500 9,500
----------- ----------- -----------
$12,734,714 $21,312,607 $26,394,457
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdrafts ................................. $ -- $ -- $ 1,088,561
Current maturities of long-term debt ............ 153,992 141,235 146,743
Accounts payable - trade ........................ 2,512,800 4,763,771 4,126,764
Accrued liabilities ............................. 207,208 352,467 325,209
Line of credit .................................. 4,755,505 10,035,345 13,729,698
Income taxes payable ............................ 18,977 323,019 93,164
----------- ----------- -----------
Total current liabilities .............. 7,648,482 15,615,837 19,510,139
LONG-TERM DEBT, LESS CURRENT MATURITIES ............ 347,137 241,680 172,620
STOCKHOLDERS' EQUITY
Common stock $.10 par value; authorized
1,000,000 shares; issued and
outstanding 65,763 shares ..................... 6,576 6,576 6,576
Additional paid-in capital ...................... 2,515,908 2,515,908 2,515,908
Retained earnings ............................... 2,216,611 2,932,606 4,189,214
----------- ----------- -----------
Total stockholders' equity ............. 4,739,095 5,455,090 6,711,698
----------- ----------- -----------
$12,734,714 $21,312,607 $26,394,457
=========== =========== ===========
</TABLE>
F-9
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SIX MONTHS ENDED JUNE 30,
MARCH 31, DECEMBER 31, -----------------------------
1997 1997 1997 1998
------------- -------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales .............................. $ 11,823,132 $ 17,721,766 $ 9,070,866 $ 14,945,051
Cost of sales .......................... 8,091,140 12,894,231 6,805,210 10,271,146
------------ ------------ ----------- ------------
3,731,992 4,827,535 2,265,656 4,673,905
Operating costs and expenses
Selling expenses .................... 409,481 353,469 250,551 447,579
General and administrative expenses . 2,465,861 2,929,298 1,741,692 1,799,306
------------ ------------ ----------- ------------
2,875,342 3,282,767 1,992,243 2,246,885
------------ ------------ ----------- ------------
Operating profit ........... 856,650 1,544,768 273,413 2,427,020
Other income (expenses)
Interest expense .................... (325,318) (530,882) (271,173) (534,774)
Other income ........................ 1,674 70,202 9,632 11,705
------------ ------------ ----------- ------------
Earnings before income taxes 533,006 1,084,088 11,872 1,903,951
Income tax expense ..................... 135,655 368,093 4,031 647,343
------------ ------------ ----------- ------------
Net earnings ............... $ 397,351 $ 715,995 $ 7,841 $ 1,256,608
============ ============ =========== ============
</TABLE>
F-10
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the two fiscal years in the period ended December 31,
1997 and the six months ended June 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1996 ........... 65,763 $6,576 $2,515,908 $1,819,260 $4,341,744
Net earnings ....................... -- -- -- 397,351 397,351
------ ------ ---------- ---------- ----------
Balance at March 31, 1997 .......... 65,763 6,576 2,515,908 2,216,611 4,739,095
Net earnings ....................... -- -- -- 715,995 715,995
------ ------ ---------- ---------- ----------
Balance at December 31, 1997 ....... 65,763 6,576 2,515,908 2,932,606 5,455,090
Net earnings (unaudited) ........... -- -- -- 1,256,608 1,256,608
------ ------ ---------- ---------- ----------
Balance at June 30, 1998 (unaudited) 65,763 $6,576 $2,515,908 $4,189,214 $6,711,698
====== ====== ========== ========== ==========
</TABLE>
F-11
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR NINE MONTHS SIX MONTHS
ENDED ENDED ENDED
MARCH 31, DECEMBER 31, JUNE 30,
1997 1997 1998
------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ....................................... $ 397,351 $ 715,995 $ 1,256,608
Adjustments to reconcile net earnings to net cash
used in operating activities
Depreciation ................................... 112,421 130,476 95,553
Deferred income taxes .......................... -- (15,358) --
Inventory obsolescence ......................... 400,000 431,206 307,536
Changes in operating assets and liabilities
Accounts receivable - trade .................. (1,159,669) (1,817,451) (92,631)
Inventories .................................. (4,021,498) (6,923,403) (5,283,208)
Income taxes payable ......................... -- 304,042 (229,855)
Prepaid expenses ............................. (16,417) 240 17,571
Other assets ................................. (1,000) -- --
Liability for bank overdraft ................. -- -- 1,088,561
Accounts payable - trade ..................... 1,052,036 2,250,971 (637,007)
Accrued liabilities .......................... 125,261 145,259 (27,258)
----------- ----------- -----------
Net cash used in operating activities ..... (3,111,515) (4,778,023) (3,504,130)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment ......... (197,518) (247,838) (47,044)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable and line of credit ..... 5,011,172 5,280,149 3,694,353
Repayments of notes payable and line of credit ..... (1,573,323) (118,523) (63,552)
Change in receivables from stockholders ............ (132,690) (124,265) (79,253)
----------- ----------- -----------
Net cash provided by financing activities . 3,305,159 5,037,361 3,551,548
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................. (3,874) 11,500 374
Cash and cash equivalents at beginning of period ...... 12,467 8,593 20,093
----------- ----------- -----------
Cash and cash equivalents at end of period ............ $ 8,593 $ 20,093 $ 20,467
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during period for
Interest ......................................... $ 325,318 $ 458,660 $ 502,116
Income taxes ..................................... 80,000 $ 65,000 $ 892,555
</TABLE>
F-12
<PAGE>
TEXAS INTERNATIONAL AVIATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and March 31, 1997
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follows.
NATURE OF OPERATIONS
Texas International Aviation, Inc. and its wholly-owned subsidiary TIA
International (collectively, the Company) are engaged in wholesale
distribution of aircraft hardware products. Sales of the Company's products
are worldwide.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized at the time of shipment.
CASH EQUIVALENTS
The Company considers highly liquid investments with original maturities of
three months or less to be cash equivalents.
INVENTORIES
Inventories are comprised of goods held for resale, which are valued at the
lower of cost (specific identification) or market.
DEPRECIATION
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives ranging
from 5 to 7 years on an accelerated method. Computer software is depreciated
using the straight-line method over three years.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
<PAGE>
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
INCOME TAXES
Deferred income taxes are determined using the liability method, under which
deferred tax assets and liabilities are determined based on differences
between financial and tax bases of assets and liabilities at the rate
expected to be in effect when taxes become payable.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial statements as
of June 30, 1998 and for the six months ended June 30, 1997 and 1998 include
all adjustments, consisting only of those of a normal recurring nature,
necessary to present fairly the Company's financial position as of June 30,
1998 and the results of its operations and cash flows for the six months
ended June 30, 1997 and 1998. The results of operations for the six months
ended June 30, 1997 and 1998 are not necessarily indicative of the results to
be expected for the full year.
NOTE B - LINE OF CREDIT
The Company has a $12.5 million line of credit with a bank expiring on July
1, 1998. The Company may borrow up to $10 million for operations and up to $5
million on eligible inventory buyback contracts, with total borrowings not to
exceed $12.5 million. Borrowings under the line of credit bear interest at
the lesser of prime or a maximum rate, as defined, (8.5% at December 31,
1997). Borrowings are collateralized by substantially all assets of the
Company. The Company had $2,464,655 and $7,744,495 available for borrowings
under the line of credit at December 31, 1997 and March 31, 1997,
respectively. The line of credit includes certain restrictive covenants which
include, among others, working capital requirements, interest coverage, and
tangible net worth.
NOTE C - LONG-TERM DEBT
DECEMBER 31, MARCH 31,
1997 1997
------------- ----------
Notes payable to stockholders, in 60
monthly installments, of principal
of $5,705 through January 2001,
plus interest at 7% ........................... $187,263 $237,945
Note payable to a bank bearing interest
at a rate equal to the lesser of
prime or a maximum rate, as defined,
(8.5% at December 31, 1997) due in 36
monthly installments of principal
($6,945) plus interest through May 1, 2000 .... 194,440 250,000
Other ............................................ 1,212 13,184
-------- --------
382,915 501,129
Less current maturities ....................... 141,235 153,992
-------- --------
$241,680 $347,137
======== ========
F-14
<PAGE>
NOTE C - LONG-TERM DEBT - CONTINUED
The following are scheduled future maturities of long-term debt at December
31, 1997:
YEAR ENDING
DECEMBER 31,
--------------
1998 $141,235
1999 144,120
2000 91,049
2001 6,511
--------
$382,915
========
NOTE D - INCOME TAXES
The income tax provision is comprised of the following components:
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1997 1997
---------------- ---------------
Current
Federal ................... $ 347,855 $131,155
State ..................... 35,596 4,500
--------- --------
383,451 135,655
Deferred
Federal ................... (14,113) --
State ..................... (1,245) --
--------- --------
(15,358) --
--------- --------
Total ..................... $ 368,093 $135,655
========= ========
F-15
<PAGE>
NOTE D - INCOME TAXES - CONTINUED
The income tax provision reconciled to the tax computed at the statutory
Federal rate is as follows:
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1997 1997
-------------- -----------
Tax at statutory rate ...................... $ 368,590 $ 181,222
State income taxes, net of Federal benefit . 23,493 2,970
Impact of foreign sales corporation ........ (27,517) (43,822)
Other ...................................... 3,527 (4,715)
--------- ---------
$ 368,093 $ 135,655
========= =========
Deferred tax assets consist of the following at December 31, 1997:
Allowance for doubtful accounts ............ $ 5,645
Accrued vacation ........................... 9,713
---------
$15,358
=========
NOTE E - BENEFIT PLAN
The Company sponsors the Texas International Aviation, Inc. 401(k) Plan (the
Plan). Under the Plan, eligible employees are permitted to contribute to the
Plan up to 20% of gross compensation and the Company matches 50% of the
employees' contributions up to 3% of the employees' gross compensation.
Matching contributions begin vesting after three years of employment at a
rate of 20% per year and fully vest after seven years. The Company made
approximately $14,300 and $14,000 of matching contributions during the nine
months and year ended December 31, 1997 and March 31, 1997, respectively.
NOTE F - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
A significant portion of the Company's sales are to customers whose
activities are related to the aviation industry, including some who are
located in foreign countries. The Company generally extends credit to these
customers and, therefore, collection of receivables is affected by the
economy of the aviation industry. Also, with respect to foreign sales,
collection may be more difficult in the event of a default. However, the
Company closely monitors extensions of credit and has not experienced
significant credit losses. Most foreign sales are made to large,
well-established companies.
F-16
<PAGE>
NOTE F - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS - CONTINUED
During the nine months ended December 31, 1997, sales to three customers were
approximately 12% each (total 36%) of the Company's total sales. The loss of
any one of these customers could have a severe impact on the operations of
the Company.
Some product purchases are denominated in foreign currencies. The Company had
foreign currency transaction gains of approximately $65,000 and $1,000 for
the nine months and year ended December 31, 1997 and March 31, 1997,
respectively.
NOTE G - COMMITMENTS
The Company leases office and warehouse facilities in Grand Prairie, Texas
from a partnership owned by the stockholders. The lease expires December 31,
1997 and rental payments of $7,500 are due monthly. Rent expense for these
facilities was $82,065 and $82,500 for the period ended December 31, 1997 and
March 31, 1997, respectively.
The Company leases office facilities in California, under a lease agreement
classified as an operating lease. Total rent expense for this facility during
1997 was approximately $10,700 and $3,000 for the periods ended December 31,
1997 and March 31, 1997, respectively. The lease expires August 31, 1999 and
rental payments of $1,425 are due monthly.
The Company leases office facilities in Washington under a lease agreement
classified as an operating lease. Total rent expense for this facility for
the period ended December 31, 1997 was approximately $1,900. The lease
expires July 16, 1998, and rental payments of $345 are due monthly.
Future minimum rentals on these leases at December 31, 1997 are as follows:
YEAR ENDING
DECEMBER 31,
--------------
1998 $21,341
1999 13,399
-------
$34,740
=======
F-17
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 3, 1998, accompanying the consolidated
financial statements of Texas International Aviation, Inc. contained in the 8-K
dated July 31, 1998 of Pentacon, Inc. We hereby consent to the incorporation by
references of said report in the Registration Statements of Pentacon, Inc. on
Form S-8 (File No. 333-48913, effective March 30, 1998) and on Form S-1 (File
No. 333-49809, effective April 9, 1998).
Grant Thornton LLP
Dallas, Texas
September 28, 1998
