FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
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.)
9432 OLD KATY ROAD, SUITE 222 HOUSTON, TEXAS 77055
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-463-8850
(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 JULY 31, 1998 WAS 16,664,010.
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2
PENTACON, INC.
FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1998
INDEX
Part I - Financial Information
Item 1 - Financial Statements
General Information................................................3
Historical Consolidated Balance Sheets - Pentacon, Inc. as of
June 30, 1998 and September 30, 1997............................4
Consolidated Statements of Operations - Pentacon, Inc. Historical
for the Three Months and Nine Months ended June 30, 1998 and
1997 and Pro Forma for the Three Months and Nine Months ended
June 30, 1998 and 1997..........................................5
Historical Consolidated Statements of Cash Flows - Pentacon, Inc.
for the Nine Months ended June 30, 1998 and 1997................9
Notes to the Consolidated Financial Statements....................10
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................15
Part II - Other Information
Item 6 - Exhibits and Reports...........................................21
Signature...............................................................21
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3
PENTACON, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
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.
Operating results for interim periods are not necessarily indicative of
the results for full years. The financial statements included herein 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 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.
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4
PENTACON, INC.
HISTORICAL CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 SEPTEMBER 30, 1997
------------- ------------------
(Unaudited)
(in thousands, except share data)
ASSETS
Cash and cash equivalents ..................... $ 1,080 $ 733
Accounts receivable ........................... 25,124 7,892
Inventories ................................... 50,447 22,951
Deferred income taxes ......................... 2,194 1,420
Other current assets .......................... 248 --
-------- --------
Total current assets ...... 79,093 32,996
Property, plant and equipment, net of
accumulated depreciation ................ 5,636 1,578
Goodwill, net of accumulated amortization ..... 66,407 --
Deferred income taxes ......................... 943 65
Other assets .................................. 1,043 272
-------- --------
Total assets .............. $153,122 $ 34,911
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .............................. $ 17,433 $ 7,521
Accrued expenses .............................. 5,064 1,362
Income taxes payable .......................... 590 3,594
Current maturities of long-term debt and
capital lease obligations ................ 401 364
-------- --------
Total current liabilities . 23,488 12,841
Long-term debt and capital lease
obligations, net of current maturities ... 23,642 13,686
-------- --------
Total liabilities ......... 47,130 26,527
Preferred stock, $.01 par value,
10,000,000 shares authorized, no
shares issued and outstanding in 1998 .... -- --
Common stock, $.01 par value,
50,000,000 shares authorized,
16,097,152 shares issued and outstanding
in 1998 and $10 par value, 2,500,000 shares
authorized, 145,000 shares issued and
outstanding in 1997 ...................... 161 1,450
Treasury stock ................................ -- (2,690)
Additional paid in capital .................... 94,032 --
Retained earnings ............................. 11,799 9,624
-------- --------
Total stockholders' equity ........... 105,992 8,384
-------- --------
Total liabilities and
stockholders' equity .... $153,122 $ 34,911
======== ========
The accompanying notes are an integral part of these statements.
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PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------
June 30,
--------------------
1998 1997
---- ----
(in thousands, except
per share data)
Revenues ........................................... $ 46,428 $ 14,334
Cost of sales ...................................... 30,380 8,798
-------- --------
Gross profit ............................. 16,048 5,536
Operating expenses ................................. 10,931 3,649
Goodwill amortization .............................. 390 --
-------- --------
Operating income ......................... 4,727 1,887
Other (income) expense, net ........................ (49) (9)
Interest expense ................................... 369 339
-------- --------
Income before taxes ...................... 4,407 1,557
Income taxes ....................................... 2,286 640
-------- --------
Net income ............................... $ 2,121 $ 917
======== ========
Net income per share:
Basic .................................... $ 0.13 $ 0.31
Diluted .................................. $ 0.13 $ 0.31
The accompanying notes are an integral part of these statements.
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6
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
---------------------------
June 30,
---------------------------
1998 1997
-------- --------
(in thousands, except per
share data)
Revenues .......................................... $ 80,786 $ 38,568
Cost of sales ..................................... 51,322 23,540
-------- --------
Gross profit ............................ 29,464 15,028
Operating expenses ................................ 23,547 10,571
Goodwill amortization ............................. 489 --
-------- --------
Operating income ........................ 5,428 4,457
Other (income) expense, net ....................... (67) (32)
Interest expense .................................. 976 907
-------- --------
Income before taxes ..................... 4,519 3,582
Income taxes ...................................... 2,344 1,463
-------- --------
Net income .............................. $ 2,175 $ 2,119
======== ========
Net income per share:
Basic ................................... $ 0.26 $ 0.71
Diluted ................................. $ 0.26 $ 0.71
The accompanying notes are an integral part of these statements.
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7
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
--------------------------
June 30,
--------------------------
1998 1997
-------- --------
(in thousands, except
per share data)
Revenues .......................................... $ 46,428 $ 38,413
Cost of sales ..................................... 30,380 25,206
-------- --------
Gross profit ............................ 16,048 13,207
Operating expenses ................................ 10,931 8,270
Goodwill amortization ............................. 390 374
-------- --------
Operating income ........................ 4,727 4,563
Other (income) expense, net ....................... (49) (35)
Interest expense .................................. 369 262
-------- --------
Income before taxes ..................... 4,407 4,336
Income taxes ...................................... 1,960 1,931
-------- --------
Net income .............................. $ 2,447 $ 2,405
======== ========
Net income per share:
Basic ................................... $ 0.15 $ 0.15
Diluted ................................. $ 0.15 $ 0.15
The accompanying notes are an integral part of these statements.
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8
PENTACON, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
---------------------------
June 30,
---------------------------
1998 1997
---- ----
(in thousands, except
per share data)
Revenues .................................... $ 126,767 $ 107,102
Cost of sales ............................... 82,916 71,079
--------- ---------
Gross profit ...................... 43,851 36,023
Operating expenses .......................... 31,520 24,725
Goodwill amortization ....................... 1,138 1,122
--------- ---------
Operating income .................. 11,193 10,176
Other (income) expense, net ................. (71) 51
Interest expense ............................ 875 659
--------- ---------
Income before taxes ............... 10,389 9,466
Income taxes ................................ 4,719 4,341
--------- ---------
Net income ........................ $ 5,670 $ 5,125
========= =========
Net income per share:
Basic ............................. $ 0.36 $ 0.33
Diluted ........................... $ 0.36 $ 0.33
The accompanying notes are an integral part of these statements.
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9
PENTACON, INC.
HISTORICAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
----------------------
June 30,
---------------------
1998 1997
---- ----
(in thousands)
Cash Flows From Operating Activities:
Net income .................................. $ 2,175 $ 2,119
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ............... 894 146
Deferred income taxes ....................... 213 (377)
Compensation expense related to issuance
of management shares .................. 1,800 --
Changes in operating assets and liabilities:
Accounts receivable .......... (379) (226)
Inventories .................. (8,056) (2,957)
Other current assets ......... 140 --
Accounts payable and accrued
expenses ................... (2,543) 1,429
Income taxes payable ......... (4,383) (487)
Other assets and liabilities,
net ........................ 1,495 --
-------- --------
Net cash used in operating activities .. (8,644) (353)
Cash Flows From Investing Activities:
Capital expenditures ........................ (2,095) (94)
Cash paid for acquisitions, net of cash
acquired .................................. (3,917) --
Cash paid for Founding Companies, net of
cash acquired ............................. (21,948) --
Other ....................................... (52) (239)
-------- --------
Net cash used in investing activities .. (28,012) (333)
Cash Flows From Financing Activities:
Principal payments on debt .................. (49,413) (146)
Borrowings of debt .......................... 35,900 425
Proceeds from issuance of Common Stock,
net of offering costs ..................... 50,815 --
Debt issuance costs ......................... (299) --
-------- --------
Net cash provided by financing
activities ........................... 37,003 279
Increase (decrease) in cash and cash equivalents ..... 347 (407)
Cash and cash equivalents, beginning of period ....... 733 407
-------- --------
Cash and cash equivalents, end of period ............. $ 1,080 $ --
======== ========
The accompanying notes are an integral part of these statements.
<PAGE>
10
PENTACON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
Pentacon was incorporated in March 1997. On March 10, 1998, Pentacon
acquired the Founding Companies for consideration consisting of cash and Common
Stock.
For financial statement purposes, Alatec, one of the Founding Companies,
has been identified as the accounting acquiror. Accordingly, the historical
financial statements represent those of Alatec prior to the Acquisitions and the
Offering. The Acquisitions were accounted for using the purchase method of
accounting. 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.
The accompanying unaudited interim 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
interim statements have been included and are of a normal and recurring nature.
The interim statements should be read in conjunction with the financial
statements and related notes thereto included in the Registration Statement.
The pro forma financial information for the three and nine months ended
June 30, 1998 and 1997 includes the results of Pentacon combined with the
Founding Companies as if the Acquisitions had occurred at the beginning of each
respective three- and nine-month period. The pro forma financial information
includes the effects of (i) the 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 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 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 Notes to Financial Statements of Pentacon and Alatec included in
the Company's Registration Statement.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Obtained for Internal Use. The SOP requires companies to
capitalize qualifying
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11
computer software costs incurred during the application development stage. The
SOP is effective for fiscal years beginning after December 15, 1998 and permits
early adoption. The Company adopted the SOP in the quarter ended March 31, 1998.
The adoption had no impact on net income as the Company's policy was materially
consistent with the requirements of the SOP.
3. ACQUISITIONS
During the quarter ended June 30, 1998, the Company completed two
acquisitions. 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. The consideration paid consisted of an aggregate of
567,152 shares of Common Stock and approximately $4.1 million in cash. 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 nine months ended June 30, 1998,
including the Founding Companies, were effective on the first day of the period
being reported, the pro forma revenues, gross margin, operating income and net
income would have been:
Nine Months Ended
---------------------------------------
June 30,
---------------------------------------
1998 1997
---- ----
(in thousands, except per share data)
Revenues..................... $ 136,410 $ 117,116
Gross margin................. 47,360 39,585
Operating income............. 12,218 10,390
Net income................... 6,057 5,081
Net income per share:
Basic................... $ 0.38 $ 0.32
Diluted................. $ 0.38 $ 0.32
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. Texas
International Aviation, Inc. has annualized revenues of approximately $30.0
million. The consideration paid consisted of an aggregate of 566,858 shares of
Common Stock and approximately $10.6 million in cash.
4. CREDIT FACILITY
Effective March 13, 1998, the Company entered into a credit agreement with
NationsBank of Texas, N.A. (the "Credit Facility"). The Credit Facility provided
the Company with a revolving line of credit of up to $50.0 million, which may be
used for general corporate purposes, including the repayment or refinancing of
indebtedness of the Founding Companies, future acquisitions, capital
expenditures and working capital. The Credit Facility is secured by the stock of
the Founding Companies. Advances under the Credit Facility bear interest at the
bank's designated variable rate plus margins ranging from 0 to 25 basis points,
depending on the ratio of the Company's interest-bearing debt to its pro forma
trailing earnings before interest, taxes, depreciation and amortization for the
previous four quarters. At the Company's option, the
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12
loans may bear interest based on a designated London interbank offering rate
plus a margin ranging from 100 to 175 basis points, depending on the same
ratios. Commitment fees of 20 to 37.5 basis points per annum are payable on the
unused portion of the line of credit, based on the same ratio. 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 March 13, 2001. On May
13, 1998, the Company increased the Credit Facility from $50.0 million to $75.0
million. On July 17, 1998, the Company amended the borrowing base provisions of
the Credit Facility in connection with the acquisition of Texas International
Aviation, Inc. (See Note 3). At June 30, 1998, the Company had borrowed $20.9
million under the amended Credit Facility and the approximate level of
additional available borrowings based upon eligible accounts receivable and
inventory was $17.6 million.
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, $23.3 million was used to pay the cash portion of
the purchase price relating to the Acquisitions of the Founding Companies 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. During the three months ended June 30, 1998, 567,152
shares of Common Stock were issued in connection with acquisitions (See Note 3).
6. EARNINGS PER SHARE
The historical periods ended June 30, 1997 represent 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 these periods. The computation of net income
per share for the three- and nine-month periods ended June 30, 1998 and pro
forma net income per share for the three- and nine-month periods ended June 30,
1998 and 1997 is based on the weighted average shares of Common Stock
outstanding as of June 30, 1998, which includes shares:
Issued in consideration for acquisition of Founding
Companies........................................... 6,720,000
Sold pursuant to the Offering and the over-allotment... 5,980,000
Issued to McFarland, Grossman Capital Ventures, L.P.... 2,295,000
Issued to management and directors..................... 535,000
Issued in connection with acquisitions................. 567,152
----------
16,097,152
Basic and diluted historical net income per share is computed based on the
following information:
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Three Months Ended Nine Months Ended
------------------- -------------------
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
BASIC: (in thousands)
Net income ..................... $ 2,121 $ 917 $ 2,175 $ 2,119
======= ======= ======= =======
Average Common shares .......... 15,721 2,969 8,232 2,969
======= ======= ======= =======
DILUTED:
Net income ..................... $ 2,121 $ 917 $ 2,175 $ 2,119
======= ======= ======= =======
Average Common shares .......... 15,721 2,969 8,232 2,969
Common share equivalents:
Warrants .................. 25 -- 9 --
Options ................... 188 -- 36 --
------- ------- ------- -------
Total Common share
equivalents ........ 213 -- 45 --
------- ------- ------- -------
Average Common shares and
Common share equivalents .. 15,934 2,969 8,277 2,969
======= ======= ======= =======
Basic and diluted pro forma net income per share is computed based on the
following information:
Three Months Ended Nine Months Ended
-------------------- --------------------
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
(in thousands)
BASIC:
Net income ..................... $ 2,447 $ 2,405 $ 5,670 $ 5,125
======= ======= ======= =======
Average Common shares .......... 15,721 15,530 15,594 15,530
======= ======= ======= =======
DILUTED:
Net income ..................... $ 2,447 $ 2,405 $ 5,670 $ 5,125
======= ======= ======= =======
Average Common shares .......... 15,721 15,530 15,594 15,530
Common share equivalents:
Warrants .................. 25 20 23 20
Options ................... 188 -- 85 --
------- ------- ------- -------
Total Common share
equivalents ........ 213 20 108 20
------- ------- ------- -------
Average Common shares and
Common share equivalents .. 15,934 15,550 15,702 15,550
======= ======= ======= =======
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14
7. INCOME TAXES
Prior to the Acquisitions, the stockholders of AXS and SSL elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code. Under
these provisions, AXS and SSL did not pay federal and certain state income taxes
as the AXS and SSL stockholders paid income taxes on their proportionate share
of the respective company's earnings. Commencing with the Acquisitions, the
Company will be taxed at applicable federal and state income tax rates.
The Company intends to file a consolidated federal income tax return which
includes the operations of the Founding Companies for periods subsequent to the
acquisition date. The Founding Companies will each file a "short period" federal
income tax return through the date of the Acquisitions.
The provision for income taxes included in the Historical Consolidated
Statements of Operations for the three- and nine-month periods ended June 30,
1998 assumes the application of statutory federal and state income tax rates,
the non-deductibility of goodwill amortization and the non-deductibility of $1.8
million of compensation related to Common Stock sold to management. The
provision for income taxes included in the Pro Forma Consolidated Statements of
Operations for the three- and nine-month periods ended June 30, 1998 and 1997
assumes the application of statutory federal and state income tax rates and the
non-deductibility of goodwill amortization. Interim period income tax provisions
are based upon estimates of annual effective tax rates and events may occur
which will cause such rates to vary.
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.
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15
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 Unaudited
Pro Forma Combined Financial Statements of the Company and related notes
thereto, the financial statements of Alatec, Pentacon, AXS, Maumee and SSL 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 Registration Statement. 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. Among the key factors that could
cause actual results to differ materially from expectations are, estimates of
costs or projected or anticipated changes to cost estimates relating to entering
new markets or expanding in existing markets, changes in economic and industry
conditions and changes in regulatory requirements. These and other risks and
assumptions are described in the Company's Registration Statement and reports
that are available from the United States Securities and Exchange Commission.
RESULTS OF OPERATIONS
The pro forma financial information for the three and nine months ended
June 30, 1998 and 1997 includes the results of Pentacon combined with the
Founding Companies as if the Acquisitions had occurred at the beginning of each
respective three- and nine-month period. The pro forma financial information
includes the effects of (i) the 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 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. Acquisitions subsequent to the Offering 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 or nine-month period are not
necessarily indicative of the results that may be achieved for any subsequent
three-month or nine-month period or for a full fiscal year.
PRO FORMA THREE MONTH PERIODS ENDED JUNE 30, 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:
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16
Pro Forma
Three Month Period Ended
June 30,
------------------------------------
1998 1997
----------------- -----------------
(dollar amounts in thousands)
Revenues ................................. $46,428 100.0% $38,413 100.0%
Cost of sales ........................... 30,380 65.4 25,206 65.6
------- ----- ------- -----
Gross profit .......... 16,048 34.6 13,207 34.4
Operating expenses ....................... 10,931 23.6 8,270 21.5
Goodwill amortization .................... 390 0.8 374 1.0
------- ----- ------- -----
Operating income ...... 4,727 10.2 4,563 11.9
REVENUES
Pro forma revenues increased 20.8% to $46.4 million for the three months
ended June 30, 1998 from $38.4 million for the three months ended June 30, 1997.
The increase in pro forma revenues was attributable to internal revenue growth
of the Founding Companies of $6.4 million, or 16.8%, with the remainder
resulting from acquisitions during the three month period ended June 30, 1998.
The increase in Founding Companies' pro forma revenues primarily resulted from
increases in sales to existing customers.
COST OF SALES
Pro forma cost of sales increased $5.2 million, or 20.6%, to $30.4 million
for the three months ended June 30, 1998 from $25.2 million for the three months
ended June 30, 1997. As a percentage of pro forma revenues, pro forma cost of
sales decreased from 65.6% in the three months ended June 30, 1997 to 65.4% in
the three months ended June 30, 1998. The decrease in pro forma cost of sales as
a percentage of pro forma revenues was a result of reductions in the percentage
by the Founding Companies and was due to the ability to implement selective
price increases and improvements in product mix.
OPERATING EXPENSES
Pro forma operating expenses increased $2.6 million, or 31.3%, to $10.9
million for the three months ended June 30, 1998 from $8.3 million for the three
months ended June 30, 1997. As a percentage of pro forma revenues, pro forma
operating expenses increased to 23.6% for the three months ended June 30, 1998
from 21.5% for the three months ended June 30, 1997. The increase was primarily
attributable to additions of sales and warehouse personnel to handle increased
sales volume, higher sales commissions resulting from increased international
sales and the costs of establishing a corporate office.
OPERATING INCOME
Due to the factors discussed above, pro forma operating income increased
$0.1 million to $4.7 million for the three months ended June 30, 1998 from $4.6
million for the three months ended June 30, 1997. As a percentage of pro forma
revenues, pro forma operating income decreased to 10.2% for the three months
ended June 30, 1998 from 11.9% for the three months ended June 30, 1997.
<PAGE>
17
PRO FORMA NINE MONTH PERIODS ENDED JUNE 30, 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
Nine Month Period Ended
June 30,
----------------------------------------
1998 1997
------------------- ------------------
(dollar amounts in thousands)
Revenues ........................... $126,767 100.0% $107,102 100.0%
Cost of sales ...................... 82,916 65.4 71,079 66.4
-------- ----- -------- -----
Gross profit ............. 43,851 34.6 36,023 33.6
Operating expenses ................. 31,520 24.9 24,725 23.1
Goodwill amortization .............. 1,138 0.9 1,122 1.0
-------- ----- -------- -----
Operating income ......... 11,193 8.8 10,176 9.5
REVENUES
Pro forma revenues increased $19.7 million, or 18.4%, to $126.8 million in
the nine months ended June 30, 1998 from $107.1 million in the nine months ended
June 30, 1997. Pro forma revenues of the Founding Companies increased $18.1
million or 16.9% over the nine-month period ended June 30, 1997. The increase in
pro forma revenues of the Founding Companies was attributable to several
factors, including increases in net sales to new customers and an increase in
net sales to existing customers.
COST OF SALES
Pro forma cost of sales increased $11.8 million to $82.9 million for the
nine months ended June 30, 1998 from $71.1 million for the nine months ended
June 30, 1997. As a percentage of pro forma revenues, pro forma cost of sales
decreased to 65.4% of revenues for the nine months ended June 30, 1998 from
66.4% of revenues for the nine months ended June 30, 1997. The decrease resulted
from an increase in sales of product with higher margins and improved pricing on
purchases partially offset by increases in costs of initial implementations of
inventory management systems at customer locations.
OPERATING EXPENSES
Pro forma operating expenses increased $6.8 million, or 27.5%, to $31.5
million for the nine months ended June 30, 1998 from $24.7 million for the nine
months ended June 30, 1997. As a percentage of pro forma revenues, pro forma
operating expenses increased to 24.9% for the nine months ended June 30, 1998
from 23.1% for the nine months ended June 30, 1997. The increase was the result
of the increased level of revenues, increased commissions on international
sales, compensation increases, increased professional fees incurred in
connection with the purchase transaction and the costs of establishing a
corporate office.
<PAGE>
18
OPERATING INCOME
Due to the factors discussed above, pro forma operating income increased
$1.0 million, or 9.8%, to $11.2 million for the nine months ended June 30, 1998
from $10.2 million for the nine months ended June 30, 1997. As a percentage of
pro forma revenues, pro forma operating income decreased to 8.8% for the nine
months ended June 30, 1998 from 9.5% for the nine months ended June 30, 1997.
HISTORICAL THREE MONTH AND NINE MONTH PERIODS ENDED JUNE 30, 1998
AND 1997
The historical financial information represents the information of Alatec
prior to the Acquisitions and the Offering and the consolidated results of
Pentacon subsequent to the 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
June 30,
----------------------------------------
1998 1997
------------------- ------------------
(dollar amounts in thousands)
Revenues ............................. $46,428 100.0% $14,334 100.0%
Cost of sales ........................ 30,380 65.4 8,798 61.4
------- ----- ------- -----
Gross profit ............... 16,048 34.6 5,536 38.6
Operating expenses ................... 10,931 23.5 3,649 25.4
Goodwill amortization ................ 390 0.9 -- --
------- ----- ------- -----
Operating income ........... 4,727 10.2 1,887 13.2
The increase in historical revenues, cost of sales and operating expenses
for the three months ended June 30, 1998 as compared to the three months ended
June 30, 1997 results primarily from the Acquisitions and, to a lesser extent,
from an increase in Alatec's revenues, cost of sales and operating expenses. The
increase in goodwill amortization results entirely from the Acquisitions. The
increase in operating income is due to the factors discussed above.
Historical
Nine Month Period Ended
June 30,
----------------------------------------
1998 1997
------------------- ------------------
(dollar amounts in thousands)
Revenues ........................... $80,786 100.0% $38,568 100.0%
Cost of sales ...................... 51,322 63.5 23,540 61.0
------- ----- ------- -----
Gross profit ............. 29,464 36.5 15,028 39.0
Operating expenses ................. 23,547 29.2 10,571 27.4
Goodwill amortization .............. 489 0.6 -- --
------- ----- ------- -----
Operating income ......... 5,428 6.7 4,457 11.6
The increase in historical revenues, cost of sales and operating expenses
for the nine months ended June 30, 1998 as compared to the nine months ended
June 30, 1997 results primarily from the Acquisitions and, to a lesser extent,
from an increase in Alatec's revenues, cost
<PAGE>
19
of sales and operating expenses. The increase in goodwill amortization results
entirely from the Acquisitions. The increase in operating income is due to the
factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $8.6 million of net cash from operating activities during
the nine months ended June 30, 1998, primarily for working capital requirements.
Net cash used in investing activities was $28.0 million, $21.9 million of which
represents the cash paid for the Founding Companies, net of cash acquired, and
$3.9 million of which represents cash paid for acquisitions, net of cash
acquired. Net cash provided by financing activities was $37.0 million for the
nine months ended June 30, 1998 and primarily consisted of $50.8 million net
proceeds of the Offering and $35.9 million of borrowings on long-term debt
partially offset by $49.4 million repayment of long-term debt. At June 30, 1998,
the Company had cash of $1.1 million, working capital of $55.6 million and total
debt of $24.0 million.
Effective March 13, 1998, the Company entered into a credit agreement with
NationsBank of Texas, N.A. (the "Credit Facility"). The Credit Facility provided
the Company with a revolving line of credit of up to $50.0 million, which may be
used for general corporate purposes, including the repayment or refinancing of
indebtedness of the Founding Companies, future acquisitions, capital
expenditures and working capital. The Credit Facility is secured by the stock of
the Founding Companies. Advances under the Credit Facility bear interest at the
bank's designated variable rate plus margins ranging from 0 to 25 basis points,
depending on the ratio of the Company's interest-bearing debt to its pro forma
trailing earnings before interest, taxes, depreciation and amortization for the
previous four quarters. At the Company's option, the loans may bear interest
based on a designated London interbank offering rate plus a margin ranging from
100 to 175 basis points, depending on the same ratios. Commitment fees of 20 to
37.5 basis points per annum are payable on the unused portion of the line of
credit, based on the same ratio. 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 March 13, 2001. On May 13, 1998, the
Company increased the Credit Facility from $50.0 million to $75.0 million. On
July 17, 1998, the Company amended the borrowing base provisions of the Credit
Facility in connection with the acquisition of Texas International Aviation,
Inc. (See Note 3). At June 30, 1998, the Company had borrowed $20.9 million
under the amended Credit Facility and the approximate level of additional
available borrowings based upon eligible accounts receivable and inventory was
$17.6 million.
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, $23.3 million was used to pay the cash portion of
the purchase price relating to the Acquisitions of the Founding Companies with
the remainder being used to pay certain indebtedness of the Founding Companies,
make capital expenditures and fund working capital requirements.
The Company's acquisition program may require significant additional
capital. The Company intends to seek additional capital as necessary to fund
such acquisitions through one or
<PAGE>
20
more funding sources that may include borrowings under the Credit Facility or
offerings of debt and/or equity securities of the Company. Cash provided by
operating activities may also be used to fund a portion of future acquisitions.
Although management believes that the Company will be able to obtain sufficient
capital to fund acquisitions, there can be no assurances that such capital will
be available to the Company at the time it is required or on terms acceptable to
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 three months ended June 30, 1998, 567,152
shares of Common Stock were issued in connection with acquisitions (See Note 3).
The Company currently operates in a decentralized information systems
environment and uses a variety of software, computer systems and related
technologies for internal management, accounting and reporting purposes and for
revenue-generating activities. With respect to the Year 2000 issue, management
has studied the scope and related costs of the modifications that will be
required to ensure that the Company's computer-related systems - operating,
accounting, reporting and administrative - will continue to meet its internal
needs and the needs of its customers and suppliers. All Founding Companies have
instituted processes to have existing information systems Year 2000 compliant by
the middle of calendar 1999. Expenditures are not expected to be significant and
will be expensed as incurred.
The Company is also in the process of determining the extent to which the
Company's suppliers and customers are Year 2000 compliant and expects to
finalize this determination and to develop and implement any necessary plans to
address deficiencies. Costs associated with any necessary plans will be expensed
as incurred and are not expected to be significant. The Company does not
anticipate any material disruptions in its operations related to the Year 2000
issue.
In addition, the Company is in the process of selecting a new information
system which will be installed at all operating entities and replace the
Company's existing operating systems. The total expenditures for this new
information system are expected to be approximately $6.0 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 funding under the
Company's Credit Facility as necessary.
<PAGE>
21
PART II -OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27 - Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated June 9, 1998 which included a
copy of a press release announcing that (i) it had signed letters of intent to
acquire two fastener distribution companies and (ii) it had closed on the
acquisition of Pace Products, Inc.
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: August 11, 1998 By: /s/ BRIAN FONTANA
Senior Vice President
& Chief Financial Officer
<DOCUMENT TO COME>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF PENTACON, INC. AS OF JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,080
<SECURITIES> 0
<RECEIVABLES> 25,124
<ALLOWANCES> 0
<INVENTORY> 50,447
<CURRENT-ASSETS> 79,093
<PP&E> 5,636
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,122
<CURRENT-LIABILITIES> 23,488
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 105,831
<TOTAL-LIABILITY-AND-EQUITY> 153,122
<SALES> 80,786
<TOTAL-REVENUES> 80,786
<CGS> 51,322
<TOTAL-COSTS> 75,358
<OTHER-EXPENSES> (67)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 976
<INCOME-PRETAX> 4,519
<INCOME-TAX> 2,344
<INCOME-CONTINUING> 2,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,175
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
