SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDING THE
CURRENT REPORT OF FORM 8-K
FILED ON SEPTEMBER 18, 1998
Pursuant to Section 13 or 15(d)
of Securities Exchange Act of 1934
DATE OF EARLIEST EVENT REPORTED: SEPTEMBER 4, 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)
10375 RICHMOND AVENUE, SUITE 700
HOUSTON, TEXAS 77042
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 860-1000
<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
September 18, 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
ASI Aerospace Group, Inc. and Subsidiary
Independent Auditor's Report........................... F-8
Consolidated Balance Sheets............................ F-9
Consolidated Statements of Operations.................. F-10
Consolidated Statement of Stockholders' Equity......... F-12
Consolidated Statements of Cash Flows.................. F-13
Notes to Consolidated Financial Statements............. F-15
23.1 Consent of McGladrey & Pullen, LLP
<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. In September 1998 the Company acquired ASI Aerospace
Group, Inc. ("ASI"), 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, TIA and ASI 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 sheets of TIA and ASI as if
the acquisitions occurred on June 30, 1998.
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;
F-1
<PAGE>
(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 consolidated statements of operations of TIA and
ASI 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;
(iii) the unaudited consolidated statement of operations of TIA for
the year ended December 31, 1997; and
(iv) the audited consolidated statement of operations of ASI 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 ASI
HISTORICAL INTERNATIONAL AEROSPACE PRO FORMA PRO FORMA
ASSETS PENTACON, INC. AVIATION, INC. GROUP, INC. ADJUSTMENTS COMBINED
-------------- -------------- --------- ----------- --------
(Note 2)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .......................... $ 1,080 $ 20 $ 176 $ -- $ 1,276
Accounts receivable ................................ 25,124 4,627 10,210 -- 39,961
Inventories ........................................ 50,447 20,861 29,970 -- 101,278
Deferred income taxes .............................. 2,194 15 1,256 987 (A) 4,452
Other current assets ............................... 248 25 344 -- 617
-------------- -------------- --------- ----------- --------
Total current assets .......................... 79,093 25,548 41,956 987 147,584
Property, plant and equipment, net of accumulated
depreciation................................... 5,636 270 1,151 (794)(A) 6,263
Goodwill, net of accumulated amortization .......... 66,407 -- 4,519 66,280 (B) 137,206
Deferred income taxes .............................. 943 -- -- 325 (A) 1,268
Other assets ....................................... 1,043 575 119 (575)(C) 1,162
-------------- -------------- --------- ----------- --------
Total assets .................................. $ 153,122 $ 26,393 $ 47,745 $ 66,223 $293,483
============== ============== ========= =========== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Accounts payable ................................... $ 17,433 $ 5,215 8,499 $ -- $ 31,147
Accrued expenses and other current liabilities ..... 5,064 324 1,272 5,450 (A) 12,110
Income taxes payable ............................... 590 93 79 -- 762
Current maturities of long-term debt and capital
lease obligations ............................. 401 13,876 21,139 (35,015)(D) 401
-------------- -------------- --------- ----------- --------
Total current liabilities ..................... 23,488 19,508 30,989 (29,565) 44,420
Long-term debt and capital lease obligations,
less current maturities ....................... 23,642 173 4,269 108,641 (D) 136,725
-------------- -------------- --------- ----------- --------
Total liabilities ............................. 47,130 19,681 35,258 79,076 181,145
Redeemable preferred stock ......................... -- -- 1,800 (1,800)(E) --
Common stock ....................................... 161 7 -- (1)(E) 167
Paid-in capital .................................... 94,032 2,516 2,887 937 (E) 100,372
Retained earnings .................................. 11,799 4,189 7,800 (11,989)(A) 11,799
-------------- -------------- --------- ----------- --------
Total stockholders' equity .................... 105,992 6,712 10,687 (11,053) 112,338
-------------- -------------- --------- ----------- --------
Total liabilities and stockholders' equity .... $ 153,122 $ 26,393 $ 47,745 $ 66,223 $293,483
============== ============== ========= =========== ========
</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
============== ============== ======= ======= ======== ====== ========
<CAPTION>
OTHER MERGER PRO FORMA OFFERING AS
ASI ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------- ------------ ----------- --------- ----------- ---------
(Note 3) (Note 3)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................... $52,183 $ 9,643 $ -- $ 210,478 $ -- $ 210,478
Cost of Sales .............. 35,696 6,134 -- 140,448 -- 140,448
------- ------------ ----------- --------- ----------- ---------
Gross profit ............. 16,487 3,509 -- 70,030 -- 70,030
Operating expenses ......... 7,785 2,365 (2,137)(A) 50,889 (6,480)(E) 44,409
Goodwill amortization ...... 269 -- 1,740(B) 2,551 -- 2,551
------- ------------ ----------- --------- ----------- ---------
Operating income ......... 8,433 1,144 397 16,590 6,480 23,070
Other (income)/expense ..... 1 (3) -- (119) -- (119)
Interest expense ........... 1,535 1 6,856(C) 10,568 (2,833)(C) 7,735
------- ------------ ----------- --------- ----------- ---------
Income before taxes ...... 6,897 1,146 (6,459) 6,141 9,313 15,454
Income taxes ............... 2,910 79 (3,110)(D) 3,565 3,818(D) 7,383
------- ------------ ----------- --------- ----------- ---------
Net income ............. $ 3,987 $ 1,067 $ (3,349) $ 2,576 $ 5,495 $ 8,071
======= ============ =========== ========= =========== =========
Diluted net income per share $ 0.48
=========
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
============== ============== ======= ======= ======== ====== ==============
<CAPTION>
ASI
YEAR ENDED OTHER MERGER PRO FORMA OFFERING AS
DEC. 31, 1997 ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
-------------- ------------ ----------- ----------- ----------- -----------
(Note 3) (Note 3)
<S> <C> <C> <C> <C> <C> <C>
Revenues ................... $ 53,552 $ 14,268 $ -- $ 235,914 $ -- $ 235,914
Cost of Sales .............. 37,480 9,166 -- 159,579 -- 159,579
-------------- ------------ ----------- ----------- ----------- -----------
Gross profit ............ 16,072 5,102 -- 76,335 -- 76,335
Operating expenses ......... 8,103 3,959 (3,434)(A) 50,938 -- 50,938
Goodwill amortization ...... 192 -- 3,130(B) 3,402 -- 3,402
-------------- ------------ ----------- ----------- ----------- -----------
Operating income ...... 7,777 1,143 304 21,995 -- 21,995
Other (income)/expense ..... 99 (7) -- 39 -- 39
Interest expense ........... 1,389 333 8,265(C) 13,083 (3,807)(C) 9,276
-------------- ------------ ----------- ----------- ----------- -----------
Income before taxes .... 6,289 817 (7,961) 8,873 3,807 12,680
Income taxes ............... 2,181 244 (255)(D) 5,033 1,561 (D) 6,594
-------------- ------------ ----------- ----------- ----------- -----------
Net income ............. $ 4,108 $ 573 $ (7,706) $ 3,840 $ 2,246 $ 6,086
============== ============ =========== =========== =========== ===========
Diluted net income per share $ 0.36
===========
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. In September 1998 the Company acquired ASI, 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
and ASI 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 acquisitions.
(C) Records the estimated direct costs of the acquisitions.
(D) Reflects the repayment of debt and the disbursement of approximately
$10.6 and $64.0 million in cash for TIA and ASI, respectively.
(E) Reflects the issuance of 566,858 shares of Common Stock for TIA, the
elimination of historical common stock and paid-in capital of ASI
and TIA and the elimination of ASI redeemable preferred 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>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
ASI Aerospace Group, Inc.
San Diego, California
We have audited the accompanying consolidated balance sheets of ASI Aerospace
Group, Inc. and subsidiary as of December 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ASI Aerospace Group,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
McGladrey & Pullen, LLP
San Diego, California
February 20, 1998, except for Note 13
as to which the date is August 14, 1998
F-8
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------- 1998
ASSETS (NOTES 6 AND 7) 1996 1997 (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Current Assets
Cash ......................................... $ 13,418 $ 12,882 $ 176,249
Trade receivables, net of allowance
for doubtful accounts of 1996 $78,000;
1997 $54,000; 1998 $59,000 (Note 2) ........ 3,443,912 7,644,842 10,210,006
Inventory ...................................... 11,570,026 25,649,166 29,969,641
Prepaid expenses and other ..................... 45,905 233,009 344,132
Deferred tax assets (Note 12) .................. 349,300 1,256,000 1,256,000
----------- ----------- -----------
TOTAL CURRENT ASSETS .................. 15,422,561 34,795,899 41,956,028
----------- ----------- -----------
Property, Equipment and Leasehold
Improvements, net (Note 4) ................... 572,048 1,087,752 1,151,600
----------- ----------- -----------
Intangibles and Other Assets (Note 5) .......... 1,764,287 4,899,430 4,637,356
----------- ----------- -----------
$17,758,896 $40,783,081 $47,744,984
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Checks outstanding in excess of bank balances. $ 159,222 $ 580,982 $ --
Note payable, bank (Note 6) .................. -- 13,312,073 17,592,302
Current maturities of long-term debt (Note 7):
Related parties ............................ 2,286,697 2,286,697 2,286,697
Other ...................................... 835,044 1,084,812 1,259,738
Accounts payable, trade ...................... 4,473,462 7,331,940 8,499,131
Accrued expenses and other (Note 7) .......... 561,910 1,035,726 1,272,583
Income taxes payable ......................... 11,500 683,000 78,768
----------- ----------- -----------
TOTAL CURRENT LIABILITIES ............. 8,327,835 26,315,230 30,989,219
----------- ----------- -----------
Long-Term Debt
Note payable, bank (Note 6) .................. 3,725,000 -- --
Long-term debt, less current maturities
(Note 7) ................................... 1,984,415 4,800,233 4,269,151
----------- ----------- -----------
5,709,415 4,800,233 4,269,151
----------- ----------- -----------
Commitments (Notes 3, 8, 10 and 11)
Redeemable Preferred Stock,
redemption value $1,000 per share (Note 10) .. 1,800,000 1,800,000 1,800,000
----------- ----------- -----------
Stockholders' Equity (Note 6)
Common stock, $.01 par value; authorized 1,000
shares; issued and outstanding 113
shares ..................................... 1 1 1
Additional paid-in capital ................... 833,975 2,886,975 2,886,975
Retained earnings ............................ 1,087,670 4,980,642 7,799,638
----------- ----------- -----------
1,921,646 7,867,618 10,686,614
----------- ----------- -----------
$17,758,896 $40,783,081 $47,744,984
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales (Note 2) ....................... $ 8,525,062 $24,587,196 $53,551,932
Cost of goods sold ....................... 7,167,319 17,663,851 37,479,851
----------- ----------- -----------
GROSS PROFIT .................... 1,357,743 6,923,345 16,072,081
General and administrative expenses ...... 1,646,829 4,483,990 8,294,754
----------- ----------- -----------
OPERATING INCOME (LOSS) ......... (289,086) 2,439,355 7,777,327
----------- ----------- -----------
Nonoperating (income) expense:
Interest expense (Note 7) .............. 189,231 700,223 1,388,836
Other (income) expense (Note 3) ........ (30,135) 82,998 98,519
----------- ----------- -----------
159,096 783,221 1,487,355
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES ...... (448,182) 1,656,134 6,289,972
Provision for income taxes (Note 12) ..... 1,600 49,700 2,181,000
----------- ----------- -----------
NET INCOME (LOSS) ............... $ (449,782) $ 1,606,434 $ 4,108,972
=========== =========== ===========
Basic and diluted income (loss) per share $ (4,223) $ 14,216 $ 34,451
=========== =========== ===========
Weighted average common shares outstanding 106.5 113 113
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30,
--------------------------
1997 1998
(Unaudited) (Unaudited)
----------- -----------
Net sales (Note 2) ............................. $21,935,091 $36,458,662
Cost of goods sold ............................. 15,567,862 24,969,097
----------- -----------
GROSS PROFIT .......................... 6,367,229 11,489,565
General and administrative expenses ............ 3,277,871 5,316,138
----------- -----------
OPERATING INCOME ...................... 3,089,358 6,173,427
----------- -----------
Nonoperating expense:
Interest expense (Note 7) .................... 492,448 1,041,431
Other expense ................................ 3,768 --
----------- -----------
496,216 1,041,431
----------- -----------
INCOME BEFORE INCOME TAXES ............ 2,593,142 5,131,996
Provision for income taxes (Note 12) ........... 964,000 2,097,000
----------- -----------
NET INCOME ............................ $ 1,629,142 $ 3,034,996
=========== ===========
Basic and diluted income per share ............. $ 13,461 $ 25,903
=========== ===========
Weighted average common shares outstanding ..... 113 113
=========== ===========
F-11
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE, 1,000
SHARES AUTHORIZED
---------------------- RETAINED
ISSUED AND ADDITIONAL EARNINGS/
OUTSTANDING PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
----------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ....... 100 $ 1 $ 446,684 $ (68,982) $ 377,703
Issuance of 13 shares of
common stock ................. 13 -- 591 -- 591
Net (loss) ..................... -- -- -- (449,782) (449,782)
----------- ------ ---------- ------------ ------------
Balance, December 31, 1995 ....... 113 1 447,275 (518,764) (71,488)
Effects of intercorporate
tax allocations (Note 12) .... -- -- 386,700 -- 386,700
Net income ..................... -- -- -- 1,606,434 1,606,434
----------- ------ ---------- ------------ ------------
Balance, December 31, 1996 ....... 113 1 833,975 1,087,670 1,921,646
Effects of intercorporate
tax allocations (Note 12) .... -- -- 2,053,000 -- 2,053,000
Dividends (Note 10) ............ -- -- -- (216,000) (216,000)
Net income ..................... -- -- -- 4,108,972 4,108,972
----------- ------ ---------- ------------ ------------
Balance, December 31, 1997 ....... 113 1 2,886,975 4,980,642 7,867,618
UNAUDITED INFORMATION:
Dividends (Note 10) ............ -- -- -- (216,000) (216,000)
Net income for the six
months ended June 30, 1998 ... -- -- -- 3,034,996 3,034,996
----------- ------ ---------- ------------ ------------
Balance, June 30, 1998 (Unaudited) 113 $ 1 $2,886,975 $ 7,799,638 $ 10,686,614
=========== ====== ========== ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-12
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
(Unaudited) (Unaudited)
--------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ................................. $(449,782) $ 1,606,434 $ 4,108,972 $ 1,629,142 $ 3,034,996
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ................... 64,027 202,084 410,769 158,718 328,667
Inventory reserve ............................... 646,939 -- -- -- 270,000
Loss on disposal of equipment ................... -- 3,521 -- -- 6,716
Deferred income taxes ........................... -- 37,400 1,146,000 514,765 --
Change in working capital components,
net of effects of business combinations:
(Increase) decrease in:
Trade receivables ........................... (153,288) (1,116,618) (2,045,504) (3,118,037) (2,565,164)
Inventory ................................... 197,003 (4,294,249) (10,470,184) (4,158,416) (4,590,475)
Prepaid expenses and other .................. (32,886) 3,827 (163,739) (23,281) (111,123)
Increase (decrease) in:
Accounts payable, trade ..................... 212,043 2,984,852 827,981 1,757,278 1,167,191
Accrued expenses and other .................. (19,921) 379,686 473,816 100,266 236,857
Income taxes payable ........................ -- 11,500 671,500 449,440 (604,232)
--------- ------------ ------------ ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES ..................... 464,135 (181,563) (5,040,389) (2,690,125) (2,826,567)
--------- ------------ ------------ ----------- -----------
Cash Flows from Investing Activities
Payments for purchase of businesses ............... (236,029) (6,434,840) (5,017,475) -- --
Purchase of equipment ............................. (24,269) (59,081) (472,660) (282,559) (392,360)
Increase in deposits and other assets, net ........ (17,794) (32,290) (209,357) (679,257) 83,268
Proceeds from sales of property and equipment ..... -- 45,000 -- -- 171,935
Proceeds from stockholder receivable .............. -- 10,500 -- -- --
--------- ------------ ------------ ----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES .... (278,092) (6,470,711) (5,699,492) (961,816) (137,157)
--------- ------------ ------------ ----------- -----------
Cash Flows from Financing Activities
Checks outstanding in excess of bank balances ..... -- 159,222 421,760 822,113 (580,982)
Net borrowings on note payable, bank .............. -- 3,725,000 9,587,073 3,332,146 4,280,229
Principal payments on long-term debt .............. (25,680) (571,273) (990,984) (424,097) (556,156)
Borrowings on long-term debt ...................... (5,892) 3,004,870 1,937,496 152,329 200,000
Cash dividends paid ............................... -- -- (216,000) (216,000) (216,000)
Proceeds from issuance of common stock ............ 591 -- -- -- --
--------- ------------ ------------ ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................... (30,981) 6,317,819 10,739,345 3,666,491 3,127,091
--------- ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH ......... 155,062 (334,455) (536) 14,550 163,367
Cash, beginning ..................................... 192,811 347,873 13,418 13,418 12,882
--------- ------------ ------------ ----------- -----------
Cash, ending ........................................ $ 347,873 $ 13,418 $ 12,882 $ 27,968 $ 176,249
========= ============ ============ =========== ===========
</TABLE>
F-13
<PAGE>
ASI AEROSPACE GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -----------------------
1995 1996 1997 1997 1998
(Unaudited) (Unaudited)
----------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Supplemental Disclosures of Cash
Flow Information
Cash payments for:
Interest ............................................. $ 173,736 $ 584,425 $1,303,577 $ 426,128 $ 974,114
=========== ========== ========== ========= ==========
Income taxes ......................................... $ 3,200 $ 800 $ 433,706 $ 14,600 $2,652,000
=========== ========== ========== ========= ==========
Supplemental Schedule of Noncash Financing Activities
Capital lease obligations incurred for use of
equipment............................................. $ 28,211 $ 135,692 $ 152,329
=========== ========== ==========
Effects of intercorporate tax allocation ................ $ -- $ 386,700 $2,053,000
=========== ========== ==========
Acquisition of Businesses (Note 9):
Purchase Price:
Cash paid ......................................... $ 236,029 $6,434,840 $5,017,475
Debt to sellers ................................... 253,044 -- 1,876,678
----------- ---------- ----------
$ 489,073 $6,434,840 $6,894,153
=========== ========== ==========
Assets Acquired:
Working capital acquired .......................... $ 469,073 $4,585,391 $3,757,249
Fair value of other assets acquired,
principally equipment........................... 20,000 424,594 128,835
Costs in excess of net assets of
businesses acquired ............................ -- 1,424,855 3,098,133
Long-term liabilities assumed ..................... -- -- (90,064)
----------- ---------- ----------
$ 489,073 $6,434,840 $6,894,153
=========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
ASI Aerospace Group, Inc. (an eighty-eight percent owned subsidiary of West
Coast Aero Products Holding Company (WCAPHC)) and subsidiary (individually or
collectively, the "Company") is a distributor of specialty fasteners, primarily
for the aircraft and aerospace industry. The Company grants credit in the form
of accounts receivable to its customers which are located primarily throughout
the United States and internationally. Sales to international customers during
the year ended December 31, 1997 were approximately 5%. All sales are transacted
in U.S. dollars.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Pollard Aviation, Inc. All material intercompany
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable and short-term debt approximate fair value
due to the immediate short-term maturity of these financial instruments.
Based on the borrowing rates currently available to the Company for bank loans
with similar maturities and similar collateral requirements, the fair value of
notes payable and long-term debt approximates the carrying amount.
F-15
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH
The Company maintains its cash accounts primarily in one commercial bank located
in California. Accounts at this bank are insured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000. The Company's accounts at this
institution, at times, may exceed the federally insured limit. The Company has
not experienced any losses in such accounts.
INVENTORY
Inventory is stated at lower of cost (weighted average method) or market and
consists entirely of products for resale. The Company periodically reviews the
age and turnover of its inventory to determine whether any inventory has become
obsolete or has declined in value and incurs a charge to operations for known
and estimated inventory obsolescence. Inventory quantities in excess of a
four-year supply based on projected and historical sales levels have been
reduced to their net realizable value. It is reasonably possible that additional
adjustments to reduce inventory to market value will be required in the future.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost.
Depreciation on property and equipment is computed utilizing the straight-line
method over the estimated useful lives ranging from 5 to 7 years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the term of the leases or the estimated useful lives of the improvements.
Amortization of equipment acquired under capital leases is included with
depreciation expense on owned assets.
INTANGIBLE ASSETS
The Company's intangible asset "costs in excess of net assets of businesses
acquired" is amortized utilizing the straight-line method over 15 years.
Non-competition agreements with former owners of businesses acquired are
expensed on a straight-line basis over the lives of the respective agreements.
Organization costs are being amortized over 3 years.
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
In accordance with FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
records impairment losses on long-lived assets used in operations when events
and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets. The Company continually evaluates the
recovery of its intangible assets by assessing whether the amortization of the
balance over its estimated remaining life can be recovered based upon operating
income, cash flows and business prospects.
F-16
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS (CONTINUED)
The Company does not believe an impairment of its long-lived assets used in
operations or its intangible assets has occurred.
INCOME TAXES
The Company recognizes deferred tax assets for deductible temporary differences
and deferred tax liabilities for taxable temporary differences. Temporary
differences are the differences between the reported amount of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
ADVERTISING AND PROMOTION
Costs associated with advertising and promotion are expensed in the year
incurred.
EARNINGS PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128), Earnings per Share. In computing earnings per
share for the year ended December 31, 1997 and unaudited earnings per share for
the six month periods ended June 30, 1997 and 1998, dividends on preferred stock
were deducted from net income in calculating basic earnings per share. The
Company has no dilutive potential common shares. Accordingly, the Company's
presentation of diluted earnings (loss) per share is the same as that of basic
earnings (loss) per share for the years ended December 31, 1995, 1996 and 1997.
F-17
<PAGE>
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying balance sheet as of June 30, 1998 and the statements of
operations and cash flows for the six month periods ended June 30, 1997 and
1998, respectively, have not been audited. However, these financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In management's opinion, the accompanying
interim financial statements reflect all material adjustments (consisting only
of normal recurring accruals) necessary for a fair statement of the results for
the interim periods presented. The results for the interim periods are not
necessarily indicative of the results which will be reported for the entire
year.
NOTE 2. CONCENTRATIONS
The Company performs ongoing credit evaluation of its customers and generally
does not require collateral. Provisions are made for estimated uncollectible
trade receivables as considered necessary. To date, losses on trade receivables
have been minimal in relation to the volume of sales and have been within
management's expectations.
Net sales and accounts receivable include sales to and accounts receivable from
the following major customers.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1995 1996 1997
------------------------- ------------------------- --------------------------
NET NET NET NET NET NET
SALES RECEIVABLES SALES RECEIVABLES SALES RECEIVABLES
---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Customer A $1,156,297 $ 55,593 $5,799,826 $ 636,404 $16,260,993 $ 1,996,032
Customer B -- -- 2,638,029 168,307 -- --
---------- ----------- ---------- ----------- ----------- -----------
$1,156,297 $ 55,593 $8,437,855 $ 804,711 $16,260,993 $ 1,996,032
========== =========== ========== =========== =========== ===========
</TABLE>
JUNE 30, (UNAUDITED)
--------------------------------------------------------
1997 1998
------------------------- --------------------------
NET NET NET NET
SALES RECEIVABLES SALES RECEIVABLES
---------- ----------- ----------- -----------
Customer A ........ $6,636,950 $ 1,408,298 $11,083,781 $ 2,721,049
========== =========== =========== ===========
The net sales to Customer B did not exceed 10% of net sales for the years ended
December 31, 1995 and 1997.
F-18
<PAGE>
NOTE 3. INVESTMENT IN JITCO, LLC
The Company is a 50% member in JITCO, LLC (JITCO) at December 31, 1997. The
Company may be required to make additional capital contributions to JITCO at
such time as additional working capital is needed for the operation of the
business. Members' contributions are pro rata based on their respective
ownership percentages. The Company is accounting for its investment in JITCO by
the equity method of accounting and the net investment of approximately $11,500
and $20,000 is included in deposits and other assets as of December 31, 1996 and
1997, respectively.
The following are the approximate reported assets, liabilities, revenues, and
expenses of JITCO as of and for the years ended December 31:
1996 1997
-------- ----------
Assets ............................. $334,100 $1,924,000
Liabilities ........................ $216,400 $1,876,000
Revenues ........................... $ 22,200 $2,045,000
Expenses ........................... $114,500 $2,258,000
The Company's share in the net loss of JITCO was approximately $18,500 and
$106,000 for the years ended December 31, 1996 and 1997, respectively, and is
included in other expense in the Company's consolidated statements of
operations.
At December 31, 1997, the Company has guaranteed the payment of up to $120,000
of certain notes payable to a bank by JITCO.
NOTE 4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ 1998
1996 1997 (UNAUDITED)
---------- ---------- ----------
<S> <C> <C> <C>
Office furniture and equipment ............... $ 500,786 $ 939,456 $1,153,990
Leasehold improvements ....................... 81,875 121,800 242,468
Building ..................................... 93,000 93,000 --
---------- ---------- ----------
675,661 1,154,256 1,396,458
Less accumulated depreciation and amortization 160,613 343,806 369,855
---------- ---------- ----------
515,048 810,450 1,026,603
Construction in progress ..................... -- 220,302 124,997
Land ......................................... 57,000 57,000 --
---------- ---------- ----------
$ 572,048 $1,087,752 $1,151,600
========== ========== ==========
</TABLE>
F-19
<PAGE>
NOTE 5. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ 1998
1996 1997 (Unaudited)
---------- ---------- ----------
<S> <C> <C> <C>
Costs in excess of net assets of businesses
Acquired, less accumulated amortization
of 1996 $137,426; 1997 $336,325; 1998 $483,493 $1,663,081 $4,579,745 $4,420,087
Organization costs, net of accumulated amortization
of 1996 $20,926; 1997 $34,882; 1998 $41,860 ... 48,532 34,576 27,598
Covenant not to compete, less accumulated
Amortization of 1997 $13,333; 1998 $25,833 .... -- 111,667 99,167
Deposits and other assets (Note 3) ................ 52,674 173,442 90,504
---------- ---------- ----------
$1,764,287 $4,899,430 $4,637,356
========== ========== ==========
</TABLE>
NOTE 6. NOTE PAYABLE, BANK
The Company has a revolving line of credit agreement with a commercial bank. The
agreement allows for advances up to a maximum of $19,000,000, of which
approximately $13,300,000 was outstanding and approximately $1,500,000 was
available for borrowing at December 31, 1997. Borrowings are limited to 80% of
the Company's eligible domestic trade receivables plus 70% of eligible foreign
accounts and 50% of eligible inventory up to $9,000,000, as defined by the
agreement. The line of credit bears interest at LIBOR (5.69% at December 31,
1997) plus 3%. The Company may elect to fix the rate under this line of credit
at the bank's prime rate (8.5% at December 31, 1997) plus an applicable margin
ranging from 2.25% to 3% based on the Company's total liabilities to tangible
net worth at the time, as defined by the agreement. Advances are collateralized
by substantially all of the Company's assets and the line of credit agreement
expires in August 1998. As of December 31, 1996, the balance outstanding on this
agreement of $3,725,000 was classified as long-term based on an expiration date
greater than one year in the future. The Company had an adequate borrowing base
to support this balance and did not intend to pay down the balance within a
twelve-month period.
F-20
<PAGE>
NOTE 6. NOTE PAYABLE, BANK (CONTINUED)
In connection with this credit agreement as well as other obligations (Note 7),
the Company has agreed, among other things, to maintain certain consolidated
financial ratios and consolidated amounts, including:
{ a current ratio of not less than 1.20 to 1.0
{ a minimum tangible net worth, as defined, of $6,500,000 at December 31, 1997
{ a total debt to tangible net worth ratio not to exceed 4.25 to 1.0
{ minimum profitability of $1,000,000
{ a minimum debt service ratio of 1.35 to 1.0
{ annual limit on capital expenditures of $700,000
The agreement also provides for certain covenants including restrictions on new
indebtedness or loans other than trade debt or loans incurred in the normal
course of business, paying dividends on Company stock other than the 12%
cumulative preferred stock dividends, purchasing or retiring any Company stock,
or amending or altering the Company's capital structure. The agreement requires
the bank's preapproval for any and all business acquisitions.
F-21
<PAGE>
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Note payable to a bank, due in monthly Installments
of $62,500, plus interest at 1.5% above the
bank's prime rate through November 2002 (a) (c) .... $2,500,000 $3,687,500
Unsecured subordinated note payable to a related
party, due on demand, monthly interest only
Payments at 11.2% .................................. 1,600,000 1,600,000
Unsecured subordinated notes payable to
Various related parties, due on demand,
Monthly interest only payments at 12.0% ............ 686,697 686,697
Unsecured subordinated note payable to former owner
of acquired business, due July 2002, annual
interest only Payments at 10% ...................... -- 500,000
Unsecured notes payable to former owners of Acquired
businesses, due in aggregate monthly Installments
of $24,371 including Interest at 10% through
August 2007 ........................................ -- 1,298,924
Notepayable to former owner of acquired Business,
due in monthly payments of $5,027 Including interest
at 7.0% through May 2000 (b) ....................... 185,507 136,451
Other .................................................. 133,952 262,170
---------- ----------
5,106,156 8,171,742
Less current maturities ................................ 3,121,741 3,371,509
---------- ----------
$1,984,415 $4,800,233
========== ==========
</TABLE>
F-22
<PAGE>
NOTE 7. LONG-TERM DEBT (CONTINUED)
(a) Subject to the loan agreement covenants on the revolving line of credit
(Note 6) and collateralized by substantially all assets of the Company.
(b) These amounts are collateralized by certain inventory and trade
receivables.
(c) Interest under this note may be fixed by the Company for terms of not less
than 30 days at the then current LIBOR rate plus 3.5%. At December 31,
1997 the Company had elected to fix the rate on the entire outstanding
balance at the LIBOR rate option.
Approximate aggregate annual maturities on long-term debt at December 31, 1997
are as follows:
Years Ending December 31,
----------
1998 ................................................ $3,372,000
1999 ................................................ 1,068,000
2000 ................................................ 1,042,000
2001 ................................................ 996,000
2002 ................................................ 1,366,000
Thereafter .......................................... 328,000
----------
$8,172,000
==========
During the years ended December 31, 1995, 1996 and 1997, the Company incurred
approximately $188,000, $263,000 and $310,000, respectively, in interest expense
to related parties of which approximately $83,000 and $187,000 are included in
accrued expenses and other at December 31, 1996 and 1997, respectively.
During the six-month periods ended June 30, 1997 and 1998, the Company incurred
approximately $137,000 and $145,000 in interest expense, respectively, to
related parties, of which approximately $42,000 and $73,000 are included in
accrued expenses and other at June 30, 1997 and 1998, respectively.
NOTE 8. LEASE COMMITMENTS
OPERATING LEASES
The Company leases its office and warehouse facilities under noncancelable
operating lease agreements expiring through July 2002. The leases provide for
aggregate monthly payments of approximately $41,000. The Company also leases
certain equipment under noncancelable operating lease agreements expiring
through August 2000. The equipment leases provide for aggregate monthly payments
of approximately $3,200. Total rental expense included in the consolidated
statements of operations for the years ended December 31, 1995, 1996 and 1997
was approximately $108,000, $212,000 and $396,000, respectively.
F-23
<PAGE>
NOTE 8. LEASE COMMITMENTS (CONTINUED)
OPERATING LEASES (CONTINUED)
Rent expense for the six months ended June 30, 1997 and 1998 totaled $147,000
and $113,000, respectively.
At December 31, 1997, the approximate aggregate future annual minimum lease
commitments due under noncancelable operating leases are as follows:
Years Ending December 31,
- -------------------------
1998 ........................................................ $ 406,000
1999 ........................................................ 373,000
2000 ........................................................ 313,000
2001 ........................................................ 306,000
2002 ........................................................ 116,000
----------
TOTAL MINIMUM LEASE PAYMENTS ................ $1,514,000
==========
NOTE 9. BUSINESS ACQUISITIONS
In July 1997 the Company acquired the net assets of Adams Supply Company
(Adams), a distributor of specialty fasteners, located in Torrance, California.
The purchase price of approximately $5,920,000 consisted of cash of
approximately $4,567,000 and notes payable to the sellers of $1,352,000.
In June 1997 the Company acquired the net assets of Paschall International
(Paschall), a distributor of commercial airline internal components, located in
Pasadena, California. The purchase price of approximately $974,000 consisted of
cash of approximately $450,000 and a note payable to the former owner of
$525,000.
In March 1996 the Company acquired the net assets of Barco Aviation, Inc.,
(Barco) a distributor of specialty fasteners to the aerospace industry located
in Santa Monica, California. The purchase price of $6,434,840 was paid in cash.
In June 1995 the Company acquired the net assets of Pollard, a distributor of
specialty fasteners, located in Dallas, Texas. The purchase price consisted of
$236,029 in cash and a promissory note payable to the former owner of $253,044.
Each of these acquisitions were accounted for as purchase business combinations
with the operations of the acquired business included in the Company's
consolidated financial statements subsequent to the acquisition date. Barco,
Paschall and Adams are operating as divisions of the Company.
F-24
<PAGE>
NOTE 9. BUSINESS ACQUISITIONS (CONTINUED)
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and the acquired divisions as if the
acquisitions had occurred January 1, 1996.
1996 1997
----------- -----------
Net sales .............................. $39,949,000 $61,931,000
Net income ............................. 2,283,000 6,690,000
Earnings per common share .............. 20,204 57,292
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of goodwill and other intangible assets, and an increased interest
expense on acquisition debt. They do not purport to be indicative of the results
of operations which actually would have resulted had the combinations been in
effect on January 1, 1996, or of the results of operations of the consolidated
entities.
NOTE 10. REDEEMABLE PREFERRED STOCK
The Company has 1,800 shares of mandatory redeemable preferred stock authorized,
issued and outstanding which is redeemable by the holder on April 1, 2001 at
$1,000 per share.
During the year ended December 31, 1995, the Company, with the approval of the
preferred stockholders, amended the articles of incorporation to waive the
preferred stock 12% accrued dividends and any future dividends on preferred
stock until May 1, 1996. Payments on the dividends resumed in May 1997 and will
continue annually thereafter. The majority of WCAPHC's common stockholders are
also preferred stockholders. The Company declared and paid dividends of $216,000
($120 per share) to stockholders of record during the year ended December 31,
1997.
NOTE 11. BENEFIT PLAN
The Company has a 401(k) plan for those employees who meet the eligibility
requirements set forth in the Plan. The Company is required to match a minimum
of 50% of the employees' elective deferral contributions up to 10% of
compensation. The Company contributed $57,906 and $117,341 to the Plan for the
years ended December 31, 1996 and 1997, respectively. During the six month
periods ended June 30, 1997 and 1998, the Company contributed $49,669 and
$79,875 to the Plan.
F-25
<PAGE>
NOTE 12. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and tax purposes. Significant components of the Company's net deferred tax
assets at December 31, 1995, 1996 and 1997 are as follows:
1995 1996 1997
--------- ----------- -----------
Deferred tax assets:
Inventory ...................... $ 552,300 $ 670,500 $ 1,038,300
Accounts receivable ............ 2,100 31,000 21,600
Accrued expenses and other ..... 61,800 31,200 62,400
State income taxes ............. 500 210,400
Net operating loss carryforwards 329,000 24,900
--------- ----------- -----------
945,700 757,600 1,332,700
Less valuation allowance ....... (944,700) (334,900)
--------- ----------- -----------
1,000 422,700 1,332,700
--------- ----------- -----------
Deferred tax liabilities, other .... (1,000) (73,400) (76,700)
--------- ----------- -----------
Net deferred tax assets .. $ -- $ 349,300 $ 1,256,000
========= =========== ===========
The provision for income taxes consists of the following for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal income tax ........................... $ -- $ 386,700 $ 2,469,000
State income tax ............................. 1,600 12,300 618,700
Deferred:
Federal deferred tax (benefit) ............... -- (174,600) (674,700)
State deferred tax (benefit) ................. -- 129,400 (207,100)
Benefit of utilization of net operating losses -- (304,100) (24,900)
------- ----------- -----------
$ 1,600 $ 49,700 $ 2,181,000
======= =========== ===========
</TABLE>
The provisions for income taxes for the six-month periods ended June 30, 1997
and 1998 were calculated using the Company's effective tax rate expected to be
applicable for the full year.
F-26
<PAGE>
NOTE 12. INCOME TAXES (CONTINUED)
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period that deductible temporary differences and carryforwards
are expected to be available to reduce taxable income. Based upon the Company's
current level of profitability, management is reasonably certain the Company
will generate taxable income in future years sufficient to realize the full
benefit of its deferred taxes. Accordingly, no valuation allowance was recorded
as of December 31, 1997. In the event the Company does not generate sufficient
future taxable income, the amount of deferred tax assets will be reduced.
The Company is a member of a group that files consolidated federal and unitary
state tax returns. Accordingly, income taxes payable to the tax authorities is
recognized on the financial statements of the parent company who is the taxpayer
for income tax purposes. The members of the consolidated group generally record
a benefit (expense) for any member of the group for the income tax reductions
(additions) resulting from the members' inclusion in the consolidated return.
This allocation approximates the amounts that would be reported if the Company
was separately filing its tax returns. The parent company, WCAPHC, and affiliate
have unequivocally and irrevocably foregone their rights to receive payments
from the Company for such benefits. Accordingly, the results of these
intercorporate tax allocations is reported on the accompanying consolidated
statements of stockholders' equity as a credit to additional paid-in capital for
the years ended December 31, 1996 and 1997.
A reconciliation of the effective tax rates with the federal statutory rate is
as folows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Income tax at 34% statutory rate ................... $(152,900) $ 563,100 $ 2,138,600
Nondeductible expenses ............................. 3,800 19,800 30,600
State income taxes, net of federal tax benefit ..... (25,400) 103,300 354,300
Effect of operating loss with no current
year tax benefit ............................... 171,000 -- --
Change in valuation allowance,
Including effect of net operating loss carryover -- (609,800) (334,900)
Other .............................................. 5,100 (26,700) (7,600)
--------- ----------- -----------
$ 1,600 $ 49,700 $ 2,181,000
========= =========== ===========
</TABLE>
NOTE 13. SUBSEQUENT EVENT
On August 14, 1998, Pentacon, Inc. (Pentacon) and the stockholders of the
Company signed a definitive agreement for the acquisition of all of the
outstanding shares of the Company. All rights and obligations of the parties are
subject to obtaining all required corporate and regulatory approvals.
F-27
<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/ BRIAN FONTANA
-----------------
Brian Fontana
Senior Vice President and Chief
Financial Officer
Dated: November 17, 1998
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 20, 1998 (except for Note 13, as to
which the date is August 14, 1998), accompanying the consolidated financial
statements of ASI Aerospace Group, Inc. contained in the form 8-K/A dated
November 17, 1998 of Pentacon, Inc. We hereby consent to the incorporation by
reference of said report in the Registration Statement of Pentacon, Inc. on Form
S-8 (File No. 333-48913, effective March 30, 1998).
McGladrey & Pullen, LLP
San Diego, California
November 17, 1998
